Sunday, February 26, 2017

It’s Tax Time. Are You Ready?

If you’re like most taxpayers, you always end up with with an ominous stack of “homework” around tax time.

Unfortunately, the job of pulling together the records for your tax appointment is never easy—or even fun—but the effort usually pays off when it comes to the extra tax money you save from being prepared.

When you arrive at your appointment fully prepared, you’ll have more time to:

  • Consider every possible legal tax deduction available
  • Better evaluate your options for reporting income and deductions to choose those best suited to your situation
  • Explore current law changes that affect your personal tax situation
  • Talk about possible law changes and discuss tax planning alternatives that could reduce your future tax liability

Make the Time Now for Making Smart Choices Later

The tax law allows a variety of methods for handling income and deductions on your return. Choices made at the time you prepare your return often affect not only the current year, but later year returns as well.

When you’re fully prepared for your appointment, you get more time to explore all avenues available for lowering your taxes.

For example, the law allows choices in transactions such as:

  • Sales of property: If you’re receiving payments on a sales contract over a period of years, you are sometimes able to choose between reporting the whole gain in the year you sell or over a period of time, as you receive payments from the buyer.
  • Depreciation: You’re able to deduct the cost of your investment in certain business property using different methods. You can either depreciate the cost over a number of years, or in certain cases, you can deduct them all in one year.
  • Higher education expenses: If you are paying college expenses for yourself, your spouse, or your dependents, you might qualify for a tax benefit of either an above-the-line tax deduction or a tax credit.

Where to Begin?

Ideally, preparation for your tax appointment should begin in January of the tax year with which you’re working. Right after the new year starts, set up a safe storage location—a file drawer, a cupboard, a safe, etc.

As you receive pertinent records, file them right away, before they’re forgotten or lost. By making the practice a habit, you’ll find your job a lot easier when your actual appointment date rolls around.

Other general suggestions to consider for your tax preparation appointment include:

  • Segregate your records according to income and expense categories. For instance, file medical expense receipts in an envelope or folder, interest payments in another, charitable donations in a third, etc. If you receive an organizer or questionnaire to complete before your appointment, make certain you fill out every section that applies to you. (Important: Read all explanations and follow instructions carefully to be sure you don’t miss important data. Tax organizers may appear to be confusing or a lot of work, but they are designed to remind you of transactions you may miss otherwise.)
  • Keep your annual income statements (e.g., W-2s from employers, 1099s from banks, stockbrokers, etc., and K-1s from partnerships, etc.) separate from your other documents. Be sure to take these documents to your appointment, including the instructions and supporting statements for Schedule K-1s.
  • Write down questions you may have so you don’t forget to ask them at the appointment.
  • Make certain that you have social security numbers for all your dependents. The IRS checks these carefully and will deny deductions for returns filed without them or with incorrect numbers.
  • Review last year’s return. Compare your income on that return to the income for the current year. For instance, a dividend from ABC stock on your prior-year return may remind you that you sold ABC this year and need to report the sale. Most good tax preparers will do this comparison for you as part of their process too, but it never hurts to do a preliminary check yourself.
  • Compare deductions from last year with your records for this year. Did you forget anything?
  • Collect any other documents and financial papers that you’re puzzled about. Prepare to bring these to your appointment so you can ask about them.

Being prepared and making sure you have the basic details of your tax return covered will make it so your tax preparer can spend more time on what matters most—making sure you don’t pay more tax than you are required to pay.

The post It’s Tax Time. Are You Ready? appeared first on Fundera Ledger.

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