Happy New Year!
The college bowls are over, the Super Bowl is coming and so is a new U.S. President. Best of all – it’s tax time! Well, maybe only Uncle Sam likes this time of year. But, to be honest, we CPAs don’t really mind it all that much, but we know most of our clients hate this time of year.
To help lessen your pain this year, we thought we would try and give you a few tips on how to make our job easier, and less costly to you.
It never fails to amaze us. We get a new client and spend a great deal of up front time preparing the first return. Once everything is in our system, we naturally think the job of preparing your next year's return will be easier and, accordingly, we can charge less. Unfortunately, history tells us our job this year won't be all that different from last year.
While some of the complexity of preparing this year's returns may be due to changes in tax law, sometimes it's simply due to the form in which we get the information. Following a few simple rules should help us keep our time down and maximize the value of our services to you.
Make sure we or whoever prepares your tax return knows if your marital status, dependency exemptions or address have changed from the prior year. If you or your spouse are claimed as dependents of someone else, make sure to tell the preparer and be sure to tell them if you or your spouse are 65 or over, blind or disabled – it can affect your taxes.
If any of your dependents are under age 14 and have unearned income, your accountant needs to know and don’t forget about the credits available for having children if they are young enough and your income isn’t too high. Be sure your accountant knows the age of the children. Any childcare expenses will also need to be reported to your preparer.
Did your employment status change this year? Did you start a new job or did you retire? Did you receive unemployment compensation this year or disability payments? What about Social Security? Unless you know a certain item of income is absolutely not taxable, make sure your preparer knows about it.
Purchases, Sales and Debts
Believe it or not, if you have any debt cancelled during the year, it could give rise to taxable income. Did you start a new business, incur new debt, buy or sell property in 2000? If so, your preparer will need to know all the details.
What about student loan interest you paid? You should receive a 1099 telling you how much you paid in 2000. Some, or all, interest may be deductible. Give it to the accountant and let them decide what to do with it.
If you exercised any stock options in 2000, be sure to tell your preparer. Depending on the type of stock option, you may or may not have taxable income. For example, say you exercised options and had income of $100,000. If the plan was non-qualified, the income should be reported as W-2 income and taxes should already be withheld. Many times, we preparers spend time tracking down the proceeds of stock option exercises because we don’t know the income is already reported on the W-2. If you have any questions, ask your payroll department.
Did you withdraw any funds from your IRA to acquire a principal residence? In some instances, you won’t have the 10% premature withdrawal penalty if the withdrawal is properly reported.
Typically, you will receive a 1099-Int or Div from your bank or stockbroker. Make sure you give a copy to your preparer. Even if you don’t know what all those numbers mean, your preparer will.
If you sold a mutual fund or a stock this year, you should receive a 1099-B. In some instances, your preparer may not need any further information. However, if the 1099-B doesn’t show your original cost, you will need to determine what the cost was to help your preparer compute the gain or loss.
Sometimes, companies “spin off” divisions and give their stockholders stock in the newly created company. This will generally result in you owning stock in two companies and your tax basis in the original shares will be split between the new company shares and the old company shares. Make sure you provide this information to your preparer.
Do you own stock in a company that was sold this year in exchange for the stock of the purchaser? If so, you will receive information telling you the value of the new stock you received in exchange for the old stock. If the transaction was a non-taxable exchange, you will need to tell the government certain information, or risk being taxed now instead of later.
Even though your tax-exempt interest may not be taxable for regular income tax purposes, certain interest is added back for Alternative Minimum Tax purposes and in determining taxability of certain types of income (Social Security for example). Make sure you give your preparer all income information.
Schedule C Income
Income from a trade or business you conduct as a sole proprietor is reported on your Schedule C. Many times people assume the only reportable income is what is reported on a 1099. This is not true. Be sure to give your preparer the whole picture, even if you don’t get a 1099.
Be sure to give your preparer detail on all of your expenses. Did you buy equipment this year – include purchase amount and date. Do you use your car for business – keep a log and give the information on mileage, expenses and any interest expense to your preparer.
Most sole proprietors know they can’t deduct health insurance on their Schedule C, but it’s at least partially deductible on page one of the 1040. Make sure the preparer knows how much you paid.
If you run your business out of your home, talk to your preparer about the availability of the home office deduction. If you are eligible for the home office deduction discuss your options very carefully with your preparer. Sometimes, it doesn’t pay to take a deduction now if it could result in a taxable gain on the sale of your house in the future.
With the exception of very small amounts, you will probably get a 1099 on any miscellaneous income, IRA or retirement distributions, rent payments and similar income. Be certain to provide copies of all 1099s, or summaries of the information on 1099s you receive, to your preparer. The more information included on the return from these sources, the less possibility of getting a nasty letter from the IRS saying you underreported income.
Make sure you provide copies of all partnership Forms K-1 to your preparer. The IRS will receive them, so eventually they will be reflected on your return - either by you or by the IRS.
If you receive alimony, chances are your ex-spouse will be deducting it from their taxable income and telling the IRS all about it. Make sure you include it on your return.
Be certain to provide your preparer with details about all medical expenses, including medical mileage, prescriptions and eyeglasses.
Don’t forget about those pesky real estate taxes and personal property taxes you have to pay and any state income tax estimates. These are deductible when you pay them, so don’t let the IRS get out of letting you have the deduction. In certain circumstances, auto registration fees may be deductible as personal property taxes. Ask your accountant about the possibilities.
Make sure you give details of all your union dues, employee business expenses and non-cash contributions to your preparer. If you gave more than $5,000 in non-cash contributions to a charity, you may need an appraisal. Start planning for it now. Appraisals take time to prepare.
If you have household employees, and they qualify as your employees, make sure you give them a W-2 and file a Schedule H. Your CPA can tell you what you will need to do.
Finally, don't assume your CPA has ESP. Many times clients assume we know that they made all the estimated payments we told them to make, but we don't. If you don't tell us, we will have to call you and ask.
This discussion has barely scratched the surface on ways you can help keep the time down when your accountant prepares your income tax return. We could go on forever on the rules and what is and is not includible in income, so we will close with these thoughts.
Most accountants are more than willing to give you a detailed list of what they will need. Sometimes these are called organizers and sometimes not. Their main purpose is to collect the information in a clear and logical format to reduce the possibilty of mistakes in return preparation and limit additional fact finding questions. If you don’t have one, ask your preparer for one.
If you still have questions, ask your accountant to clarify anything you don't know. If you don't have an accountant, give us a call. With the complexities of the Internal Revenue Code, you can't be too careful. We will be more than glad to serve you.
Once again, have a very Happy New Year!