NEWS AND RESOURCES

Financial Planning for January, 2010

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Tax Organizers - Friend or Foe?

If you use a CPA to prepare your taxes, you are no doubt looking forward to the arrival of your annual tax organizer. In case you forgot, that is the package we send to help you gather your tax information. While many clients choose to ignore the annual tax organizer, this can be hazardous to their financial health for several reasons.

Believe it or not, a tax organizer has a purpose other than confusing you. Most start with a questionnaire designed to help you identify tax saving opportunities. Among those will be a list of questions about your marital status, changes in employment, gifts to family, real estate purchases and sales, and other seemingly intrusive questions. Do not ignore them. For 2009, failure to answer these questions could cost you a fortune. Failing to answer a question about buying a principal residence could cost you the $8,000 new homeowner tax credit. If you don’t tell a tax preparer about a new automobile purchase, you might lose the deduction for sales taxes on new vehicles for 2009.

Some questions seem silly on the surface. For example, a question about ownership or control of a foreign bank account might seem ridiculous to someone who has never left the country. If, however, you have the authority to sign on your Dutch mother’s savings account in Amsterdam, failure to report this could cost you a bundle. Why on earth would we ask if you had tax-exempt income? If it’s tax free, who cares? Did you know that many tax return calculations require the inclusion of tax-exempt income?

One of the most important parts of the tax organizer is your name, address and other personal information. Failure to include the appropriate personal information on your tax return can hold up a refund or cause you to lose a deduction. If you had a new child this year, your preparer needs to know his or her name and social security number if you wish to utilize the child tax credit.

Hopefully, you are getting the idea that the tax organizer is extremely important to income tax preparers. It is the most cost-effective way for you to help your tax advisor prepare an accurate return and keep your fees down.

Aside from the questions on the organizer, you will find sections to help you identify and quantify your major sources of income. Wages, salaries and similar compensation, along with related withholding taxes, are the primary source of income for most taxpayers. Other sources include interest, dividends, rents, royalties and income from a trade or business that is reported on Schedule C. Did you own an interest in a partnership? Don’t forget to include the K-1 the partnership provided you.

If you sold stock or other assets this year, make sure you provide the cost basis of the asset. How important is this? Brokers are required to report the proceeds from the sale of stocks and other assets in your account on a 1099-B. It’s not unusual for a taxpayer to forget to include the 1099; however, a few months (or a year) later, the IRS sends a bill for tax on the full sales price – plus penalty and interest. Either the taxpayer or the preparer will spend time amending the return and explaining to the IRS that you don’t owe anywhere near what they think. The whole ordeal can be avoided by making sure you complete the tax organizer and include the requested attachments.

Income isn't the only thing the tax organizer is designed to capture. Making sure you deduct everything you legally can is one of your tax preparer's main goals. Help us out by providing every bit of information you can up front. The golden rule for deductions is, "When in doubt, write it down and ask about it." You might be pleasantly surprised at some of the answers.

Finally, be sure to let your accountant know how much you paid in estimated taxes and when you paid them.

Unfortunately, tax preparers can't read minds. Unless you let us know all the pertinent information, we cannot properly prepare your income tax return(s). The organizers we send each year are designed to help ensure that you provide all the necessary information. Properly utilized, a tax organizer will save both time and money. Your answers will also help us advise you on other financial matters.

Have a terrific 2010. We look forward to serving you in the coming year.

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