Tax and Financial News for January 2007
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Tax Preparation Made Less Difficult
Tax Preparation Made Less Difficult
Every year, millions of Americans spend an inordinate amount of time preparing their income tax returns. Some of this time is spent deciphering a complex tax code; however, a good bit of it is wasted because of disorganization. Whether you prepare your own return or use a paid preparer, organization is the key to minimizing your frustration with the process of letting Uncle Sam know how much you owe him.
A Good Guide
As is often the case, the past can help you plan for the future. One of your most powerful checklists in gathering tax information is last year's tax return. It's the best place to go to help remind you of the types of income and expenses you typically report.
Just take a look at the form. What dependency exemptions did you take in 2005? Do you still have those same exemptions? Are there any additions to your family or has a child left the nest and is no longer a dependent?
What kind of income did you report last year? Did you have wages that were reported to you on Form W-2? Were those wages from one employer or possibly multiple employers? Did you have the same employer(s) in 2006 that you did in 2005? Any changes in employment in 2006? Did you have interest and dividend income in 2005? Does your dividend and interest income come from the same source in 2006 as it did in 2005?
The information you can collect just by making sure you capture the same items of income you reported on your 2005 return can be a tremendous time saver. Even if you don't have the same sources of income in 2006 as in 2005, accounting for any changes will help you organize your data before starting the tax preparation process.
As with items of income, using your 2005 return can help tremendously with organizing itemized deductions. Each category of itemized deduction can be made up of numerous items. For example, schedules listing the charities you support and how much you gave in 2005 can guide you in identifying your 2006 charitable contributions. Investment fees, multiple sources for medical and interest expense, and other itemized deductions can be more easily captured if you know what you deducted in prior years and to whom the payments went.
Tax preparers think so much of prior years' tax returns as guides for the current one that we will typically ask for a copy of two or three prior years' returns if we don't already have them. Why shouldn't you attach the same importance?
Outside Help
It is probably not wise to rely solely on your prior year's return to help you identify all items of tax significance. Tax law changes or errors in the prior year can trip you up if your only source is last year's return. This is why the use of a professionally prepared organizer is advisable.
If your return was prepared by a tax professional in 2005, chances are good that you will receive a 2006 organizer directly from your preparer. If you prepared your return in the past and plan to do so again, the American Institute of Certified Public Accountants has a fairly comprehensive organizer that can be downloaded. Just click on the word "organizer" to take you there - and you will need Adobe Acrobat Reader if you don't already have it.
Paperwork from Afar
There are a number of forms you might expect to receive in the mail for the next few months. Of course, you can expect a W-2 from your employer, but the trail of paper doesn't end here. If you earned dividends and/or interest from a bank, brokerage or other financial institution, you can expect to receive a Federal Form 1099. If you sold stocks, bonds or real estate, you can also expect to receive a 1099. Independent contractors should receive a 1099 for any income over $600 from a single source. Retirement income and royalties will also be reported to you on Form 1099.
If you are expecting one or more 1099s, don't even think about sitting down to prepare your taxes (or take the information to your preparer) until you have the 1099s in hand. The most efficient way to prepare a tax return is to have all the information available at one time. If you use a paid preparer, this efficiency helps minimize the fees.
Are you a partner in a partnership or stockholder in an S Corporation? If so, you can expect to receive a Form K-1 from that entity. Make sure you either provide that K-1 to your preparer or make a note that it is outstanding. Most of the time, entering the data from a K-1, though vital in preparing the return, does not require an extensive amount of time. Of course, if you are in several partnerships or S Corporations, the time required to enter all of them will increase. Depending on the significance of your K-1 income, you may or may not get a fairly clear picture of your bottom line tax until it is entered.
Conclusion
Preparing a tax return, or collecting the data for someone else to prepare it, ranks right up there with a root canal for many people. Organizing data before tackling the preparation of your return will minimize your time and stress. Should you need help, please do not hesitate to call us. We're here to help you in any way we can.
Happy New Year!
A Good Guide
As is often the case, the past can help you plan for the future. One of your most powerful checklists in gathering tax information is last year's tax return. It's the best place to go to help remind you of the types of income and expenses you typically report.
Just take a look at the form. What dependency exemptions did you take in 2005? Do you still have those same exemptions? Are there any additions to your family or has a child left the nest and is no longer a dependent?
What kind of income did you report last year? Did you have wages that were reported to you on Form W-2? Were those wages from one employer or possibly multiple employers? Did you have the same employer(s) in 2006 that you did in 2005? Any changes in employment in 2006? Did you have interest and dividend income in 2005? Does your dividend and interest income come from the same source in 2006 as it did in 2005?
The information you can collect just by making sure you capture the same items of income you reported on your 2005 return can be a tremendous time saver. Even if you don't have the same sources of income in 2006 as in 2005, accounting for any changes will help you organize your data before starting the tax preparation process.
As with items of income, using your 2005 return can help tremendously with organizing itemized deductions. Each category of itemized deduction can be made up of numerous items. For example, schedules listing the charities you support and how much you gave in 2005 can guide you in identifying your 2006 charitable contributions. Investment fees, multiple sources for medical and interest expense, and other itemized deductions can be more easily captured if you know what you deducted in prior years and to whom the payments went.
Tax preparers think so much of prior years' tax returns as guides for the current one that we will typically ask for a copy of two or three prior years' returns if we don't already have them. Why shouldn't you attach the same importance?
Outside Help
It is probably not wise to rely solely on your prior year's return to help you identify all items of tax significance. Tax law changes or errors in the prior year can trip you up if your only source is last year's return. This is why the use of a professionally prepared organizer is advisable.
If your return was prepared by a tax professional in 2005, chances are good that you will receive a 2006 organizer directly from your preparer. If you prepared your return in the past and plan to do so again, the American Institute of Certified Public Accountants has a fairly comprehensive organizer that can be downloaded. Just click on the word "organizer" to take you there - and you will need Adobe Acrobat Reader if you don't already have it.
Paperwork from Afar
There are a number of forms you might expect to receive in the mail for the next few months. Of course, you can expect a W-2 from your employer, but the trail of paper doesn't end here. If you earned dividends and/or interest from a bank, brokerage or other financial institution, you can expect to receive a Federal Form 1099. If you sold stocks, bonds or real estate, you can also expect to receive a 1099. Independent contractors should receive a 1099 for any income over $600 from a single source. Retirement income and royalties will also be reported to you on Form 1099.
If you are expecting one or more 1099s, don't even think about sitting down to prepare your taxes (or take the information to your preparer) until you have the 1099s in hand. The most efficient way to prepare a tax return is to have all the information available at one time. If you use a paid preparer, this efficiency helps minimize the fees.
Are you a partner in a partnership or stockholder in an S Corporation? If so, you can expect to receive a Form K-1 from that entity. Make sure you either provide that K-1 to your preparer or make a note that it is outstanding. Most of the time, entering the data from a K-1, though vital in preparing the return, does not require an extensive amount of time. Of course, if you are in several partnerships or S Corporations, the time required to enter all of them will increase. Depending on the significance of your K-1 income, you may or may not get a fairly clear picture of your bottom line tax until it is entered.
Conclusion
Preparing a tax return, or collecting the data for someone else to prepare it, ranks right up there with a root canal for many people. Organizing data before tackling the preparation of your return will minimize your time and stress. Should you need help, please do not hesitate to call us. We're here to help you in any way we can.
Happy New Year!
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