Skip to main content

Organizing Your Paperwork for Tax Season

Image
By
How prepared are you to prepare your 1040? The earlier you compile and organize the relevant paperwork, the easier things may be for you (or the tax preparer working for you). Here are some tips to help you get ready:


As a first step, look at your 2012 return. Unless your job, living situation or financial situation has changed notably since you last filed your taxes, chances are you will need the same set of forms, schedules and receipts this year as you did last year. So open that manila folder (or online vault) and make or print a list of the items that accompanied your 2012 return. You should receive the TY 2013 versions of everything you need by early February at the latest.

How much documentation is needed? If you don’t freelance or own a business, your list may be short: W-2(s), 1099-INT(s), perhaps 1099-DIVs or 1099-Bs, a Form 1098 if you pay a mortgage, and maybe not much more. Independent contractors need their 1099-MISCs, and the self-employed need to compile every bit of documentation related to business expenses they can find: store and restaurant receipts, mileage records, utility bills, and so on.1

In totaling receipts, don’t forget charitable donations. The IRS wants all of them to be documented. A taxpayer who donates $250 or more to a qualified charity needs a written acknowledgment of such a donation. If your own documentation is sufficiently detailed, you may deduct $0.14 for each mile driven on behalf of a volunteer effort for a qualified charity.1

Or medical expenses & out-of-pocket expenses. Collect receipts for any expense for which your employer doesn't reimburse you, and any medical bills that came your way last year.

If you’re turning to a tax preparer, stand out by being considerate. If you present clean, neat and well-organized documentation to a preparer, that diligence and orderliness will matter. You might get better and speedier service as a result: you are telegraphing that you are a step removed from the clients with missing or inadequate paperwork. 

 Also, while you don't want to wait to the last minute, you also shouldn't be too eager as 1099s can often be revised. There are many who are eager to file and later find the revised 1099 may result in lower taxes. However, the only way to get that money back is to file an amended return -- the cost of which is more than the over-payment.

Make sure you give your preparer your federal tax I.D. number (TIN), and remember that joint filers must supply TINs for each spouse. If you claim anyone as a dependent, you will need to supply your preparer with that person’s federal tax I.D. number. Any dependent you claim has to have a TIN, and that goes for newborns, infants and children as well. So if your kids don’t have Social Security numbers yet, apply for them now using Form SS-5 (available online or at your Social Security office). If you claim the Child & Dependent Care Tax Credit, you will need to show the TIN for the person or business that takes care of your kids while you work.1,3

While we’re on the subject of taxes, some other questions are worth examining...

How long should you keep tax returns? The IRS statute of limitations for refunds is 3 years, but if you underreport taxable income, fail to file a return or file a claim for a loss from worthless securities or bad debt deduction, it wants you to keep them longer. You may have heard that keeping your returns for 7 years is wise; some CPAs and tax advisors will tell you to keep them for life. If the tax records are linked to assets, you will want to retain them for when you figure out the depreciation, amortization, or depletion deduction and the gain or loss. Insurers and creditors may want you to keep federal tax returns indefinitely.2

Can you use electronic files as records in audits? Yes. In fact, early in the audit process, the IRS may request accounting software backup files via Form 4564 (the Information Document Request). Form 4564 asks the taxpayer/preparer to supply the file to the IRS on a flash drive, CD or DVD, plus the necessary administrator username and password. Nothing is emailed. The IRS has the ability to read most tax prep software files. For more, search online for “Electronic Accounting Software Records FAQs.” The IRS page should be the top result.4

How do you calculate cost basis for an investment? A whole article could be written about this (See: New Cost Basis Reporting Presents Opportunity for Investors), and there are many potential variables in the calculation. At the most basic level with regards to stock, the cost basis is original purchase price + any commission on the purchase.

So in simple terms, if you buy 200 shares of the Little Emerging Company @ $20 a share with a $100 commission, your cost basis = $4,100, or $20.50 per share. If you sell all 200 shares for $4,000 and incur another $100 commission linked to the sale, you lose $200 – the $3,900 you wind up with falls $200 short of your $4,100 cost basis.5

Numerous factors affect cost basis: stock splits, dividend reinvestment, how shares of a security are bought or gifted. Cost basis may also be “stepped up” when an asset is inherited. Since 2011, brokerages have been required to keep track of cost basis for stocks and mutual fund shares, and to report cost basis to investors (and the IRS) when such securities are sold.5

P.S.: this tax season is off to a late start. Business filers were able to send in federal tax returns starting January 13, but the start date for processing 1040 and 1041 forms was pushed back to January 31. Per federal law, the April 15 deadline for federal tax returns remains in place, as does the 6-month extension available for those who file IRS Form 4868.6,7


Best Regards,
Kevin Kroskey, CFP®, MBA

This article adapted with permission from MarketingLibrary.net, Inc.
Citations.
1 - bankrate.com/finance/taxes/7-ways-to-get-organized-for-the-tax-year-1.aspx [1/6/14]
2 - irs.gov/Businesses/Small-Businesses-&-Self-Employed/How-long-should-I-keep-records [8/8/13]
3 - irs.gov/Individuals/International-Taxpayers/Taxpayer-Identification-Numbers-%28TIN%29 [1/17/14]
4 - irs.gov/Businesses/Small-Businesses-&-Self-Employed/Use-of-Electronic-Accounting-Software-Records;-Frequently-Asked-Questions-and-Answers [5/22/13]

5 - turbotax.intuit.com/tax-tools/tax-tips/Rental-Property/Cost-Basis--Tracking-Your-Tax-Basis/INF12037.html [1/23/14]
6 - irs.gov/uac/Newsroom/Starting-Jan.-13-2014-Business-Tax-Filers-Can-File-2013-Returns [1/9/14]
7 - irs.gov/taxtopics/tc301.html [1/22/14]

Popular posts from this blog

Diversification: Disciplinarian of Disciplinarians

By
Disciplined diversification works when you do and even when you don't want it to. Diversification in effect forces you to sell the thing that has been doing so well in your portfolio and to buy the thing that hasn't. While this makes rational sense, it is emotionally difficult to execute. Think back to the tail end of 2008--were you selling bonds and cash to buy stocks? Most likely you weren't unless your advisor or some sort of automatic trigger did it for you. Carl Richards of www.behaviorgap.com provided a good reminder of how diversification works in a recent NY Times blog post. The diversification he discusses here is more so related to equity asset-class diversification but also touches on the three basic building blocks--equities, bonds, and cash. He doesn't discuss alternative asset classes -- an asset class that doesn't fit neatly into the three basic categories -- being used to further diversification, but that's a detailed topic for another day. ...
Read more

2013 Key Tax Proposals

By
On February 13, President Obama's Fiscal Year 2013 budget was released. Follow this link to get a full copy of the   2013 Budget . The   Treasury's Green Book   containing general explanations of the Administration's revenue proposals can be found here. Robert Keebler, a leading professional in the area of tax and estate planning, highlighted some of the key proposals potentially affecting taxpayers below: Extend Bush tax cuts for all but the top two brackets. The only change would be to have the 33% and 35% rates go back to their pre-2001 levels of 36% and 39.6%. Taxpayers in the top two marginal brackets would still benefit from reduced rates on the portion of their income taxed in the lower brackets. Raise the long-term capital gains rate to 20% for single taxpayers making more than $200,000 per year, $250,000 for married taxpayers filing jointly and $125,000 for married taxpayers filing separately. Tax rate on qualified dividends would revert to ordinary income t...
Read more

Should We Go Back on the Gold Standard?

By
If you watched the Republican presidential debates, you might have noticed that a number of  candidates yearn for a return to the gold standard—that is, that every dollar issued by the government would be backed by a comparable value in gold bars that were stashed away in a government vault. Sen. Ted Cruz of Texas argued that the dollar should have a fixed value in gold, and Sen. Rand Paul of Kentucky added that printing money without backing in the precious metal destroys the value of our currency. Mike Huckabee, former governor of Arkansas, thinks that if not gold, then the dollar could be pegged to a basket of commodities. All are mostly concerned that printing money will cause runaway inflation.   But there may be several problems with this return to the fiscal system of the late 1800s and early 1900s. One is that inflation has barely budged even as the Federal Reserve Board was piling one QE stimulus on top of another, and the government was adding records amoun...
Read more