Tax Preparation Tips to Ease the Stress of Filing
Collect Pertinent Income and Expense Information
Around the end of January each year, employers, vendors, financial institutions, and others prepare and forward various tax forms and information pertinent to your filing. Create a set of files – whether that’s a large multi-pocketed accordion file, a group of large manila envelopes, or a digital filing system on your hard drive – to sort and separate the data into one of the following categories:
Personal Information. This information should include your legal name, as well as the legal names of your spouse and all dependents. You also need their Social Security numbers and dates of birth. I also keep my primary bank information – account number and bank routing number – so I can request a direct deposit refund if circumstances warrant.
Income. Common forms include W-2s from employers; 1099 forms for other types of income, such as self-employment, investments, and retirement distributions; and K-1s for any partnerships in which you participate. Keep a separate folder for security transactions so you can quickly determine holding periods from buy and sell dates to ensure you qualify for capital gains treatment wherever possible.
Personal Expenses (Deductions). You will receive Form 5498 for IRA and health savings accounts contributions from vendors and Form 1098 for home mortgage interest deductions. But you’ll have to collect most of the information documenting allowable deductions, such as business expenses, from other financial documents, such as check registers, canceled checks, bank statements, and credit card statements. Download and print summaries of the prior year’s transactions for each credit card, and review each transaction to determine whether it may be deductible. I use a marker to highlight the transactions that may affect my filing for easy identification later. You can use a similar culling process for canceled checks.
Business Information. If you own a small business, perform freelancing jobs, or have other side income, you need to keep your business income and expense items separate from your personal information. Some expenses are deductible for a business but not a personal filer. If you have questions about what type of information to save, review Schedule C of Form 1040.
Review Tax Filings From Previous Years
For most people, the changes from one tax year to the next are relatively slight. Previous tax returns are excellent reminders of areas you can easily overlook, such as interest or dividends, capital loss carry-forward balances, and infrequently used deductions.
I keep paper copies as well as scanned copies of past years’ returns, in addition to four spreadsheets detailing my income and expenses for each year. One spreadsheet contains the information from Form 1040, while the others have previously filed data for Schedules A, C, and D. This allows me to quickly check whether I’ve overlooked an income or expense item, as well as the year-to-year changes in amounts.
Steps to Take Before You Prepare Your Taxes
Choose a Preparer
If you don’t have a tax preparer yet, a good way to find one is to ask friends and advisors (such as an attorney you know) for referrals. Be sure that the person you choose has a Preparer Tax Identification Number (PTIN) showing that they are authorized to prepare federal income tax returns.
You should also inquire about fees, which are likely to depend on the complexity of your return. Avoid using a firm that intends to take a percentage of your refund. The IRS website has tips for choosing a preparer and a link to the IRS directory of preparers, which you can search according to their credentials and location.
Schedule an Appointment
The sooner you meet with your preparer, the sooner you should be able to complete your return (even if you decide to file for an extension, as discussed later). If you anticipate a refund, you’ll get that sooner, too. If you wait too long to schedule an appointment with a tax preparer, it might not happen before April 15, and you could miss out on opportunities to lower your tax bill, such as making deductible contributions to an IRA or a health savings account.
Gather Your Documents
By the end of January, you should have received all the various tax documents that you need from your employer or employers, as well as from banks, brokerage firms, and others with whom you do business. For each form, check that the information matches your own records.
Round Up Your Receipts
Which receipts you’ll need to provide depends on whether you itemize your deductions or claim the standard deduction. You’ll want to choose whichever produces the greater write-off, but the only way to know for sure is to add up your itemized deductions and compare that with your standard deduction. For the 2019 tax year, the standard deduction for single taxpayers is $12,200 and for married couples filing jointly it is $24,400. For 2020, these amounts rise to $12,400 for single taxpayers and $24,800 for married couples filing jointly.
Tips for Choosing Tax Software
Is the Software for The Correct Tax Year?
This advice sounds obvious, but income tax software from years past is still for sale online and at some discount software retail stores. The tax software should note which tax year it is to be used for. In 2012, you will prepare income taxes for the tax year 2011.
You must use new tax software every year.
Does Your Computer Meet the Minimum System Requirements?
If you have an older computer, be sure the tax software will run on your system by checking the requirements listed on the box for desktop software. If you use online tax software, this should not be an issue as long as you are using a current web browser. The box, support web page or other documentation for the software should mention whether the tax software runs on a PC or Mac and how much hard drive space and memory is required. Video and Internet-related requirements should be mentioned as well.
Does the Tax Software Have a Guarantee?
Does the tax software manufacturer stand behind the accuracy of the product? If you are audited, will a tax professional be provided to assist you at no cost, or if there’s a fee, what is it and do you have to pay at the time you file your return, or can you pay if you’re audited.
How Much Tax Software Help and Support Do You Need?
If you have a question that is specific to using the tax software, you should be able to contact software support by clicking a link in the software, but you may need to wait for an answer. The top tax software brands offer support by chat, which is instantaneous, but you may need to wait several minutes for an answer if the support rep needs to research your question.
Do You Want to File Electronically?
eFile fees may be included with the cost of tax software, but there is often a separate charge for it. Find out how much the tax software charges for electronic filing if you plan to eFile (the IRS strongly prefers that you do so) instead of printing out and mailing your tax return. State returns usually have a separate eFile fee as well.
Tax Prep Checklist: What to Gather Before Filing
Let’s start with the obvious items on any tax prep checklist.
Last year’s taxes, both your federal and — if applicable — state return. These aren’t strictly necessary, but they’re good refreshers of what you filed last year and the documents you used.
Social Security numbers for yourself, your spouse and all dependents. Remember, in addition to children, dependents can include elderly parents and others.
Gather all the documents that confirm the money you received during the previous year.
W-2 forms. Employers must issue these by Jan. 31, so keep an eye on your mailboxes, both physical and electronic.
1099 forms. Each of these ends with a different suffix, depending on the type of payment you received. For example, form 1099-MISC is for contract work. If you’re paid via a third party such as PayPal or Amazon, you’ll likely get a 1099-K. Investment earnings show up on 1099-INT for interest, 1099-DIV for dividends and 1099-B for broker-handled transactions.
Deductions help reduce your taxable income, which generally means a lower tax bill. The key to claiming deductions is documentation — not only can it protect you if you’re ever audited, it can cut your tax bill by helping you remember what to claim. Gathering those records may take time, but it can pay off, says Norm Blatner, a CPA at Blatner & Mineo in Buffalo, New York.
Tips to Find the Best Tax Preparer Near You
Ask for a Preparer Tax Identification Number
The IRS requires anyone who prepares or assists in preparing federal tax returns for compensation to have a PTIN. Note the phrase “for compensation” — volunteer preparers don’t need PTINs. Make sure your income tax preparer puts his or her PTIN number on your return — the IRS requires that, too.
Require a CPA, law license or Enrolled Agent designation
A PTIN is relatively easy to get, so go a step further and get a credentialed preparer — someone who’s also a certified public accountant, licensed attorney, enrolled agent or who has completed the IRS’ Annual Filing Season program. The Accredited Business Accountant/Advisor and Accredited Tax Preparer are examples of programs that help preparers fulfill the Annual Filing Season Program requirement. These credentials all require varying amounts of study, exams and ongoing education.
Look for friends in high places
Membership in a professional organization such as the National Association of Tax Professionals, the National Association of Enrolled Agents, the American Institute of Certified Public Accountants, or the American Academy of Attorney CPAs is always a good thing to have, as most have codes of ethics, professional conduct requirements and various certification programs.
How much do tax preparers charge? The average fee for preparing a tax return, including an itemized Form 1040 with Schedule A and a state tax return, was $294 in 2018, according to the National Society of Accountants. The average cost to prepare a Form 1040 and state return without itemized deductions was $188.
Reconsider those who don’t e-file
The IRS requires any paid preparer who does more than 10 returns for clients to file electronically via the IRS’ e-file system. If your tax preparer doesn’t offer e-file, it may be a sign the person isn’t doing as much tax prep as you thought.