By FPA member Lisa A.K. Kirchenbauer, CFP®, RLP®
Last Updated: March 31, 2011
It's that time again! Most of us dread having to sit down and weed through the forms, the receipts and the calculations to get out our taxes done. The reality is that you can make the whole process go smoother, get more accurate results and maybe receive money back if you are lucky! The key is some planning and organization upfront and during the year.
Here is a step-by-step process to help you get your taxes done efficiently and accurately:
- Use a computer program or have someone else do your taxes. These days with Alternative Minimum Tax and so many special tax breaks or issues to consider, you either need the reminders and hints of a program like TurboTax or you should seek out a professional. You may even want to consider a tax professional [either a Certified Public Accountant (CPA) or Enrolled Agent (EA)] who also does financial planning and can provide a more holistic look at your finances and not just your taxes. The people I know that still do their taxes by hand often have to amend them or risk a notice from the Internal Revenue Service (IRS) indicating that they owe taxes and penalties because they missed something on their return. Play it smart…get help.
- Pull together all of your information and separate it into several key categories:
- Form W-2s, K-1s (for trusts and partnerships) and 1099s and any other related forms for income, distributions, tax refunds and anything else that will in some way be considered "income."
- Form 1098s for mortgage interest if you have more than one loan against your house. Make sure you have all the forms — sometimes they are just part of your December statement.
- Investment-related information. You have already gathered your Form 1099 for the investment accounts listed above, but if you sold anything during the tax year, you will need to produce the cost information or "cost basis" for that investment. Some brokerage firms and mutual fund companies provide that information right on their statements. If yours doesn't get it ready, calculate it yourself by adding together all investments made, as well as all reinvested income and capital gains. This is often the point where taxpayers punt and seek the help of a tax professional.
- Other deductible expenses:
- Unreimbursed business expenses.
- Medical expenses: co-pays, doctors and dentists' bills, prescriptions and anything else that wasn't reimbursed by a medical spending account.
- Childcare costs not reimbursed by a dependent care spending account.
- Charitable expenses: For anything more than $250, you will need to have a receipt of your donation from the organization.
- Educational expenses or job hunting expenses may also count.
- Car usage: If you take a deduction for your car, you'll want the mileage info, repairs, gas, and other related expenses.
- Review your credit card bills and bank registers for other deductible expenses that you may not have caught upfront.
- Did you make estimated tax payments during the year? Make sure that you check these carefully. This is often where self-employed people get in trouble.
- Is there anything else you can do to reduce your liability or get more back? Depending on your income level and whether you participate in an employer-sponsored retirement plan, you may be able to make a contribution to an Individual Retirement Account (IRA) or a Simplified Employee Pension (SEP) IRA (if you are self-employed) and take a deduction for that expense. Did you contribute to a 529 plan for your children (only for a state income tax deduction and it depends on the state that you live in and the plan you participate in)?
Not sure what you can deduct? Ask your financial professional or go to the IRS website for more information.
If you are using a software tool, be sure to let it take your through its process and ask questions to help you avoid missing anything important that you are entitled to.
Finally, one way to make this process easier next year is to consider these three tips:
- Start a tax-related file now and start adding receipts and other important information throughout the year.
- Keep your investment statements organized in a binder and be sure to hold onto confirmation slips for any sales during the year.
- Mark your checkbook register and keep receipts for all deductible expenses. Mark them now and put them in the folder, so you won't miss them next year.
FPA member Lisa A.K. Kirchenbauer, CFP®, RLP® is the president of Omega Wealth Management.