Smooth Sailing this Tax Season

Last week’s post discussed tax tips relevant to small business owners and self-employed persons.  What about everyone else?  Hopefully, with these strategies in place, you’ll feel confident about the upcoming tax deadline.

1.     Outsource vs. Self-Prepare.  

There’s one key decision to make: are you going to prepare the tax returns yourself or hire someone?  For families with one or two W-2s and few itemized deductions, self-preparation can save you money.  Yet it won’t necessarily save you time. Federal Form 1040-EZ is simple, but anything more complex should be processed through a tax preparation program like TurboTax.  You need to assign value to your time.  I’m a CPA with extensive tax preparation experience.  When using TurboTax in the past, it took me a full day to enter all the info and finalize the tax returns.  Additional fees for electronic filing and system upgrades left me frustrated.  Thus, the initial financial investment you make in a tax preparation program isn’t the only investment.  Your time may be an equally or more valuable resource.

The deadline for 2016 Federal Form 1040 is April 18, 2017 but can be extended to October 15th.  If you want to hire an outside tax preparer, begin looking now … several adhere to an earlier, internal deadline for new client relationships.

2.     Investigate complexity. 

Suppose you’re going to hire an outside tax preparer; not all tax preparers are created equal.  Enrolled Agents, or EAs, go through specialized tax training for individuals and are typically more affordable than Certified Public Accountants (CPAs).  By their nature, CPAs have a broad range of expertise.  Some are quite specialized on audit or tax issues, and others even further specialize into domestic or international individual and corporate tax matters.

It’s always a good idea to inquire about your potential tax preparer’s area of expertise and experience with complex tax situations.

Honestly assess who is best suited to handle your taxes.  Here are some of the triggers for more complex tax situations:

·      Earned wages in multiple states or outside the U.S.

·      Moved to a new state

·      Started a “side hustle”

·      Bought and/or sold a home

·      Married someone with significant student loan debt (to evaluate MFJ vs. MFS status)

·      Owned investment property or another business venture

3.     Get organized. 

Regardless of your decision to hire an outside CPA or self-prepare your taxes, you need to get organized.  By organized, I don’t mean stuffing every tax-related item into a shoebox.  Instead, if self-preparing, pull out your 2015 tax return and use it as a guide.  Go line-by-line, gathering documentation for each income source (wages first, then interest and dividend income).  After the income section, move onto deductions in Schedule A if you itemize.  For multiple charitable contributions, create a one-page summary with the name of the charitable institution, overall dollar amount given, and be sure to separate cash from non-cash donations.  In theory, each piece of paper should tie to a corresponding line on the federal income tax return. 

If you hire a tax preparer, use their tax organizer as a guide.  If the preparer doesn’t have a tax organizer, consider following the steps outlined in the prior paragraph.  Many tax preparers expect tax items to be orderly and may charge more if your items are disorganized.

4.     Understand timing. 

Be realistic.  If you drop off your tax items to an outside preparer on April 14th, don’t expect your taxes to be filed by the April 18th deadline.  Tax preparers are extremely busy this time of year – many working over 55 hours a week.  They may need a few weeks to finalize your tax return.  Self-preparers shouldn’t wait until the last minute, either.  Start working on your taxes in March or early April so you can fill in gaps and review the draft tax returns with a fresh set of eyes.  Once your tax returns are electronically sent or mailed to the IRS and state government authorities, they are final.  Subsequent changes could require an amendment.

If seriously stressed and the tax deadline is a few days away, a timely-filed extension request could be your saving grace.

Final Considerations

Even if you hire an accountant to assist with individual tax compliance, you assume ultimate responsibility for tax filings.  Failing to disclose important tax information to your preparer could put you at risk for an audit adjustment. 

If you found this article helpful, please share it.  Oh, and try not to stress too much!

Forever faithful,

Deb Meyer, CPA, CFP®