A new year is wonderful because it signifies a fresh start. Then reality sets in. Tax documents appear in your physical mailbox and email inbox. If you’ve worked with a tax preparer in the past, you may receive an engagement letter this month. You’re not the only one who is anxious about this upcoming tax season. Here are four strategies to ease your tax anxiety.
1. Get Organized
Pull out your 2017 income tax returns and familiarize yourself. As you receive 2018 tax documents, sort them into file folders. I personally separate 2018 tax info into four manila file folders: 1) Income, 2) Expenses, 3) Business Activity, and 4) Other.
W-2s, 1099s, and investment statements showing interest, dividends, and capital gains go into the Income folder.
The Expense folder is critical, especially if you’re itemizing deductions. Gather Form 1098 if you have a mortgage, real estate and personal property tax receipts, and charitable contributions. Include medical expenses in this folder if they exceed 7.5% of Adjusted Gross Income, or AGI.
My husband and I have a significant amount of charitable contributions, so we create a one-page summary in Excel with the name of the charitable institution, transaction date, and dollar amount given. We separate cash from non-cash donations. In the non-cash contribution section, identify what was given (i.e. stock, household goods) along with the estimated cost basis and fair market value. For thrift shop donations, a nice rule of thumb to determine cost basis is to multiply the fair market value by three (e.g. $200 FMV * 3 = $600 cost basis).
Both of my businesses are currently single member LLCs taxed as sole proprietorships, so I don’t have a separate business tax filing. Therefore, all of the Business Activity runs through my personal tax return (Federal Form 1040) on Schedule C. I maintain QuickBooks Online files for each of my businesses and use the Income Statement to populate Schedule C in the tax program. If you’re a small business owner, strongly consider having your taxes professionally prepared unless you have deep knowledge of the tax code. Self-preparing means you may miss out on important deductions such as home office, auto, or qualified business income deduction (up to 20% of income).
The Other folder is reserved for items that do not fit in the Income, Expense, or Business Activity folder. Quarterly estimated tax payment receipts and support for federal and state tax credits go into this folder. For example, my family incurs daycare and after-school costs that exceed the $5,000 dependent care FSA election. We also have 529 plan contributions that are eligible for a Missouri state income tax deduction.
In theory, each document you save 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. Many tax preparers expect tax items to be orderly and may charge more if your items are disorganized.
2. Decide Early if You’ll Outsource
Do you have a pretty straightforward tax situation? For families with one or two W-2s and few expenses, you may save money by self-preparing. Yet, as parents, time is one of our most valuable resources. Federal Form 1040-EZ is simple, but anything more complex should be processed through a tax preparation program like TurboTax.
For about 10 years, I used TurboTax to self-prepare my taxes. It took me a full day to enter all the info and finalize the tax returns -- even as a CPA. Navigating the software and e-filing took extra time. With two growing businesses, my tax director Jan at SV CPA Services now prepares my personal taxes. It’s such a relief having another professional do the heavy lifting, enabling me to focus on relationships with clients.
If you’re still on the fence about self-preparing versus hiring an outside professional, remember that 2018 was a major year for tax reform. The Tax Cuts and Jobs Act (“TCJA”) was passed in late December 2017, and several of the provisions didn’t apply until the 2018 tax year (for related reading, see my prior blog post on TCJA or Kiplinger article). Families who itemized deductions in 2017 may not be itemizing for the 2018 tax year, due to a higher standard deduction and a $10,000 annual cap on state, local, real estate and personal property tax deductions. Working with a knowledgeable tax preparer offers peace of mind that you’re taking advantage of any new deductions.
3. Analyze Complexity
Suppose you’re going to hire an outside tax preparer. Recognize that not all tax preparers are created equal. Cost doesn’t necessarily equal value.
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 specialize in domestic or international individual and corporate tax matters.
Always inquire about your potential tax preparer’s area of expertise.
Honestly assess who is best suited to handle your taxes. Here are some triggers for more complex tax situations:
· Earned wages in multiple states or outside the U.S.
· Moved to a new state
· Operated or started a small business
· Bought and/or sold a home
· Married someone with significant student loan debt
· Owned investment property or an outside business interest
Work with a tax professional who has successfully navigated these issues with other clients and could represent you if you’re ever audited.
4. Be Cognizant of Timing
The deadline for filing your 2018 U.S. personal federal tax return is April 15, 2019. Although this deadline can be extended to October 15th, you are responsible for paying tax by April 15th. Partnerships, S Corporations, and C Corporations have an even earlier tax filing deadline – March 15th! Begin your search now if you want to hire an outside tax preparer. Several tax advisors internally adhere to an earlier deadline for new client relationships.
Be realistic. If you drop off your tax items to an outside preparer in early April, don’t expect your taxes to be filed by the April 15thdeadline. Tax preparers are extremely busy this time of year – many working 50, 60 or 70 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 as soon as possible 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, and that may be costly.
If you are seriously stressed and the tax deadline is a few days away, a timely-filed extension request could be your saving grace. Just remember that you don’t get an extension of time to pay the tax. And don’t delay if you’re expecting a refund. The sooner you file for a refund, the more money in your pocket. Being proactive pays off.
Hopefully, this article eased your anxiety about tax season. I get a lot of inquiries this time of year at SV CPA Services for individual tax return preparation. My tax director Jan and I are focused on quality of relationships, not quantity. Therefore, we’re only offering new tax return preparation services to small business owners who are interested in an ongoing accounting relationship or individuals who work with me through WorthyNest®. Existing clients are grandfathered in. Please contact me via email at firstname.lastname@example.org or phone at (636) 344-0415 if you’re interested in further exploring a relationship.
Deborah L. Meyer, CPA/PFS, CFP®is a fee-only financial planner and investment advisor based in St. Charles, Missouri who works with clients nationally. As the owner of WorthyNest, Deb helps parents build wealth without contradicting their values and is a 2018 recipient of the AICPA’s Standing Ovation award.