10 Steps That Will Help You Prepare Your Taxes

It is estimated by the federal government that 60% of US taxpayers employ the services of paid tax preparers to complete and file their tax returns. If you are one of those millions of people, it is essential that you make an early start on the preparation for your return so that you can enjoy a satisfactory experience with your tax returns. Federal tax returns for the year 2016, or extension applications, will become due on April 17, 2017, because the usual deadline date of April 15 falls on a Saturday this year. However, even with that slight extension of time, you will still need to make a prompt start.

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A tax preparer may ask you to complete a questionnaire or they may take the information that they need directly from you. Whichever way your tax preparer operates, you will still need to allow enough time to gather and collate the information. Here the ten things that you will need to do to prepare for your tax prep meeting.

1. Select a tax preparer

If you haven’t already appointed a tax preparer, then now is the time to do it. One of the easiest ways to find a good tax preparer is to ask people like your attorney, business associates, or your friends for their recommendations. Always make sure that whoever you choose to be your tax preparer has a Preparer Tax Identification Number (PTIN). That proves that he or she has been authorized to prepare federal income tax returns. It is also advisable to inquire in advance about the fees that will be charged. The amount charged will usually depend on how complex your tax return will be. It is not generally recommended that you use tax preparers who charge a percentage of your tax refund.

2. Make an appointment

It is always advisable to meet with your tax preparer sooner rather than later, even if you are going to apply for an extension and especially if you are expecting to receive a tax refund. If you leave it too long before you make a start on your tax return, you may not even see your tax preparer before the deadline of April 17, which may mean that you miss out on taking actions such as making contributions to health savings accounts and IRAs, which are deductible and could lower your tax bill.

3. Collect the information you need

By the time that the end January arrives, you should be in possession of all the information and forms that you will need to complete your tax return and you should check that the information agrees with your own records, if you kept them.

  • Here is a list of some of the most important forms that you will need. A full list of forms is available from the IRS.
  • Form W-2 for those who are in employment.
  • Form SSA-1099 for those who were in receipt of social security benefits.
  • Form W-2G for certain types of gambling winnings
  • Form 1099 for income from items such as, cancellation of debt (1099-C), interest (1099-D), dividends (1099-D) and for nonemployee income paid to contractors (1099-MISC).
  • Form 1095 – A new form used to report the purchase of health coverage.
  • Form 1098 for mortgage interest, form 1098-E for reporting student loan interest and form 1098-T for reporting tuition payments.

You will also require schedule K-1s from any entity in which you own an interest, including partnerships, corporations, trusts, estates, and limited liability companies.

4. Collect your receipts together

The receipts that you will require will depend on whether you choose to claim the standard deduction or you choose to itemize your deductions. You can choose to itemize your deductions if you think that doing so will result in a higher write-off. The only way to be sure, unfortunately, is to calculate what the itemized deduction would be and then compare that to what the standard deduction would be.

Gather together your receipts and categorize them according to the type of expense. Look out for receipts relating to medical costs that were not covered by medical insurance or a health plan, job related expenses, investment related expenses, and property taxes. If you need to report business income and expenditure on Schedule C, you will need to have your books prepared and ready as well. The more time you spend organizing your paperwork, the less time your tax preparer will have to spend doing it, and that will result in lower fees.

5. Collect records for any charitable donations

If you itemize your deductions and you made any charitable donations in the year, you will need documentation to be able to claim a write-off for those donations. For a donation of $250 or more, for example, you will need written confirmation of the donation from the charity that states that you did not receive anything in return for your donation. If you don’t have such a confirmation, you should contact the charity and request one. You can find more about the documentation needed for charitable donations in IRS Publication 1771.

6. Be prepared for changes in tax law

While you don’t need to become a tax expert, it is a good idea to keep abreast of the major changes in tax law. The individual health care mandate, for example, introduced new forms for claiming the premium tax credit for those individuals who bought medical coverage through a government marketplace. You can find further information on exemptions from the mandate and the individual mandate on the IRS website.

7. Prepare a personal information list

You will also need to prepare a list of some basic personal information. As well as your own social security number, you will also need the social security number of each dependent that you claim for. You will need information such as the addresses of any vacation homes that you own, rental properties that you own, and information about any properties that you have bought or sold in the year.

8. Decide if you need to request a filing extension

If you decide that you need more time to prepare your tax return, then you can ask for a filing extension to October 15, 2016. An extension will give you more time to complete your return, but there is no extension for paying tax beyond April 18 so, a filing extension will avoid a late filing penalty, but it won’t avoid a late payment penalty if you don’t pay what you think owe on time.

9. Make a decision what to do about a refund

There are several options open to you if you are expecting a tax refund.

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You could elect to have some or all of the refund applied against the tax due on your next tax return, in which case, the funds will be used to reduce or eliminate the first instalment on your estimated taxes that would be due on April 17, 2017.

You could opt to have the government pay your refund directly into your checking or savings account.

You could use the refund to buy US savings bonds or to contribute to certain types of accounts, such as health savings accounts, education savings accounts or IRAs.

You can, if you wish, complete a form 888 and split your refund across more than one of the direct deposit choices. You will need to inform your tax preparer of what it is you decide to do with your refund. If you want to use the refund for 2016 purposes, to make a deductible IRA contribution, for example, you will need to notify the institution of which year you want your payment applied to.

10. Locate a copy of the prior year return

If you are going to use a new preparer for the first time this year, a copy of your prior year’s return will serve as a reminder of the things that you don’t want to be overlooked.

For example, it will show the payers of interest and dividends. If you received any similar income this year, you will need to look for the 1099s for the current year, unless you have closed the account or sold the stock, in which case you won’t have a 1099 for that account.

If you made small donations to charities, it is possible that you didn’t receive written acknowledgement, but you can still deduct your donation, so long as you have proof, such as a cancelled check. A list of the donations you made last year will help you remember the donations that you may have made this year.

Start doing the prep work early

The most important thing is to start your prep work early and that will make your tax return experience a lot easier. Ideally, you will have been keeping and organizing your receipts throughout the year. Smartphone apps such as Expensify and Shoeboxed can make this a lot easier, especially now that the IRS will accept electronic receipts. Whether you are using a preparer or you are doing your own return, keeping your records organized and being thorough will cut down the time that it takes to prepare your return and that, in turn, will cut down the fees of a preparer. More importantly, if you follow these ten steps, it will help to ensure that you don’t miss out on any potential tax benefits.