Monday, January 21, 2008

SOME ADVICE FOR PREPARING YOUR 2007 TAX RETURN

As the beginning of the tax filing season, which in my opinion is February 1st, quickly approaches I thought I would remind you of some previously offered tax preparation advice from January 2007:

CHECK OUT ALL YOUR OPTIONS -

When preparing your tax return you are often given choices on how to treat a certain situation or item. You should review each option and do separate tax calculations to see which one will result in the lowest tax. You should also consider how the federal option will affect your resident and non-resident state and local tax returns. Your goal is to choose the options that will allow you to pay the absolute least amount of combined overall federal, state and local income taxes.

One of the options for a married couple to consider is whether to file joint or separate returns. You can check out my postings “Joint or Separate – That is the Question,
Part I and Part II” for some guidance.

DON’T BE IN SUCH A HURRY

You should not rush to be among the first taxpayers of the year to have your taxes done. Do not give or send your tax preparer your ‘stuff’, or attempt to prepare your own returns, until you have received all the forms and information needed to complete the returns! That means every W-2, every 1099, and every K-1 and all the cost basis information on the sale of investments. I have had many experiences where a client came in very early in the season and had his/her return prepared, only to receive another Form 1099 in the mail the day after he/she had sent the finished returns off to his/her “uncles”.

If you have a brokerage account there is an excellent chance that you will receive at least one, if not two, corrected “Consolidated 1099 Statements” to report taxable dividends, interest and gross proceeds after the initial statement arrives in late January. This is because of the rules concerning the taxation of “qualified” dividends, which became effective with tax year 2004. The final corrected 1099 may not arrive until mid-March.

BUT DON’T WAIT UNTIL THE LAST MINUTE

Many taxpayers who expect to owe their “uncles” wait until the very last minute to get their “stuff” together to prepare their return. Even if you owe taxes on your 2007 return(s) you should have the return prepared early, once you have all the necessary information in hand. You don’t have to actually file the returns and pay the tax until April 15th. But by having your 1040 prepared early you will know exactly how much you will owe and have over a month to come up with the money, instead of running around trying to juggle funds days before the deadline. Hey, you might even be surprised to find that you will be getting a refund!

Also consider the workload of your tax preparer. I have a strict long-standing rule that all returns that are not literally in my hands, with all the necessary information, by March 31st will be automatically extended!

IDENTIFYING IRA CONTRIBUTIONS

When making your IRA contribution by mail make sure you clearly identify the tax year to which you want the contribution applied. If making a contribution in early 2008 for tax year 2007 write “2007 IRA contribution” clearly in the memo section of the check. If you are enclosing a payment voucher or coupon provided by the trustee make sure that the correct tax year is marked. Follow up by checking your next IRA account statement to verify that the contribution was applied to the proper year. If you find that the contribution was applied to the wrong tax year contact the trustee immediately.

Now also seems like a good time to remind you of some advice if you have dependent children who will be working part-time after school or in the summer this year:

DEPENDENTS AND INCOME TAX WITHHOLDING

If a dependent student with an after-school or summer job does not expect to earn more than $5,450.00 (the standard deduction for Single) during 2008, including up to $300.00 in interest, dividends and capital gains, the child should claim “EXEMPT” on his/her Form W-4. This way he/she will not have to file a federal income tax return simply to get a refund of the income tax withheld.

Now here is some advice from someone else. Madison, a new “visitor” to THE WANDERING TAX PRO from the MyBlogLog community, has a good way of making sure she does not miss anything when getting ready to prepare her tax returns in the post “
Organize & Prepare: Do Your Taxes Quickly” at her blog MY DOLLAR PLAN. The only thing I do not agree with is “Once I know I have all the forms and all the data is correct, I can quickly enter the information in Tax Cut”.

TTFN

2 comments:

My Dollar Plan said...

Great list of material! Thanks for the mention.

Tim Archer said...

And perhaps one of the simplest tips of all, get yourself organized right from the beginning. Set aside a folder right now to hold your 2008 tax return documents, receipts, etc and use it throughout the year to quickly file away the tax documentation you may need later!
Read more at:
http://themoneykings.com/blog/organize_2008_tax_return_documents