MORE DON'T FORGET TO REMEMBER

Some reminders as you prepare to have your 2016 tax returns prepared, from my website FIND A TAX PROFESSIONAL –

 

CHOOSING A TAX PROFESSIONAL

 

DON’T ASSUME (my annual, perhaps controversial, warning)

 

WHAT TO ASK A POTENTIAL TAX PREPARER

 

WHAT TO GIVE YOUR TAX PREPARER

 

YOU ARE RESPONSIBLE

 

The last item – YOU ARE RESPONSIBLE – is very important.  Regardless of who prepares your return you are ultimately responsible for all the information reported on your return!

 

Before I go – some shameful self-promotion.  Even if you use a tax professional to prepare your 1040, the more you know about what you can deduct the more prepared you will be when meeting with your tax pro.  Learn about what you can and cannot deduct in my GUIDE TO SCHEDULE A.

 

TTFN

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GETTING READY TO PREPARE YOUR RETURN

Another timely updated year-beginning post re-run:

You should have begun to receive the various forms needed to prepare your Form 1040. Employers, banks, brokers, mortgage companies, mutual funds, etc. are required to provide taxpayers with W-2s, most 1099s and 1098s by January 31, 2012.  Some 1099s are not required to be delivered until mid-February.  If you have not received all your information returns by February 15th, contact the employer, bank, broker, or whoever and arrange to receive a duplicate copy.

When you receive your W-2s and 1099s check the figures against your own records to make sure the amounts reported are correct. Carefully compare the gross federal and state wages, federal, state and local income tax withheld, and Social Security and Medicare taxes withheld numbers on your W-2s to the amounts on your paystubs or other records. Also verify that the Social Security numbers on the forms are correct. If you find an error or discrepancy, contact the appropriate employer or financial institution for an explanation or a corrected copy.

If the federal and state wages are not the same I always attempt to reconcile the numbers. My home state of New Jersey does not allow a deduction from state wages for contributions to pension or deferred compensation plans other than a 401(k), or for employee contributions to flexible spending accounts for insurance premiums, medical expenses and dependent care. Third-party disability pay, which is usually at least partially taxable for federal purposes, is exempt from NJ state income tax and will not be included in the state wages amount.

If you do not receive a W-2 from an employer and you cannot contact the employer because it has gone out of business or disappeared all is not lost. You can use your paystubs or other records to reconstruct the various items of income and withholding and file Form 4852 “Substitute for FormW-2 Wage and Tax Statement” with your federal and state tax returns. In such a situation I recommend that you consult a tax professional.

A word of warning for taxpayers who have brokerage accounts.  You should receive at least one “Corrected” Consolidated Year-End 1099 statement. It would be a good idea to wait a few weeks after receiving the original 1099 information before having your return prepared.

Here is another heads up. Insurance company and telephone company dividend checks mailed out in December or January often have a Form 1099-DIV attached. Do not separate the check and throw out the 1099-DIV by mistake thinking it is merely a check-stub. Conversely, check any 1099-DIV you receive from an insurance company or telephone company to see if there is a dividend check attached. I can’t tell you how many times I have found checks attached to 1099s given to me by clients at tax time.

Just because you receive a Form 1099-G for a state tax refund does not mean that the refund is taxable. A state income tax refund is only taxable to the extent you received a “tax benefit” from deducting state and local taxes paid on your Schedule A.

Let us say your total itemized deductions on a joint 2010 Form 1040 were $11,728, just above the standard deduction amount of $11,400. Included in this amount is a deduction for the state income tax withheld during the year of $1,723. Your 2010 state income tax return reported an overpayment of $531 and you received a refund check for that amount in May of 2010. In January you may receive a Form 1099-G from your state tax authority for the $531 refund. Only $328 of this refund is taxable on your 2011 Form 1040. As your itemized deductions exceeded the standard deduction by $328, you only received a “tax benefit” of $328 from your deduction for state income taxes.

If you did not itemize on your 2010 Form 1040, or you filed a Form 1040A, a state income tax refund is not taxable. If you elected to deduct state and local sales tax instead of state and local income tax on your 2010 Schedule A the refund is also not taxable.

FYI, many states have stopped mailing out paper Form 1099-Gs.  You must go to the website of the state’s Division or Department of Taxation or Revenue to download a copy.  So just because you did not receive a Form 1099-G in the mail does not mean that one was not issued by the state.

The IRS is very picky about matching names to Social Security numbers. If a Social Security number and name reported on your tax return does not match exactly the name in the files of the Social Security Administration the IRS will remove the name and dependency exemption of that person and automatically recalculate the tax liability as Head of Household, Married Filing Separately or Single.

If you have changed your last name as a result of marriage or divorce during 2011 make sure to notify the Social Security Administration of the change before filing your tax return. You do this by submitting a Form SS-5 to request a new Social Security card. Go to www.ssa.gov/ssnumber.

TTFN

IF I HAD MY DRUTHERS - PART II

A while back I blogged here at TWTP on my “wish list” for changes to the federal income Tax Code.

Here is a “wish list” for my clients – things I wish they would all do:

(1) I wish that when a client receives a letter or notice from the Internal Revenue Service, or a state tax authority, about a tax return they would put it in the mail to me, fax it to me, or include it as a “pdf” format attachment in an email to me IMMEDIATELY.

I still have some clients who insist on trying to call me first to tell me that they got a notice from the IRS. This is a total waste of time. My telephone answering machine is turned off during the “regular” year – it is only on during the tax filing season (January 15 to April 15).

And what would happen if they did manage to reach me by telephone? They would tell me that they got a notice from the IRS or the NJ Division of Taxation or whoever and I would tell them to mail, fax or email it to me!

Here is an example. A client tried repeatedly to call me with no success. So he told his mother to try to call me, which she did for a week or so, again without success. The mother mailed me a note saying that her son was trying to get in touch with me. I mailed a note to the son, along with a self-addressed envelope, telling him to mail me the notice.

The notice, which was from the NJ Division of Taxation, was dated October 1st. I received the notice in the mail from the client, finally, on November 10th. Look at how much time was wasted!

(2) I wish clients would keep track of the cost basis of all their investments and give the information to me at tax time when they have sold investments.

Or at the very least tell - not ask – their brokers to provide them with – or send directly to me - a detailed Profit and Loss Statement showing dates of purchase and cost basis for every investment sold during the tax year.

Some clients do it right. They set up a file folder for each investment at purchase and put the original purchase confirmation in the file.

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If dividends are reinvested they put the annual DRP statements in the file each year. If the investment spins-off or merges or whatever they put any related correspondence, notices and statements in the file.

If they purchase real estate they put the Closing/Settlement Statement in the file along with any receipts for expenses involved in the purchase that were not paid through the closing. They also place any receipts for capital improvements in the file each year.

If they receive an investment (including real estate) by gift they ask the giver to provide them with the cost basis of the investment gifted. If they inherit an investment (including real estate) they ask the Executor of the estate to provide them with the market value or appraised value on the date of death that was used in filing the federal estate, if required, and/or state inheritance tax return or filing.

When the investment is sold they put the sale confirmation, or Closing Statement, in the file and give me the file folder with their tax “stuff”.

To be honest, I would prefer a complete and accurate Profit and Loss Statement from the broker, to save me the time of actually determining the gain or loss on each investment. However, the individual file folder system discussed above would provide more complete, and verifiable, information – and I do not always trust that the broker-provided statement is always totally accurate (sometimes a broker will state that a stock was purchased for “25 3/8 per share” on a certain date, and not give me the actual net dollar amount that includes all commissions and fees).

Under the new “Don’t Call It a Bailout” Act this problem will eventually be dealt with to a great degree, at least with stock, bond and mutual fund investments if not real estate – but not completely.

(3) I wish clients would provide me with specific numbers for deductions they are claiming – instead of telling me “claim the maximum” or “whatever I am allowed” or “same as last year”.

The maximum is what you actually paid. You are allowed what you actually paid. It is very rare that an expense or number of miles driven for an activity is exactly the same as it was the previous year.

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I need clients to tell me “$1023.50” or “$20.00 per week for 50 weeks” or “4638 miles”!

Each year I include in my January client mailing worksheets that apply to specific clients’ individual situations – for medical expenses, charitable contributions, rental income and expenses, employee business expenses, etc. I wish clients would fill them out completely and accurately – or provide me with a detailed listing of your deductions in any other format.

When clients do not give me the proper information and I have to email or write to you this wastes valuable time and delays the completion of the return.

I want to make sure my clients take advantage of all the deductions and credits to which they are entitled – but I can only do this if I am given complete and accurate information.

(4) I wish clients would make and keep a photocopy of all their Form W-2s for the year before sending me their “stuff” – as I clearly instruct in my annual January client mailing.

Each year during the season I get two or three frantic calls or emails asking me to fax photocopies of the W-2s to a bank, mortgage company or to the client. This is not a big thing, but anything that takes time away from actual 1040 preparation during this time is bad.

(5) My invoices all clearly state “payment due upon receipt”. This means once you receive the invoice and not “30 days net”. I wish my clients would sit down and write my check, and put it in the mail, as soon as they have finished reviewing the finished returns

This is only the beginnings of my client “wish list”. I could probably fill several more posts - and may just do that.

I hope that my clients read this post and take heed. As for the rest of you – I know you will make your own individual tax preparers a lot happier if you make these wishes come true for them as well.

TTFN

SOME LAST MINUTE ADVICE

Most of you should have received all of your 2007 Form W-2s by now – though employers still have three days to get them to you.

If you don’t have all your W-2s in your hand by “end of business” on Friday you should call the Payroll or “Human Resources” Department of the employer and ask for a duplicate.

If you do not receive a W-2 from an employer and you cannot contact the employer because it has gone out of business or disappeared all is not lost. You can use your paystubs or other records to reconstruct the various items of income and withholding and file Form 4852 “Substitute for Form W-2 Wage and Tax Statement” with your federal and state tax returns. In such a situation I recommend that you consult a tax professional.

You also should receive all 1099s for bank interest, stock dividends, and non-employee compensation by Friday. A word to the wise – just because you have not received a Form 1099 does not mean that you do not have to report the income. If income is taxable it is taxable whether or not you receive a Form 1099. And just because you have not received a Form 1099 does not mean that the “payee” has not issued one. The form could have gotten lost in the mails. But while your copy was lost chances are that the one sent to the IRS made it.

THIS AND THAT

* The Social Security Administration has announced that due to a “programming error” an incorrect amount appears in the “Benefits for 2007” box on about 2.7 Million 2007 SSA-1099s. The SSA has corrected the problem and will be mailing out corrected SSA-1099s beginning today (January 25th). The revised SSA-1099 states in red typeface that it is a “Corrected Notice”. Click here for more information.

* The National Association of Tax Professionals reminds us of some items to keep in mind when filing your 2007 Form 1040:

· If you are eligible to claim a tax credit for child and dependent care expenses be sure to include the Social Security or Employee Identification number of your caregiver on the Form 2441.

· Remember to sign your return in the proper place. If you are filing a joint tax return with a spouse, both of you must sign.

· Attach Copy B of all Forms W-2 received during the year to the federal return. Also attach any Forms 1099 that report tax withholding. {make sure you attach Copy B - or else "Sam" will send the return back to you - rdf}

· Mail your return to the proper address. The IRS often changes the address for mailing returns. If the IRS sent you a tax booklet, use the enclosed envelope. If you have a balance due, you must use a payment voucher and mail your return to a lock box instead of the service center. If you electronically file your return, the chance of mailing your return to the wrong service center is virtually eliminated.

· Check the accuracy of all the Social Security numbers entered on your tax return. Each person for whom you claim a personal exemption is required to have a Social Security number or some other taxpayer identification number. Make sure the name and number appear just as they do on the officially-issued Social Security card. {this is very, very important - rdf}

· If you owe money this year, make your check payable to the “United States Treasury Service” not the “IRS. {I will explain why the checks are no longer payable to "IRS" in a future posting - rdf}

· Double check the tax from the tax tables, as well as all calculations.

· Make a copy of the return for your records.

· Be certain there is enough postage on the envelope. Include your full return address. If you owe, it’s a good idea to spend the extra dollars and use registered mail so there is a record that the IRS received your return.

* I have a final comment on what you should give your tax preparer. This year my annual January client mailing included the following:

“The last word - I want to make sure you take advantage of all the deductions and credits to which you are entitled. In order to make sure that you pay the absolute least amount of federal and state income taxes possible I need complete and accurate information from you. This means I need specific numbers for deductions you are claiming. ‘Claim the maximum’ or ‘Whatever is allowed’ or ‘Same as last year’ won’t cut it. The maximum is what you actually paid – you are allowed what you actually paid - and it is rare that an expense or number of miles driven is exactly the same as it was the previous year (although, I will admit, not impossible). I cannot make up numbers for you– I need you to tell me $1023.50 or $20.00 per week for 50 weeks or 4638 miles!”

TTFN

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

MY GETTING READY FOR FILING SUITE OF POSTS

As you start to receive your 2007 tax forms and reports in the mail, and begin to get your 2007 “stuff” together to turn over to your tax pro (possibly me), or before you start to prepare your own returns (are you sure you want to do that), I refer you to my getting ready for filing “suite” of January 2007 posts. The advice I provided in these posts for 2006 returns still applies to 2007.

As you would expect, the various amounts for exemptions, standard deductions, etc in these January 2007 posts apply to tax year 2006. You can find the appropriate 2007 amounts on the WHAT’S NEW FOR 2007 Page of my website.

GETTING READY TO PREPARE YOUR RETURN -

A reminder for taxpayers who have brokerage accounts - Because of the rules and rates for “qualified” dividends that have been in effect since 2004, you should again this year receive at least one “Corrected” 1099 statement. You should wait a few weeks after receiving the original 1099 information before giving your “stuff” to your preparer.

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A bank may issue one Form 1099-INT for all the accounts – savings, money market and CDs – that belong to the same name and Social Security number. There may be 6 or 7 accounts listed on a 1099-INT. It is important to verify each account listed on the form to make sure all of them belong to you. One of my clients received a 1099-INT last year with someone else’s account, that earned $300+ interest, included in the listing! Had he not carefully checked the form he would have paid close to $100.00 in unnecessary federal and state income tax. If you find an error on a Form 1099-INT go to the bank immediately and request a corrected form.

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Another reminder – According to Internal Revenue Service Revenue Ruling 69-184 you cannot be both a partner in and an employee of the same partnership. A partner cannot receive a salary from the partnership, and should not be given a W-2. If you are a partner who received “guaranteed payments” in 2007 but you receive a 2007 Form W-2 from the partnership you should go to the partnership’s accounting firm, tell them that they FU-ed. Check out my January 2006 post “EMPLOYEE OR PARTNER – THAT IS THE QUESTION”.

WHAT TO GIVE YOUR TAX PREPARER- PART I and PART II

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New for 2007 – Retired Policemen and Firefighters need to provide your tax pro with the amount withheld from your pension for the year for health insurance premiums.

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As you are gathering your “stuff” to hand over to your preparer it is a good time to review the new stricter documentation rules for cash contributions. Check out my post “NEW RULES FOR CASH CONTRIBUTIONS.”

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A final reminder - The upcoming tax-filing season will be full of delayed refunds.

As TAX GIRL Kelly Phillips Erb correctly points out “Congress is responsible for this mess, not IRS”. The employees of the IRS deserve kudos for being on top of the issue and putting in long hard hours to fix their system with the least possible amount of delay and inconvenience.

But there will be delays and inconvenience, and I expect more than the IRS has suggested in its information releases.

If you are a victim, do not take your anger out on the IRS. Instead write a chastising letter to your Congress-persons. Tell them to make abolishing the dreaded Alternative Minimum Tax a priority for early in 2008. And tell them to be damned sure that there is never again a repeat of the 2007 fiasco.

TTFN