Article Highlights:

  • Time to gather your information for your tax appointment
  • New for 2018
  • Choosing your alternatives
  • Tips for pulling your information together

Tax time is just around the corner, and if you are like most taxpayers, you are finding yourself with the ominous chore of pulling together the records for your tax appointment. The difficultly of this task depends upon how well you maintained your tax records throughout the year. No matter how good your record keeping was, arriving at your tax appointment fully prepared will give us more time to:

  • Consider every possible legal deduction;
  • Evaluate which income reporting methods and deductions are best suited to your situation;
  • Explore current law changes that are affecting your tax status; and
  • Talk about tax-planning alternatives that could reduce your future tax liability.

New for 2018 – There are a number of new complications this year, including:

  • To combat tax fraud, the IRS is requiring all tax preparers to verify their clients’ identity with a government picture ID, although there is an exception for clients if the preparer has had a multi-year business relationship with a client AND has previously verified the client’s identity with a government picture ID. Since that was not previously required, it will be necessary for all clients this year, so be sure to bring a picture ID (also a requirement for a spouse) to your appointment.  
  • Although the federal government changed its tax rules with the tax reform, many states with state income tax, such as California, have not conformed to the federal changes, which means a separate set of rules may apply to your state and federal tax returns.
  • The tax reform added a new 20% deduction for pass-through income from business activities. In some cases, the computation can be very complicated and will take additional time.  

Choosing Your Best Alternatives – The tax law allows a variety of methods of handling income and deductions on your return. The choices you make as you prepare your return will often affect not only the current year but also future returns. Topics these choices relate to include:

  • Sales of property – If you’re receiving payments on a sales contract over a period of years, you can sometimes choose between reporting the whole gain in the year you sell or over a period of time as you receive payments from the buyer.
  • Depreciation – You’re able to deduct the cost of your investment into certain business properties. You can either depreciate the costs over a number of years or, in certain cases, deduct them all in one year.

Where to Begin – Preparation for your tax appointment should begin in January. Right after the New Year, set up a safe storage location, such as a file drawer, cupboard, or safe. As you receive pertinent records, file them right away, before you forget or lose them. Make this a habit, and you’ll find your job a lot easier on your appointment date.Other general suggestions to prepare for your appointment include:

  • Segregate your records according to income and expense categories. File medical expense receipts in one envelope or folder, mortgage interest payment records in another, charitable donations in a third, etc. If you receive an organizer or questionnaire to complete before your appointment, fill out every section that applies to you. (Important: Read all explanations, and follow the instructions carefully. By design, organizers remind you of transactions you may otherwise miss.)
  • Call attention to any foreign bank account, foreign financial account, or foreign trust in which you have an ownership interest, signature authority, or controlling stake. We also need to know about foreign inheritances and ownership of foreign assets. In short, bring any foreign financial dealings to our attention so we know if you will have any special reporting requirements. The penalties for not making and submitting required reports can be severe.
  • If you acquired your health insurance through a government marketplace, you will receive Form 1095-A, issued by the marketplace, which will include information needed to complete your return. In addition, you will need to provide proof of insurance to avoid a penalty or qualify for one of the many exemptions from the penalty. If you received a hardship penalty exemption from the marketplace, you will have been issued an exemption certificate number (ECN), which must be included on your tax return. The 1095-A and ECN documentation need to be included with the other material you bring to your appointment. If your insurance coverage was through an employer and the employer issued a Form 1095-B, Form 1095-C, or substitute form detailing your coverage, bring it to the appointment.
  • Keep your annual income statements separate from your other documents (e.g., W-2s from employers; 1099s from banks, stockbrokers, etc.; and K-1s from partnerships). Be sure to take these documents to your appointment, including the instructions for K-1s!
  • Write down your questions so you don’t forget to ask them at the appointment. Review last year’s return. Compare your income on that return to your income for the current year. A dividend from ABC stock on your prior-year return may remind you that you sold ABC this year and need to report the sale, or that you haven’t yet received the current year’s 1099-DIV form.
  • Make sure you have Social Security numbers for all of your dependents. The IRS checks these carefully and can deny deductions and credits for returns filed without them.
  • Compare deductions from last year with your records for this year. Did you forget anything?
  • Collect any other documents and financial papers that you’re puzzled about. Prepare to bring these to your appointment so you can ask about them.

Accuracy Even for Details – Make sure you review personal data to ensure the greatest accuracy possible in all detail on your return. Check names, addresses, Social Security numbers, and occupations on last year’s return. Note any changes for this year. Although your telephone number and e-mail address aren’t required on your return, they are always helpful should questions occur during return preparation.

Marital Status Change – If your marital status changed during the year, you lived apart from your spouse, or your spouse died during the year, list the dates and details. Bring copies of prenuptial, legal separation, divorce, or property settlement agreements, if any, to your appointment. If your spouse passed away during the year, you should have a copy of his or her trust agreement or will available for review.

Dependents – If you have qualifying dependents, you will need to provide the following for each (if you previously provided us with items 1 through 3, you will not need to supply them again):

  1. First and last name
  2. Social security number
  3. Birth date
  4. Number of months living in your home
  5. Their income amounts (both taxable and nontaxable). If your dependent is your child over age 18, note how long the child was a full-time student during the year.

For anyone other than your child to qualify as your dependent, they must pass five strict dependency tests. If you think one or more other individuals qualify as your dependents (but you aren’t sure), tally the amounts you provided toward their support vs. the amounts they provided. This will simplify the final decision.

Some Transactions Deserve Special Treatment – Certain transactions require special treatment on your tax return. It’s a good idea to invest a little extra preparation effort when you have had the following types of transactions:

  • Sales of Stock or Other Property:All sales of stocks, bonds, securities, real estate, and any other property need to be reported on your return, even if you had no profit or loss. List each sale, and have purchase and sale documents available for each transaction.

The purchase date, sale date, cost, and selling price must all be noted on your return. Make sure this information is contained on the documents you bring to your appointment.

  • Gifted or Inherited Property:If you sell property that was given to you, you need to determine when and for how much the original owner purchased it. If you sell property you inherited, you will need to know the original owner’s death date and the property’s value at that time. You may be able to find this on estate tax returns or in probate documents; otherwise, ask the executor.
  • Reinvested Dividends: You may have sold stock or a mutual fund for which you participated in a dividend reinvestment program. If so, you will need to have records of each stock purchase made with the reinvested dividends.
  • Sale of Home: The tax law provides special breaks for home sale gains, and you may be able to exclude up to $500,000 of the gain from your primary home if you file a married joint return and meet certain ownership, occupancy, and holding period requirements. The maximum exclusion is $250,000 for others. Since the cost of improvements made on your home can also be used to reduce any gains, it is good practice to keep a record of them. The exclusion of gains applies only to a primary residence, so keeping a record of improvements to other property, such as your second home, is important. Be sure to bring a copy of the sale documents (usually the final closing escrow statement).
  • Purchase of a Home: Be sure to bring a copy of the final closing escrow statement if you purchased a home.
  • Vehicle Purchase: If you purchased a new plug-in electric car (or cars) this year, you may qualify for a special credit. Please bring the purchase statement to the appointment with you.
  • Home Energy–Related Expenditures: If you installed a solar, geothermal, or wind power-generation system in your home or second home, please bring the details of the purchase and manufacturer’s credit qualification certification to your appointment. You may qualify for a substantial energy-related tax credit.
  • Identity Theft: Identity theft is rampant and can impact your tax filings. If you have reason to believe that your identity has been stolen, please contact this firm as soon as possible. The IRS provides special procedures for filing if you have had your identity stolen.
  • Car Expenses for Business: If you used one or more automobiles for business, list the expenses of each business vehicle separately. When claiming vehicle-related business expenses, the government requires your total mileage, business miles, and commuting miles for each business vehicle to be reported on your return, so be prepared to have those numbers available. Job-related vehicle expenses are not deductible by employees on their federal returns in years 2018 through 2025. However, some states, including California, still allow them. So if you have unreimbursed employee business expenses, continue to provide the information noted above in case the deduction is allowed for state taxes, and if you were reimbursed for mileage through an employer, know the reimbursement amount and whether it was included in your W-2. 
  • Charitable Donations: You must substantiate cash contributions (regardless of amount) with a bank record or written communication from the charity showing the name of the charitable organization, date, and amount.

Unreceipted cash donations put into a “Christmas kettle,” church collection plate, etc., are not deductible. For clothing and household contributions, donated items must generally be in good or better condition, and items such as undergarments and socks are not deductible. You must keep a record of each item contributed that indicates the name and address of the charity, the date and location of the contribution, and a reasonable description of the property. Contributions valued under $250 and dropped off at an unattended location do not require a receipt. For contributions above $500, the record must also include when and how the property was acquired and your cost basis in the property. For contributions above $5,000 and other types of contributions, please call this office for additional requirements.

If you have questions about assembling your tax data prior to your appointment, please give this office a call.