Organizing Your Paperwork for Tax Season

Organizing Your Documents for Tax Season
If you haven’t done it, now’s the time.

Compiling the relevant documents early can make it easier. Plus, if you pay someone to prepare your taxes, organizing your documents before handing them over can translate into time savings for them and lower cost for you. Here are some tips to help you get ready.

As a first step, look at last year’s return. Unless your job, living situation or financial situation has changed notably since you last filed your taxes, chances are you will need the same set of forms, schedules and receipts for this tax year as you did for the last one. So open that manila folder (or online vault) and make or print a list of the items that accompanied your previous return. Then start collecting the current tax year’s documents in one place. Make a note on your calendar to review your list of tax-related documents in early February, and to follow up on any that you have not received by that time.

How much documentation is needed?If you don’t freelance or own a business, your list may be short: W-2(s), 1099-INT(s), perhaps 1099-DIVs or 1099-Bs, a Form 1098 if you pay a mortgage, and maybe not much more. Independent contractors need their 1099-MISCs, and the self-employed need to compile every bit of business expense-related documentation they can find: store and restaurant receipts, mileage records, utility bills, and so on. 1

When totaling receipts, don’t forget charitable donations. Though claiming charitable deductions generally requires itemizing your deductions using Schedule A (Form 1040), beginning in 2020 a person who does not itemize deductions can deduct up to $300 for qualifying charitable contributions. The IRS requires specific types of documentation for charitable contributions. 2

Medical expenses: Collect receipts for any medical or dental expense for which your employer doesn’t reimburse you, and any medical or dental bills that came your way last year. Remember, you can’t include expenses that you paid with tax-exempt funds from your Health Savings Account (HSA). You’ll need to itemize deductions in order to claim medical expenses, and only the portion of your total qualifying medical expenses that is over 7.5% of your adjusted gross income will be deductible.3

Assemble the necessary federal Tax ID numbers (TINs). Make sure you have your own TIN, your spouse’s if filing jointly, and TINs for anyone you plan to claim as a dependent. That goes for newborns, infants and children as well. If your kids don’t have Social Security numbers yet, apply for them now using Form SS-5 (available online or at your Social Security office).4 If you claim the Child & Dependent Care Tax Credit, you will need to show the TIN for the person or business that takes care of your kids while you work.5 Your tax preparer will need all of these TINs.

While we’re on the subject of taxes, some other questions are worth examining...

How long should you keep tax returns? The IRS statute of limitations for refunds is 3 years, but if you underreport taxable income, file a claim for a loss from worthless securities or bad debt deduction, or fail to file a return (or if the IRS thinks you failed to file one), you’ll need those records to substantiate your claim. Retain any tax records that are linked to assets in order to calculate depreciation, amortization, or depletion deductions and gain or loss in the future.6 Some CPAs and tax advisors will tell you to keep federal and state tax returns for life.7

Can you use electronic files as records in audits? Yes. In fact, early in the audit process, the IRS may request accounting software backup files via Form 4564 (the Information Document Request). Form 4564 asks the taxpayer/preparer to supply the file to the IRS on a flash drive, CD or DVD, plus the necessary administrator username and password. The IRS has the ability to read most tax preparation software files.8

How do you calculate cost basis for securities? Cost basis can be a tricky topic, but it’s important to know the cost basis for each of your security shares in order to make the best tax determinations.

In the simplest situation, a cost basis for a particular share will be the sum of the original purchase price + any commission on the purchase. So if you paid a $100 commission to buy 200 shares of the Little Emerging Company @ $20 a share, your cost basis = $4,100, or $20.50 per share. Keeping it simple, if you then sold all 200 shares for $4,000, paying another $100 commission for the sale, you would show a loss of $200 since the $3,900 you made is $200 short of your $4,100 cost basis.

Numerous factors affect cost basis: among them stock splits, dividend reinvestment, and how shares are bought, gifted, and inherited. Since 2011, brokerages have been required to track cost basis for individual shares of stocks and mutual funds, and they report it to investors (and the IRS) when such securities are sold. Understanding how to direct your brokerage to sell specific shares can give you leeway to make the most tax-efficient moves. 9


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