Prepare to meet your tax ‘maker’

The days of you dropping a shoebox of receipts and records on the desk of your tax return preparer are hopefully long gone.  Not only can this cost you extra time and money, but it may also result in inaccuracies or omissions on your personal return.

Strategy: Help your tax return preparer help you.  In other words, put him or her in the best possible position to maximize the tax benefits available on your 2019 return.

Here are five steps that can go a long way toward meeting this objective.

  1. Organize your records.  Don’t expect your tax return preparer to unravel a jumble of receipts, credit card slips and other paperwork.  For starters, arrange a meeting to cover all the bases before tax-filing season kicks off.  Assemble your records logically before you present them.  Provide whatever information you can digitally.
  2. Don’t make false assumptions.  For instance, you can’t assume that your tax preparer recalls all your personal circumstances or unusual quirks in your situation.  Give him or her a refresher.  Also, check to see if any items carried over from your 2018 return—capital losses, net operating losses, passive activity losses, etc.—will be allowed on your 2019 return.
  3. Report all securities transactions.  This is vital information your tax preparer will need to complete your return.  Sometimes, a few trades might fall between the cracks, especially if you have multiple transactions involving mutual fund shares. Provide your tax return preparer with all the 1099’s you receive.  Again, doing things digitally makes it easier for everyone. Remember that transferring shares within the same family of mutual funds is a taxable event.  Don’t forget to include these transactions.
  4. Support your basis adjustments. If you sold securities in 2019, you owe tax on the difference between the sales price and your basis. Make sure you provide any documentation needed for adjusting your basis.  Otherwise, you might overpay your tax bill.  Typically, mutual fund distributions or dividends and capital gains are automatically reinvested, unless you order otherwise.  If you don’t account for taxes previously paid on these amounts, you’re paying Uncle Sam twice on the same gains or dividends!    Example:  You bought mutual fund shares years ago for $10,000 and sold them in 2019 for $15,000.  In the intervening years, you paid tax on $2,000 in reinvested dividends and capital gains, so your adjusted basis is $12,000 ($10,000 original cost + $2,000). Therefore, your taxable gain from the 2019 sale is only $3,000 ($15,000 sale price- $12,000 adjusted basis), not $5,000.
  5. Combine business with personal.  Don’t treat your personal tax return like it exists in a vacuum, especially if you own a pass-through entity (e.g., a partnership or S corp) or have other business interests.  It is often recommended that you use the same tax return preparer (or firm) to handle your business and personal returns.

The due date for filing 2019 returns for calendar-year corporations is March 16, 2020, while the deadline for filing individual returns is April 15, 2020.

Small Business Tax Strategies
Vol. 15, No.1   January 2020