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Are You Ready for Tax Season?
By Cathy Werthan   View more articles by this author
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February 09

By now, you are probably getting flooded with 1099’s, W-2’s and “Important Tax Information.” The dreaded filing season is here and you’ll be forced to confront the inevitable—getting it all together. Here are some key points to help you manage the process and avoid costly mistakes:

Make sure you have everything:


There is nothing more frustrating than receiving a letter from the IRS about a discrepancy on a previous tax return. It’s painful enough to pay tax without adding penalty and interest for little oversights. By establishing some good habits, you can substantially reduce the risk of such events.

Review a copy of your prior tax return to see what items you listed. Use this as your guide to seek out items for the current year.

Review your bank records for income sources and potentially tax deductible items.  If you haven’t done so already, commit to being more proactive by using personal finance software such as Quicken. This software has a fantastic import feature which can easily import bank and credit card transactions. All income and expenses can be captured within the categories in the software and if used correctly, will reduce the risk of oversight.

Often forgotten or overlooked is the 1099-R for distributions from retirement accounts. Taxpayers assume that because tax was withheld from the distribution there is nothing more to consider. Unfortunately, that’s not the way it works. The withholding is similar to W-2 withholding in that it is an estimated amount. The truing up comes when an actual tax return is filed, and either the IRS owes you or you owe the IRS.

In the dash to file a return, taxpayers often forget stock, mutual fund and investment transactions. Inevitably, brokerage firms fail to get 1099’s and year end statements mailed timely and often send subsequent corrected statements. Taxpayers are so inundated with correspondence; there is much confusion about what data is important and what is not. If you have investments held outside retirement accounts, don’t file until you have received a 1099 from your investment account. They have until February 16th this year to get them in the mail to you.

Know or ask questions about tax deductions:

For the basic tax return, an annual meeting with your CPA isn’t always necessary. For small business owners, high net worth individuals with varying circumstances, and those with life changes, it’s important to work closely with your tax advisor. The better your advisor knows you the more equipped they will be to help you.

Technology has played a key role in the efficiency of the filing season, but it has also served to reduce the amount of interaction between taxpayers and their advisors the last few years. This makes it all the more important for you to seek relationships with advisors who will give your situation the right amount of attention. If you’ve gotten in the habit of just completing an organizer and delivering it to your CPA, it may be time to consider scheduling a meeting with him or her to review your situation.   If you don’t know what questions to ask, then ask your accountant if there is anything special that you should be aware of this filing season. If you are so inclined, check out http://www.irs.gov for a checklist of possible tax deductions. 

Track cost basis on stocks, Non-deductible IRA’s and Roth IRA’s:

Think of basis as your starting point.  When you sell a stock or a mutual fund you are taxed on the gain of that transaction.  The gain is determined by subtracting your basis (amount purchased) from the proceeds.  Many brokerage houses will track this information for you; however, they are not required to do so. It is ultimately the taxpayer’s responsibility. 

If your income exceeds the limitations to make a deductible IRA contribution, you have the choice of making a non-deductible contribution.  This is also considered basis and must be tracked so that when you take a distribution or convert to a Roth IRA, you will know what portion of the IRA has already been taxed. The previously taxed portion will be excluded from the taxable distribution. 

Roth IRA’s are funded with after tax dollars. Therefore, every dollar of contribution is also a dollar of basis.  If you hold the Roth until retirement age and take “qualified” distributions, you should never need your basis information since all qualified distributions are non-taxable.  However, if you should need to make a non-qualified distribution,  basis information is necessary to determine the taxable gains and possibly the early withdrawal penalty on those gains. 

Make estimated tax payments:

For tax year 2009, quarterly estimated payments are required if you have a tax liability, after credit for withheld taxes, of greater than $1,000.  The IRS recognizes that it is sometimes difficult to estimate exact amounts to pay quarterly which is why they offer a “safe harbor” option.  The “safe harbor” requirement is met if your total withholding and estimated payments equal: 1) 90% of the tax shown on the 2009 return, 2) 100% of the tax shown on the 2008 return (110% if the taxpayers 2008 Adjusted Gross Income was over $150,000 for married filing joint taxpayer) (See special rule below) or 3) paying installments on a current basis under an annualized income installment method.

A special rule applies in 2009 for payments to “qualified individuals.” This special rule would allow certain individuals to qualify for the 90% rule to avoid underpayment penalties.  

Fund SEP, Keogh & IRA’s timely:


IRA contributions for 2009 must be made by April 15, 2010. There is no extension for this deadline.

SEPs and Keogh accounts must be funded by April 15, 2010 or the extended due date of your return. These options are more flexible for cash flow planning purposes. Cash is often stretched in April since both tax and retirement funding are due at the same time. Filing an extension does not extend time to pay tax, but it does extend time to fund SEP’s and Keogh accounts.

Keep good records and know when to seek professional help:

Whether you file your own return or use the help of a professional, the burden of proof is on you.  Make sure you maintain not only your tax return but also the records to support positions you’ve taken on your tax return for six years. You must be able to support every position you’ve taken on your return.  The more complete and organized your records are the easier it will be to support your position should you need to in the future. Keep your calendars, too. This document has been more helpful in audit support than you can imagine.

There are many options when deciding when and how to file your tax return. The pitfalls of doing your own are the lack of collaboration that comes from working with a professional. The software out there is designed to make the process easier but mistakes still happen. If you don’t feel completely confident that a self-prepared return is accurate, that’s your gut telling you not to do this yourself.

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