Taxes aren’t a game, so don’t leave yourself hanging.
Tis the season - no, not for Christmas - I’m referring to tax season. As Ebenezer Scrooge once said in reference to giving alms, “A poor excuse to pick a man’s pocket.” So, what can you do to minimize the amount of tax you pay?
Organize year-end info.
First, organize all your year-end information. Gather up all original W-2s, 1099s, K-1s, 1098s, summary statements relating to your investments, charitable contribution statements, real estate taxes, personal property taxes (where applicable), job search expenses, investment expenses, business expenses, and business mileage. As a tax preparer, I prefer to examine the original source documents whenever possible, rather than what the taxpayer has written on a piece of paper in an attempt to make my job easier.
If you are a professional and run your own business, your yearly revenue and expenses detail is a must. If you keep your books on some type of software, your tax preparer will need the balance sheet and statement of income, complete with details of outstanding loan balances, accounts receivable, and accounts payable. Make copies of invoices for all new equipment you purchased during the year. In fact, too much detail is better than not enough. Rely on your tax advsior to know about changes in depreciation and write-offs of SUVs. Ask about the deductability of sales taxes in some states.
Have questions ready
Have your questions ready when you meet with your tax preparer. This can be an educational process for you and is your chance to plan ahead for next year.
One thing to ask about is if you are maximizing your retirement plan possibilities. If you are self-employed and still using a SEP, the rate is now 25 percent instead of the old 15 percent maximum. Would a safe harbor 401(k) be a better idea for you? Or, should you be doing something different to create deductions? For example, would taking out a home equity loan on a car instead of an automobile loan be a good idea? With one method, the interest may be deductible; with the other method, it is not.
If you have children who are mature enough, should they work for the business and get paid? Will this benefit you as a taxpayer?
Issues other than taxes
Finally, seek your tax preparer’s advice on things other than tax issues. CPAs work with financial detail every day. Since you are paying a CPA to do your taxes, use his or her knowledge. Ask how your investments compare to others. You may wish to set up a separate appointment to review your portfolio. Certified financial planners, investment brokers, and insurance representatives all have something to gain from your investments. Most are reputable and do an excellent job, but they do make their living selling you what they advise is needed.
Here may be your chance to get advice from the person who sees how your investments are performing at the end of each year, and how your investments compare to other portfolios. And, as a plus, this person is not trying to sell you anything. The tax professional reviews thousands of investments each year and sees the results of numerous professional financial advisors. Pick their brains. See how he or she views your financial advisor.
By using these pointers and techniques, preparing your tax return can turn into a positive learning experience. You can build on this year’s experience to minimize next year’s taxes. You may even pick up some other financial expertise along the way.
Tax changes in 2004
While tax year 2003 saw multiple tax law changes, 2004 continues those changes and more.
For example, the statement from your brokerage company will show interest income, dividends, capital gains and losses, and possibly some investment credits. Some of this interest may be tax-free municipal interest. Dividends are taxed at a 15 percent rate. Gains can be taxed as long-term or short-term; be taxed at 5 percent, 15 percent, or at ordinary income rates, depending on the holding period and the type of gain.
Some of this income may be subject to alternative minimum tax. We must rely on these investment statements to reveal that information. If you sell stock you have owned for more than a year, try to have the purchase detail available.
Your tax professional needs all of this data to compute your lowest tax possible.
L. Lee Eggemeyer, CPA
Mr. Eggemeyer is the managing partner of Fick, Eggemeyer & Williamson, CPAs, PC, with offices located in Columbia, Ill., and St. Louis, Mo. He may be reached at (618) 281-4999 or visit their Web site at afewcpas.com.