Tax Preparation Saving Hints

You can save both time and money by maintaining proper record keeping throughout the year. By doing this, you will be maximizing the time spent during the tax preparation period. Good record keeping reduces errors, makes it easier to prepare your return, and provides a good defense for challenging the IRS. Good record keeping will allow you to easily flip through your financial information to answer any IRS inquiry. Here are some suggestions for maintaining proper record-keeping throughout the year:

• Keep a diary or log of expenses as they occur.
• Keep a file of bills. Set up a filing system whereby you have separate folders for each expense/payment. Maintaining an alphabetical file of bills will provide you with proof of deductions and expenses in case the IRS questions you. Plus, it just helps with your own personal or business finances.
• Record your payments either daily, weekly, or monthly into your accounting software program. It does not have to be anything fancy, just adequate to give you up-to-date information.
• If self-employed, keep a mileage log. Record the beginning odometer reading, ending reading, and the mileage for individual trips. Have a column for noting the destination and whether it was business related. This is very important for claiming business usage of your vehicle.
• Keep a file of receipts. When making a bank deposit, staple the receipt to the check stubs making up the deposit. Upon making your deposit, or receiving funds from outside sources, record it in your accounting software (if available). If you don't use accounting software, record the deposit in your checkbook or receipts log.
• Set up a folder containing your bank statements. You can include the above-mentioned receipts in this folder to ease the clutter. If you use your credit or debit card frequently, transactions will be reflected on your bank statements. This will ease in year-end tax preparation. It also provides for complete accounting of transactions.
• Be sure to reconcile your bank statement each month. This way you will notice any discrepancies and correct them immediately.
• Your checkbook stubs or duplicate checks can be used as records of your payments/deductible items.
• For IRA transactions: keep a record of any nondeductible and deductible contributions you made during the year. Records of nondeductible IRA contributions must be kept until all funds have been withdrawn.
• Home mortgage interest: Your bank statements and cancelled checks will provide information as to amounts and dates paid. This also applies for home improvements that were substantial.

There are some time limits you need to be aware of regarding your tax return and its information. They are as follows:

• Your records should be kept a minimum of three years after the year of filing. Generally, the IRS has three years from the date your return was filed to audit your return. However, in cases of suspected tax fraud, there is no time limitation at all. Also, for unreported income, the IRS can go back six years to question a tax return. Some authorities, therefore, advise keeping records six years.
• Keep records of transactions relating to particular property basis for as long as you own the property. They are used in figuring the basis of the original or replacement property.
• Save mutual fund, reinvested dividends, and cash stock purchase statements and confirmations until the securities are all sold. This information is used to show your cost basis. You will be checking back on your cost basis throughout the history of your security's transactions.

You will need to collect all the above information, if applicable, before you can start preparing your tax return. If you hire a tax professional, it still will help you save time and money by having your records organized.

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Tax Preparation Software

The majority of tax software programs available today offer much more than the typical tax forms to be filled out. They offer tax and savings strategies, thereby being an advisor of sorts.

Some tax software programs include within their financial planning mode: advice on retirement planning, family tax strategies, small business advice, counseling on bonds/stock/and mutual fund transactions, and home ownership/rental information.

The tax software program should contain current tax rules and laws that are provided in easy-to-understand terms. Even those users without any tax knowledge at all should be comfortable with the information presented. The program should also offer an error check to help reduce the amount of mistakes during the tax return preparation.

Online tax software, which is rapidly replacing desktop software, also has a variety of benefits including:

• No updates to download & install
• Always up-to-date
• Records kept safe online up to seven years
• Accessible from anywhere, anytime
• Free EF (if reputable)
• Chat-based support
• Doesn't matter if your computer dies
• Data transferable from year to year (even if your computer died)

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Choosing the Best Paid Tax Preparation

Many taxpayers prefer taking their taxes to a professional instead of doing it themselves. For this choice, there are alternatives available.

Tax preparation firms abound from January to April. Depending on the firm, taxpayers can either walk-in or make an appointment. There are also accounting firms offering tax services. For enrolled agents, check www.naea.org for information. CPA firms abound at local, regional and national levels. Many times, the individual State Board of Accountancy has a referral system put into place of members. Be sure to check with this entity before hiring any licensed CPA. Check to be certain that the CPA’s licensure is current.

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Free Tax Preparation Help

Free AARP volunteers are trained and certified in tax preparation. They are specially trained to help low-to-middle income taxpayers, aged 60 and older. More information can be obtained about the program by visiting either the AARP website or the IRS website.

VITA. For members of the military and their families, there is the strong Volunteer Income Tax Assistance (VITA) Program. Military personnel and families worldwide receive free tax preparation by volunteer trained military personnel who provide tax preparation assistance. This assistance is provided at offices/sites within their installations. These VITA sites provide free tax advice, tax preparation, and assistance to military members and their families. Tax preparers are trained and equipped to address tax issues specific to the military.

VITA works because the commanders support the program by detailing service members to prepare returns. Also, support is given providing space and equipment for tax centers. The IRS provides the tax software and trains the service members to prepare taxes at the military sites.

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Income Documents Needed

In order to get a full account of your income, you need to substantiate your claims (meaning back up the figures you supply). You need to receive verifying documents from outside sources. For 2006 tax returns, these outside source documents are to be mailed by January 31, 2007. If you do not receive them by February 15, call the IRS. Some of the income documents you will need for preparing your tax return are as follows:

• Employees: W-2 Salaries & Wages
• Self-Employed: 1099 (if over $600)
• Interest: 1099-INT or OID; deposit slips of interested received on money loaned to others
• Social Security Benefits: SSA-1099
• Dividends: 1099-D; company statements of dividend payments
• Tips: 4070 (for cash tips over $20/month); W-2
• Taxable refund of state and local income taxes: 1099-G
• Alimony: deposit slips, ex-spouse social security number, copy of divorce or separation decree
• Business: deposit slips, checkbook, invoice receipts, cancelled checks, bank statements,
• 1099-MISC (income over $600 from one source)
• Stock & Bond Sales: 1099-B, broker confirmation statement
• Sale of personal residence: closing papers, purchase records, improvement records
• Sale of real estate: closing statements, cost and improvement records, depreciation records
• IRA distribution: 1099-R
• Pensions & Annuities: 1099-R (if receiving lump sum distribution or annuity payments)
• Rent: checkbook, receipts, cancelled checks, accounting records
• Unemployment compensation: 1099-G
• Royalty Income: 1099-MISC
• Partnership Income: Schedule K-1, Form 1065
• Trust or Estate Beneficiary: Schedule K-1, Form 1041
• Gambling Income: losing tickets, Form W-2G, log showing wins and losses
• S Corporation: Schedule K-1, Form 1120S
• “Kiddie” tax on under age 14 child’s income: 1099-INT, 1099-DIV, 1099-OID

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Items Needed For Your Tax Return Preparation

If you're receiving tax counseling help to file your taxes, you need to have a variety of items with you. These include:

• Proof of identification
• Social Security Cards for you, your spouse and dependents and/or a Social Security Number verification letter issued by the Social Security Administration
• Birth dates for you, your spouse and dependents on the tax return
• Current year’s tax package if you received one
• Wage and earning statement(s) Form W-2, W-2G, 1099-R, from all employers
• Interest and dividend statements from banks (Forms 1099)
• A copy of last year’s Federal and State returns if available
• Bank Routing Numbers and Account Numbers for Direct Deposit
• Total paid for day care provider and the day care provider's tax identifying number (the provider's Social Security Number or the provider's business Employer Identification Number)
• To file taxes electronically on a married filing joint tax return, both spouses must be present to sign the required forms.

The IRS emphasizes the importance of each person using the correct Social Security Number (SSN). The most accurate information is usually located on your original social security card. (It is a good idea to laminate your Social Security card). The IRS points out that each year hundreds of thousands of returns are delayed in processing or credit/deductions are disallowed. This occurs because names and Social Security Numbers do not match Social Security Administration records. To prevent processing delays in paper returns and rejected electronically filed returns, volunteers check the accuracy of each Social Security Number, as well as the spelling of the name associated with the number.

If you do not have a Social Security Number for you or a dependent you should complete Form SS-5 , Social Security Number Application. This form should be submitted to the nearest Social Security Administration Office.

If you or your dependent is not eligible to get a Social Security Number you may need an Individual Taxpayer Identification Number (ITIN).There are a variety of tax credits available for taxpayers to claim on their tax returns. Each credit needs to have verifying documentation in order to prove its validity. This not only helps for your own record keeping, but also in case the IRS decides it wants to investigate your return further. Therefore, to be safe, it is recommended you have the following forms/documents available during your tax return preparation.

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