Tax Prep 101 - Lesson #2

Getting Organized for the Tax Year

Even if your tax situation isn't complicated, there's still documentation the Internal Revenue Service demands. But tax filing doesn't have to be an ordeal. And it can be less frustrating and less time-consuming if you have all the material at your fingertips.

By being prepared, you'll be ready to file your return at the earliest possible moment (the IRS usually starts accepting returns around mid-January). And the earlier you file, the sooner you'll get your refund.

Much of the paperwork you'll need to complete your Form 1040 will tell the IRS how much money you made so they can tax it. But there also is information that will help you trim your tax bill.

To help you organize your tax paperwork, here are some of the most common documents you'll need.

Filing by the (identification) numbers
The IRS tracks every taxpayer through a Social Security number. For those of you who file your own returns, this isn't a problem. But if you drop all your data off at your accountant's office, make sure that your Social Security number is in there, as well as your spouse's if you file jointly.

Do you have any dependents -- children, parents -- that you'll be claiming? Then you'll need those numbers, too. This includes everyone, even infants. If your kids don't have their numbers yet, contact the Social Security Administration immediately. A missing Social Security number for any person listed on your return could cost you.

The IRS could delay the processing of your return, slow down any refund, or even disallow a credit if you don't have the identification numbers to support it.

And don't forget the tax identification number of the person or business that takes care of the kids while you're at work. You'll need it if you file for the child care credit. You should receive a statement from the care provider that includes his or her tax ID number, as well as the amount you paid, so you can use it to claim the credit.

It is called an income tax
Since it's our income that the taxman wants a piece of, start thinking about the employment and income data you'll need to file.

By the end of January, employees should get a Form W-2 from the boss showing how much was earned, how much is taxable and just what taxes were withheld. If you have more than one job, you should get a Form W-2 from each employer.

You say you're still waiting for your W-2? The IRS has a substitute form, Form 4852, you can use in its place. You'll need last year's final pay stub for data to enter on the alternate W-2. And even if you have your official tax form, check it against that last pay stub to make sure the W-2 data is correct.

If you're an independent contractor, the company you worked for should send you a Form 1099-MISC showing your gross earnings. You can view, but not download, Form 1099-MISC online at the IRS Web site.

If you're self-employed, you have a bit more work to get organized. Track down all receipts and documentation for business-related expenses, from the mileage records you kept when using your car for business to the office equipment and supplies you bought to the utility bills you paid to keep the home-office lights on.

IRS interest in your other assets
Wage income isn't the only earnings that the IRS taxes. Are you saving money for your kid's college, a new house or retirement? Good for you -- and the taxman. Interest earned on most savings accounts is taxable.

You should get statements from each of the account holders, as well as formal tax forms. Copies of the forms also go to the IRS.

For interest earnings, these documents are typically Form 1099-INT.

If you've branched out into stocks or mutual funds, you should get a Form 1099-DIV for each stock, mutual fund or money market account. Reports on the proceeds from broker transactions, if you use one, will be sent to you on a Form 1099-B.

Just like with your final paycheck stub, hang onto your year-end financial statements to compare with the official final tax documents.

That pesky miscellaneous income
Did you get a state tax refund last year? Did you rent out that old house you fixed up? Did you finally settle into retirement thanks to those monthly pension checks? There's a place for each of these on your tax return, so start getting this paperwork in order, too.

State and federal tax collectors work together. In the case of state tax refunds, that means the Form 1099-G you get detailing your refund also goes to the IRS, so hang on to your copy and report it.

Rental property can provide a nice boost to your balance sheet. But make sure you keep track of all it cost you to keep your tenants happy. These expenses can be used to offset your rent income, and that means less of your investment property earnings are taxable.

Some retirement payouts are taxable, at least in part. To help you determine exactly how much you owe you'll get a Form 1099-R showing how much was paid to you during the year.

But what if it wasn't such a good year financially, let's say you were out of work for a while and collected unemployment. Sorry, but unemployment is taxable. You'll get a separate Form 1099-G for this, so it needs to go into your filing preparation package.

Tax trimming starts at home
OK, you know what information you'll need to report your income. Now it's time to do the pre-filing preparation that could help you trim the taxable amount.

Costs related to your home are a good place to start.

Homeowners know the value of a mortgage. Not only does the loan get you into your house, but the interest you pay on it is deductible. Your lender will send you a Form 1098 with this amount. You can check out your loan amortization schedule and get an idea of just what the deductible interest amount will be.

If you made an extra mortgage payment at the end of last year to up that interest amount, make sure it's counted. Sometimes lenders use automatic reporting programs that overlook extra payments. You can still claim the extra interest; just make sure you document it in case the IRS follows up.

Mortgage interest isn't limited to your primary residence. If you have a vacation home, interest on that loan will be on a separate Form 1098 -- and is just as deductible.

And don't forget the interest you paid on a home equity loan. Your year-end loan account statement will tell you how much this was, and in most cases it's deductible on your Schedule A, too.

Using taxes to reduce taxes
Homeowners get another way to reduce what they pay to Uncle Sam -- using the real estate taxes they pay as a deduction.

If part of your mortgage payment each month includes an escrow amount that's used to pay annual real estate taxes, then the 1098 form you get from your lender also will tell you this amount.

Then there are any state and local income taxes you paid. Check your W-2 for this information, and be sure to deduct it, too.

Don't own a house? Don't despair. There's still a tax deduction opportunity for you if your state or county charges a personal property tax. Most often, this tax is on autos, so if you pay, make sure the collecting tax agency sends you a statement showing how much so you can put it on your Schedule A.

Work expenses can cut your taxes
Did you look for a new job this year? Kept your job, but had to shell out for work-related items and never got paid back? Move to take a new job?

All of these situations can help reduce your tax bill, as long as you've got the documentation. In the case of job searches, find those receipts for anything related to your hunt -- as long as you're looking for work in the same field.

If you kept your current job, but had to pay for some items that your boss didn't reimburse you for -- travel expenses, uniforms, union dues, subscriptions -- then these can be deducted as miscellaneous items on Schedule A. Again, you'll need the receipts, so go through your paperwork collection carefully.

Good works, good records, good tax break
Good deeds can be their own reward; they also can reward you at tax time.

Cash donations to qualified charities can be deducted, and you should get a note from the charity acknowledging your gift if it was $250 or more. Next year, you'll need this documentation for every cash gift, regardless of how large or small.

You'll also need that receipt you got when you dropped those clothes and books off at the local Goodwill collection center to claim a deduction. If you donated the items after Aug. 17, you also better make sure that the articles were in good or better shape. A new law allows the IRS to deny deductions for anything that's deemed of "minimal monetary value." So, no giving away threadbare sweaters that really should go in the trash and then writing the gift off.

But you still can get credit if you volunteered at the local soup kitchen. No, you can't deduct the value of your time, but if you drove there, then you can deduct your mileage at 14 cents per mile as a charitable gift. Documentation of your effort can be as easy as a notation in your calendar of the days you worked and where the shelter is located.

Accurate taxes require accurate information
Now that you know what data you'll need to file your taxes you've taken a big first step in the process.

By knowing what information you need, digging out those documents now and keeping track of all the tax-related account statements you've received, you'll immediately realize if you're missing anything or if something needs to be corrected.

In either case, you still have plenty of time to track down the proper documentation -- saving you time, anxiety and possibly money when you file your return.

S. Raines, Sr. Financial Advisor/Tax Preparer

www.effectur.com