If your annual tax return is complex, or you don’t have the time or inclination to cope with filing, you’ll probably use a tax pro for the dirty details.
Strategy: Put your tax return preparer in the best position to help you. Follow these five simple steps, to save both time and money.
1. Get organized. Don’t dump a pile of receipts, credit card slips and other papers on your CPA’s desk and expect him or her to unravel it all. Arrange for a meeting this month to cover all the bases. Then provide the requested information and documentation in a neat and logical order.
Tip: Bring along relevant articles clipped from Small Business Tax Strategies. Pinpoint those tax strategies you think you can use on your 2010 return. And start planning now to minimize tax in 2011.
2. Don’t make assumptions. Give your tax pro a quick refresher about your personal circumstances or any recurring quirks. Most important, check to see whether items carried over from your 2009 return—capital losses, net operating losses (NOLs), passive activity losses (PALs), etc.—will be allowed this year.
3. Report all security transactions. This is vital info your tax pro will need to complete your return. Provide your tax return preparer with all the 1099 forms you’ve received.
Tip: Transferring shares within the same “family” of funds is a taxable event. Don’t forget to include those transactions.
4. Support your basis adjustments. If you sold securities in 2010, you owe tax on the difference between the sales price and your basis. Make sure you provide all the documentation for adjusting basis. Otherwise, you might overpay the actual tax bill.
Typically, mutual fund dividends and capital gains are automatically reinvested. If you don’t increase your basis to account for the reinvestments, you will wind up paying Uncle Sam twice on the same gains!
Example: You bought mutual fund shares years ago for $10,000 that you sold in 2010 for $15,000. During this time, you’ve paid tax on $2,000 of reinvested dividends and capital gains, so your adjusted basis is $12,000 ($10,000 original cost + $2,000). Therefore, your taxable gain is only $3,000 ($15,000 – adjusted basis of $12,000)—not $5,000.
Note that new basis reporting rules for securities take effect in 2011 (2012 for mutual funds).
5. Combine business with personal. Don’t treat your personal tax return as if it exists in a vacuum, especially if you own a pass-through entity (e.g., a partnership or S corporation) or have other business interests. One is dependent on the other. Use the same firm to handle your business and personal returns.
Tip: The deadline for corporate tax returns is March 15, 2011, so you may have to move fast.