The tax return season is already in full swing.
Strategy: If you use a pro to handle your 2016 return, make things easier by taking five basic steps.
1. Get your house in order. Don’t simply dump a pile of receipts, credit card slips and other papers on your tax pro’s desk and expect him or her to unravel it all. Schedule a meeting to cover all aspects. At that time, you can provide all the relevant information and documentation in a neat and logical order.
2. Don’t make assumptions. Give your tax pro a refresher course on your situation and any special quirks. Even more important: Check to see if items carried over from your 2015 return—capital losses, passive activity losses, net operating losses, etc.—will be allowed this year.
3. Report securities transactions. This is often vital to a return. Provide your tax pro with all 1099s. Remember that transferring shares within the same family of mutual funds is a taxable event.
4. Support basis adjustments. If you sold securities in 2016, you owe tax on the difference between your sales price and your basis. Make sure that the adjusted basis you use for calculations is properly documented. Otherwise, you might overpay the actual bill.
In fact, if you’re not careful, you could pay a “double tax” on mutual fund dividends and capital gains that have been automatically invested. Reason: You have already reported those amounts.
Example: In 2016, you sold mutual fund shares acquired at $10,000 for $15,000. During the intervening years, you’ve paid tax on $2,000 of dividends and capital gains that you reinvested to buy more shares in the fund. Therefore, your adjusted basis in the shares you sold in 2016 is $12,000 (the original $10,000 + the $2,000 that you reinvested). Therefore, your taxable gain is only $3,000 ($15,000 – $12,000), not $5,000 ($15,000 – $10,000).
Mutual fund companies are generally required to report the adjusted basis on certain sales of shares acquired after 2011 to both investors and the IRS.
5. Mix business with personal? Usually, it’s not a good idea. However, if you own a business, especially a pass-through entity like a partnership or S corporation, you may have the same firm handle both your personal and business returns. One is often dependent on the other.
Tip: For the first time, the tax filing deadline for calendar-year C corporations is in April. Specifically, the deadline for a calendar-year C corp’s 2016 return is April 18, 2017.