Sometime between now and April 15, you'll probably sit down with your tax adviser to pour over receipts, write-offs and changes to your personal tax situation. You can save on your tax bill—and your tax-preparation fees—by avoiding these common errors:
1. Making accountants do work that you can do
CPAs tell many tales of taxpayers who arrive with shoeboxes full of receipts, credit card slips, etc. Some spend an hour in the accountant's office opening envelopes they think may be tax-related.
Instead, organize your paperwork beforehand. Come with a list of questions and tax strategies (including strategies clipped from Research Recommendations). Ask your tax pro if he or she offers a tip sheet or organizer form to help you prepare for that initial meeting.
2. Assuming they recall earlier returns
Your preparer won't have your entire tax history committed to memory. So, prior to your meeting, review your previous years' returns. Remind your preparer of any reoccurring quirks.
Plus, check whether any items were carried over from your 2002 return, including net operating losses, capital losses, passive losses, etc. Make a note of those items for your preparer, who'll determine whether they can be used to reduce your 2003 tax bill.
3. Forgetting 2003 trades or income
If you sold securities outside your tax-deferred retirement plan, include this information in records given to your preparer.
That's especially true if you moved, say, from one Fidelity mutual fund to another. That's a taxable transaction, and you'll owe tax on any gain. Some people disregard such "all in the family" moves. If you fail to report such gains, you'll draw IRS scrutiny.
Also, provide your accountant with any 1099 Forms for outside income. The IRS receives copies of those same forms, and if you fail to report income reported on documents that the IRS can match, you dramatically increase your IRS-audit exposure.
4. Overpaying tax on stock sales
Not only must you report security trades, you also must provide your tax preparer with cost-basis information for calculating your capital gain or loss. Include all reinvested dividends and (in the case of mutual funds) reinvested capital gains distributions. Otherwise, you'll pay tax twice.
For example, suppose you invested $10,000 in a stock a few years ago. In 2003, you sold your holdings and received $16,000. That's a $6,000 capital gain, right? Not necessarily.
Over the years, say you've received $1,500 worth of dividends, which you reinvested. And each year, you paid tax on those reinvested dividends.
Because of those dividends, your basis in that stock was really $11,500 ($10,000 plus $1,500) and your taxable gain was really $4,500 ($16,000 minus $11,500). If you report a $6,000 gain, you'll wind up paying tax on those dividends all over again.
5. Ignoring link with business taxes
Your 2003 business results will affect your personal tax situation, especially if you do business through a pass-through entity such as an S corporation, partnership or LLC.
Best bet: Use the same tax preparer to handle your business and personal returns. And schedule a meeting well in advance of March 15 (when most corporate tax returns are due), not April 15.
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