Here is a CPA’s tax season nightmare: A small business client walks into his office with a shoebox under his arm that is filled with loose receipts. He dumps the receipts onto the CPA’s desk and says, “Let’s get to work on my taxes!”
There are two things wrong with this scenario. One, because of the client’s lack of organization, it’s going to take the CPA longer to prepare his taxes, which means it’s going to cost more money. Two, it’s likely he will miss out on legitimate deductions he would be entitled to, if he were better organized.
To save you from suffering a similar fate, here are 8 steps you can take to be better prepared for the 2017 tax season.
No matter what your employment status is – whether you worked for just one employer, or you worked for multiple employers, or you were self-employed – you must collect all the tax documents related to all the income you received in the prior year. It is important to realize that taxable income can be more than your annual salary. It can also include the following sources of income:
Make sure you have collected and accounted for all your sources of income.
Similar to the above, you must account for any income (or losses) derived from your investments. This could be interest earned from bank accounts; income from the sale of stock or stock dividends; rental income; or other payments and royalties.
Your bank or brokerage firm are obligated to provide you with the necessary tax documents which detail the amount of money you earned from your investments in the prior year.
Most taxpayers will file their taxes as wage earners and they will typically claim the standard deduction provided by the IRS.
However, if you own a business, then it is necessary to identify qualified business expenses that you will be able to deduct from your business income.
According to the IRS, a business expense must be both ordinary and necessary.
An ordinary expense is defined as “one that is common and accepted in your trade or business.” A necessary expense is defined as “one that is helpful and appropriate for your trade or business.”
If you are going to itemize your expenses on your tax return, it is advisable to seek out the services of a tax professional.
If you have donated money or any material goods (such as clothing, furniture, appliances, etc.) to a charity, those donations are tax deductible. However, it is necessary to obtain the appropriate receipts from the charity for tax purposes.
If you have donated material goods, then you must also declare a fair-market value for those goods. There is a great website called Its Deductible which can help you to determine the value of your goods and also track your donations throughout the year.
For most people, there are two deductions that are most common and standard. If you own a home, then you are able to deduct the interest that you paid throughout the year on your mortgage loan. The same applies to the interest that was paid on a student loan.
So, if you own a home or are paying off a student loan, these are two qualified deductions that are not to be missed.
If in any given year, a taxpayer has incurred a significant amount of medical expenses, then it might be in their best interest to claim a medical deduction.
The formulation for determining what deductions are allowable can be complicated, so if you’ve had extraordinary medical expenses, it’s best to consult with a tax professional who can make sure that you fully comply with IRS regulations.
A tax credit is a figure that is subtracted from the amount of taxes that you owe. The IRS provides a long list of available tax credits and it is up to the taxpayer to determine, based on their individual circumstances, if they are eligible for the credit or not.
The amount of tax savings can be sizeable so it’s important to know which credits are applicable to you.
If you have not yet made your 2016 IRA or Roth IRA contribution, you can still do that in advance of the tax filing deadline which is April 18 this year. If you’re under the age of 50, you can contribute up to $5500; if you’re 50 or older, you can contribute up to $6500 into these accounts.
Both plans offer significant advantages to taxpayers who have established these retirement accounts.
Being sufficiently prepared for the tax season will make your life (and the life of your tax professional) substantially less painful and more productive.
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