The federal government estimates that 60% of individuals use paid preparers to complete and submit their tax returns. If you are one of these people, it is important to start preparing your documents right away to expedite your tax return. Your preparer may take information directly from you or ask you to complete a questionnaire. Either way, you will need time to gather and organize the information and supporting documents.
Choose a Preparer
If you don’t yet have a tax preparer, a great way to find a preparer is to ask friends and advisors (e.g., an attorney you know) to make a referral. Be sure that the person you choose has a Preparer Tax Identification Number (PTIN) showing that they are authorized to prepare federal income tax returns. You should also inquire about fees, which are likely to depend on the complexity of your return. Avoid using a firm that intends to take a percentage of your refund. The IRS has tips for choosing a preparer and offers a link to the IRS directory of preparers (you can search according to the professional's qualifications).
Schedule an Appointment
The sooner you meet with your preparer, the sooner you can begin the tax preparation process (even if you have an extension, which is discussed later). If you anticipate a refund, the sooner you taxes are prepared and submitted, the sooner you will be paid. If you wait too long to schedule an appointment with a tax preparer, your appointment might be not be scheduled before April 15, and you may miss the opportunity to take actions that could lower your tax bill, such as your eligibility for making deductible contributions to IRAs and health savings accounts.
Gather Your Information Returns
By the end of January, you should have received various documents that you need from your employer or employers. For each form, verify that the information matches your own records.
Below are some of the most common forms (Note: This is not a complete list; the IRS has information on the many other types of information returns you may need):
- Form W-2, if you have a job
- Various 1099s to report income such as cancellation of debt (1099-C), dividends (1099-D), interest (1099-INT), and nonemployee compensation paid to independent contractors (1099-MISC) (Note: Brokers don't have to mail Form 1099-B, which reports gains and losses on securities transactions, until January 31, 2019.)
- Various 1098s reporting mortgage interest (1098)
- Form W-2Gs for certain gambling winnings
Gather Your Receipts
The receipts that you will need depends on whether you choose to itemize your personal deductions instead of claiming the standard deduction. You can choose to itemize if this produces the greater write-off. Unfortunately, the only way to know for sure is to determine the amount of your itemized deductions and compare them with your standard deduction amount.
If you are itemizing, you should have collected your receipts using whatever system you devised throughout the year to record various deductible expenses. Look for receipts for medical costs not covered by insurance (the deduction threshold is 10%, starting with the 2019 year) or reimbursed by any other health plan (e.g., a flexible spending account or health savings account), property taxes, and job-related and investment-related expenses).
If you have business income and expenses to report on Schedule C, you will need to share your books and records (e.g., QuickBooks or other accounting system, receipts for expenses, bank and credit card statements). The more organized you are, the less time it will take your preparer to process your taxes, which translates into lower fees for their service.
Charitable Contributions Receipts
If you made donations to charity and itemize your deductions, you need specific records to claim any write-off. For example, for contributions of $250 or more, you require a written acknowledgment from the charity stating the amount of your gift and that you did not receive anything (other than perhaps a token item) in return. If you don't have such an acknowledgment, contact the charity and request it. You will need to have it in hand by the time you file your return. Find details on the type of records needed for charitable deductions in IRS Publication 1771.
First Year for Tax Law Changes
The individual healthcare mandate brought in a slew of changes, including new forms for claiming the premium tax credit for eligible individuals who purchased coverage through a government Marketplace (exchange) and for figuring the shared responsibility payment for those who failed to carry coverage and do not qualify for an exemption.
You can find general information on the individual mandate and exemptions from the mandate on the IRS website. (For deadlines for enrolling through the Health Insurance Marketplace, go to the government website.) There is no penalty for failing to have health insurance since the 2019 tax year.
Other changes that started with the 2018 tax year and will last through 2025 include the end of the home-equity loan interest tax deduction and deductions for job-related expenses, tax-prep expenses and a number of other outlays; a drop in the home-mortgage interest deduction on new mortgages to interest on $750,000 from $1 million; and the end of the personal exemption.
In addition, state and local tax deductions (which include state income, property, and other taxes) now max out at $10,000; previously there was no ceiling on this deduction. On the other hand, the child tax credit doubles and so does the standard deduction.
List Your Personal Information
You probably know your Social Security number, but do you know the Social Security number for each dependent you claim? Jot this down this and other information (e.g., addresses of vacation homes and rental property, dates you moved, information about property that you bought and sold including dates, the amount you originally paid, the amount you received on the sale and your expenses) required to complete your return.
Decide on Filing an Extension
If you need more time to complete all of these tasks, you can request a filing extension to October 15. This will avoid any late-filing penalty, but be sure to pay what you think you’ll owe to minimize or avoid any late-payment penalty. There is no extension beyond April 15 for paying the tax that is due.
Decide What to Do About a Refund
If you expect a refund, you have several options regarding reimbursement.
- You can apply some or all of the refund toward your tax bill on the next return. The fund will be used for estimated taxes, reducing or eliminating the first installment of estimated taxes (due April 15, 2019).
- The IRS can send you a check or deposit the refund directly into your checking or savings account.
- You can directly contribute some or all of your refund to certain types of accounts (IRAs, health savings accounts, education savings accounts) or buy U.S. Savings bonds through Treasury Direct.
You can split your refund among the direct deposit choices by completing Form 8888. You must inform your tax return preparer what you want to do. If you want to apply a refund to the coming year (e.g., you want to use the refund to make a deductible IRA contribution), you should inform the preparer and the institution of the year to which your payment should apply.
Find a Copy of Last Year’s Return
If you use the same preparer that you used last year, they are likely to have your previous information. If you use a new preparer, last year’s return will serve as a reminder to the preparer—and you—of some items you don’t want to overlook. Below are two examples:
- Payors of interest and dividends. If you received this income last year, look for 1099s for this year (unless you’ve sold stocks, closed bank account,s or made other investment changes that account for not getting a 1099 this year).
- Charities. If you made small gifts, you may not have received any acknowledgment from the organization, but you can still deduct your gift as long as you have a canceled check or other proof. See last year’s list of organizations to which you donated and see whether you made similar gifts this year.
The Bottom Line
Start early doing prep work for your income tax so that your tax experience is a smooth one. Ideally, you will have been gathering and organizing your receipts all year. (Apps such as Expensify and Shoeboxed on a smartphone make it easier now that the IRS accepts electronic receipts.) Whether you are completing your own return or paying a third party, thorough documentation and organized records will reduce the time it will take to prepare your taxes (and the expense if you are using a paid preparer). Most importantly, these 10 preparation steps will ensure that you are not missing out on any tax benefits.