Get Ready for Tax Time

© 2004  by Lynne Ganoe  

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Tax time is not something most people look forward to, but a little forethought and organization of your records can make things run much more smoothly.  The last minute scramble to gather financial information often results in overlooked tax deductions, which increase your tax liability.

A proper record keeping system will keep everything organized throughout the year, and will greatly reduce the annual tax time headaches.  And when it comes time to turn your records over to your tax preparer, complete and properly sorted records will reduce the time it takes to prepare  your return, which often results in lower fees for you.

In addition to having your records organized, a basic knowledge of tax laws that pertain to your tax situation can help ensure that you are taking all the deductions that you qualify for.  Having children, owning a home, going to college, paying on a student loan - any of these things may qualify you for additional deductions or credits.  Some of the more common deductions that may apply to your taxes are listed in this article.     

 
Records for your business (Don't Have a Business? -  skip to Your Personal Taxes)

If you are a sole-proprietor, your business income and expenses will be reported on a Schedule C with your personal Form 1040. In most cases, you won't be sending in any of your supporting documents with your tax return, but you will need to be able to produce the information should the IRS ever question your return.  Your tax preparer will need a copy of your prior year's tax return, along with the following information for the current tax year:

 1.) Business receipts:

Gather all of your business receipts for the year.  Organize them according to expense type, using the categories listed on the IRS Schedule C:

• Advertising

• Car and Truck expenses (include these expenses only if you DO NOT use the standard mileage deduction)

• Commissions and fees paid

• Insurance (NOTE: health insurance is reported separately, on Line 29 of Form 1040)

• Legal and Professional services

• Office Expense

• Pension and profit-sharing plans

• Supplies

• Taxes and licenses

• Rent or lease expenses on business equipment and property

• Repairs and Maintenance

• Travel, meals, and entertainment (meals & entertainment are only 50% deductible)

• Wages and employee benefit programs

• Other business expenses

Make sure that they clearly display the date, who it was paid to, what it was for, and the amount.  The check number and date paid should also be written on the receipt.

For more information on business deductions, see IRS Publication 535.

 2.) Cost of Goods Sold and Inventory:

Generally, if you produce, purchase, or sell merchandise in your business, you are required to use the accrual method of accounting and carry an inventory.  However, the IRS recently changed their rules to allow qualified taxpayers to use the cash method and choose not to carry an inventory even if they do produce or resell merchandise.  You are a qualifying taxpayer if your average annual gross receipts are $1,000,000 or less for the prior 3 years.   If you choose not to carry an inventory then the cost of the items you resell, or the raw materials used to make your products, are deductible in the year you purchased them, or the year you sold the product, whichever is later.  So you will need to include the receipts for the costs of all the items you sold that year to be deducted from your gross income as cost of goods sold.

If you are required to carry an inventory, you will need to provide your tax preparer with beginning and ending inventory figures, as well as invoices for your purchases and other expenses that figure in to cost of goods sold.  See Publication 538 for more information on accounting methods and inventory valuation.

 3.) Business Income:

You will need a total of all of your business income.  You should have a list showing the date received, who it was received from, and the amount.  Since your deposit slips should have this info, you can just run a total on your adding machine and attach the tape. Also be sure to include any Form 1099's you received.  You should receive a 1099 from anyone who paid you $600 or more for services you provided to them.

 4.) Depreciation Schedule:

Include your Depreciation Schedule if you have long-term assets that you are depreciating.  These are items you use in your business that have a useful life of more than one year, such as business furniture, equipment, and buildings.  Also, most start-up costs (other than the purchase of long-term assets) can be amortized over a period of up to 60 months.  Attach any receipts for assets that you purchased in the current tax year.  Be sure your receipt shows the date the item was placed in service for your business.

For more information on depreciation, see IRS Publication 946.

 5.) Vehicle information:

If you used your vehicle for business you will need to provide the following information:

• Date you placed your vehicle in service for business purposes

• Total number of business miles

• Total number of commuting miles

• Total number of personal miles

Your mileage log should have the details of your business miles (date, description, and number of miles).

If you are itemizing your vehicle expenses, you will need to attach all related receipts.

If you are using the standard mileage deduction (for 2004, the rate is 37.5 cents per mile), you won't need any receipts, as you won't be deducting your actual vehicle expenses - just multiply your business miles by .375.  You may, however, also deduct parking and toll fees.  Since you generally don't have receipts for parking and tolls, you may want to just write the amounts down in your mileage log as you incur them.

 6.) Home Office Deduction:

If you qualify for and plan to take the home office deduction, you will need receipts for rent, utilities, insurance, property tax statement, mortgage interest statement, and receipts for repairs and maintenance to your home.  Your tax preparer will also need to know the percentage of your home that is used for your home office.  For more information on the home office deduction, see IRS Publication 587.

 7.) Estimated Tax Payments:

If you made any estimated tax payments for the current tax year, your tax preparer will need to know the date you made the payments and the amounts.  

 Your Personal Taxes

On the personal side, the following forms are some of the most common tax-related items you may receive that you will need to give your tax preparer:

 

W-2	Wage and Tax Statement
1099INT	Interest Income
1099DIV	Dividends and Distributions
1099B	Proceeds from Broker and Barter Exchange Transactions
1099MISC	Miscellaneous Income
1099R	Distributions from Pensions, Annuities, etc.
1099G	Certain Government Payments (local and state tax refunds, etc.)
1098	Mortgage Interest Statement

 Itemize or Standard Deduction?

You will want to compare the total of your itemized deductions to the standard deduction rate for your filing status to see which would give you the highest deductible amount.  The standard deduction amounts for 2004 are:

          Married Filing Joint                $9,700
            Single                                   $4,850  
            Head of Household                 $7,150
            Married Filing Separate          $4,850

If you think your itemized deductions will be more than the standard deduction, you will need to include medical bills you paid, state and local taxes, real estate taxes, personal property taxes, home mortgage interest and deductible points, investment interest, charitable contributions, casualty and theft losses, unreimbursed employee expenses, tax prep fees, and investment-related expenses. You can only deduct medical costs that exceed 7.5% of your adjusted gross income.  Misc. expenses are only deductible for costs that exceed 2% of your adjusted gross income.    For more information about itemized deductions, see the instructions for Form 1040, Schedule A.