Tax season. For those due a refund, the focus is how to get their refund sooner. While many remain calm realizing it’s time to sift through their shoe box full of 2016 papers and gather needed receipts to get the process in motion, others experience a high level of stress stemming from confusion or uncertainty as to what they will need to help their accountant accurately prepare their income tax return.
What can you do to be one of the calm and peaceful taxpayers enjoying a speedy refund? Simple. Learn the seven things that your accountant needs to receive from you to prepare your taxes efficiently and, ultimately, help get your tax refund sooner.
For Individual Taxpayers
- Mortgage interest and property taxes
Your mortgage lender likely issued you an IRS Form 1098 at the beginning of the year that summarizes your mortgage interest and property tax payments you made throughout the previous year. Your accountant should ask you for this form to claim the mortgage-interest deduction that is available to homeowners (there are limitations). Your accountant will also refer to this to calculate part of your home-office deduction, if applicable. If you carry more than one mortgage, be sure to provide Form 1098 for each as you can also potentially deduct interest paid on one other property as a second qualified residence. This is also the case if you have both mortgage interest and home equity loan interest on your residence.
- Don’t forget your 1098-T!
The IRS rewards those who go to school by offering very generous education credits. You can save up to $2,500 by using the American Opportunity Credit and up to $2,000 by using the Lifetime Learning Credit. The education credit is applicable if the college or vocational school is:
- Accredited and
- Eligible to participate in a student aid program administered by the U.S. Department of Education.
The IRS realizes that this generosity has caused criminals to abuse the system by filing fraudulent tax returns claiming these credits to trigger larger refunds. Consequently, with the passage of the Preferences Extension Act of 2015, the IRS added a new requirement that must be met in order to claim an education credit. Starting with the 2016 tax year, you must have a 1098-T tuition statement in order to claim either of these credits.
For Business Owners:
- Company Financial Statements
Your company financial statements are the building blocks of your business. Financial statements include three main reports: a balance sheet, an income statement, and a cash flow statement. If possible, bring a clean trial balance and general ledger (your accountant will thank you profusely!). For tax purposes, the income statement and the trial balance are the documents most relied upon by your accountant as they contain all the activity for the year along with the ending assets and liabilities.
- Automobile Mileage and Expense Log (for those who are self-employed)
If you use your own vehicle for business purposes, you can claim a portion of the car’s upkeep expenses as a tax deduction against your business income. The IRS allows you to calculate this one of two ways: either the actual expenses method or the simplified method.
- The simplified method allows you to apply an IRS-mandated mileage rate to the total business miles driven in the year. For the tax year 2016, the standard mileage rate is $0.54 per mile.
- The actual expense method is one’s other choice for deducting the business-related cost of the use of a vehicle. Know first, you cannot use both the actual and simplified expense method. The actual expense method requires you to keep a detailed log of vehicle expenses, such as gasoline, oil, license fees, lease payments, tires, and deprecation. If you use your car personally at all, you will have to be careful in tracking your mileage, making certain that you separate your business use from your personal use. Yes, this means you (or your accountant) will need to allocate what percentage of total vehicle expenses were used for business purposes. While the actual method requires much more detail and recordkeeping, it also provides (typically) a greater deduction for the automobile expense. The IRS suggests if you are unsure which method is most advantageous, to calculate or project under both methods and take the larger deduction of the two.
Understand, if the vehicle you are using is provided by your employer, you can only deduct unreimbursed expenses.
Regardless of which method you choose, you, the taxpayer, are still required to keep track of your business mileage in a vehicle log. This can be as simple as jotting dates, descriptions, and miles into a blank notebook, or you can use vehicle log software to keep track of your mileage and automate the deduction. This type of software can be especially helpful if you drive often to see clients or, if you work for Uber or Lyft as a side business, for example.
- Include complete financial information for all side businesses
Like many other Americans, you might have a side business you run to help make a little bit of extra money. A “side business” can range anywhere from working as a DJ on the weekends, officiating basketball games, teaching fitness classes, doing freelance photography, and even working on cars. Simply, whatever your case may be, the IRS requires that you report this income just like any other type of income.
If a business pays you more than $600 for services as an independent contractor, they are required to issue you a 1099-MISC. However, it is important to remember that not receiving a 1099-MISC for any portion of your income does not mean that the income is tax-free. Make sure to keep precise track of all of your gross receipts as well as associated expenses related to the activity. Do not forget to include information regarding any fixed asset acquisitions or dispositions as well. No matter how big or small your side business, it can be very difficult and stressful to try to do a last minute scramble to find all of the tax information you need.
Make sure that you keep track of the activity throughout the year. Using software such as Excel or QuickBooks will help make your life easier. Having all of the information ready for your accountant regarding your side businesses can help avoid many hang-ups that can prevent you from getting your taxes prepared quickly.
As I advise clients, your record keeping doesn’t have to be fancy or even automated, just complete.
- Home-office expenses
When you designate your home office or a portion of your living area as your sole place of business, or if you regularly meet clients or customers at your home, you may usually claim home-office expenses.
Home-office expenses include a percentage of your utilities, repairs and maintenance, home insurance, and mortgage interest or rent. Your accountant will calculate your home-office deduction by dividing the square footage of your office space by the livable square footage of your house, or by dividing the number of rooms your home office occupies by the total number of rooms in the house. Using either formula, your CPA will multiply your total home expenses by the home-office percentage. Communicate with your accountant before meeting to ensure that you are providing what is needed and you are accurately calculating the area to be designated “home office.”
Much like the vehicle deductions, you can also use a simplified method to claim your home-office deduction. The simplified method allows you to deduct $5 per square foot, up to 300 square feet of the portion of your home used for business. Your accountant will advise the most beneficial route for your tax situation.
- Provide your accountant with your driver’s license number & Identity Protection PIN (IP PIN) if one was issued
While it may seem like an odd request for your accountant to request your driver’s license number, it is now a necessary step in the tax preparation process. In an effort to combat stolen identity tax fraud, many states, including Ohio, now require you to provide your driver’s license number in order to e-file. For those who are married filing jointly, the driver’s license number for both the primary taxpayer and spouse must be provided. If you do not have a driver’s license or state ID card, you will have the option to indicate this and e-file. However, your return may not be processed as quickly.
At the federal level, the IRS developed a security measure called the Identity Protection PIN (IP PIN). An IP PIN is a six-digit number that the IRS issues to a taxpayer who has previously been a victim of identity related tax fraud to help prevent criminals from using the taxpayer’s social security number to file fraudulent tax returns. If you are issued an IP PIN, you must continue using an IP PIN to e-file returns indefinitely. Unfortunately, once you receive an IP PIN there is no opting out. The IRS will send you a new IP PIN through the mail every December in a document called “CP01A Notice”. If you lose your CP01A notice, you can still retrieve your IP PIN at www.irs.gov. If you try to e-file your return without this number, it will be rejected. Also, if you paper-file your tax return either using an incorrect IP PIN or omitting the PIN altogether, your return will be processed through additional behind-the-scenes screenings to validate your identity, which will ultimately delay any refund you may be due.
Gain more insight from Eric: Read "Why Your Bag of Used Clothing Isn't Worth $1000"
Take the time to gather the required information.
Knowing what your accountant needs to prepare your tax return will help cut down on the exchange of questions and answers needed to finish your return and will help you achieve the peace of mind you desire, come tax season each year. As a result, your accountant will be able to prepare your tax return more efficiently and in a timelier manner. If you are due a refund, this may also help you to receive your refund sooner.
Finally, ensure you stay in communication with your CPA year round so that there are no surprises during tax season.
While some may think they should chat with the IRS if they encounter a problem or are seeking guidance, understand they are not familiar with your entire financial picture and, as IRS agents, will only advise on the matter as it pertains to your particular question. Further, with the ongoing budget cuts and staffing challenges at the IRS, anticipate long on-hold times, waiting for your call to be answered.
If you are in doubt over the documents or paperwork needed to help your accountant prepare your income tax return, or if you are facing uncertainty with any tax issues, contact me at firstname.lastname@example.org or 216.831.0733. Our full staff of tax professionals are happy to assist and ready to help you plan, prepare, and file your income tax return.