Efficiently organizing the information needed to prepare your income tax return is more than just a courtesy to your accountant.
Better organization permits your accountant to prepare the tax return faster and minimizes your cost.
More important, anyone involved in preparing your tax return is required by law to understand information you supply about income and deductions.
Rules of the Internal Revenue Service require tax professionals to conduct reasonable inquiries into taxpayer information to assure that income is not understated.
Your accountant has to spend time clarifying details when your tax deductions are not organized.
Tax deductions should be partitioned among the associated income-producing activities.
In addition, provide totals for each category of tax-deductible expense. Don’t simply list expenses chronologically.
List expenses for a rental property with the rent received.
Be sure to list each property separately. Don’t combine landlord expenses for all properties.
Know What to Provide
Your accountant can help you determine which incurred costs are tax-deductible.
A tax organizer is available each year that shows you the different types of income and associated expenses from your prior year tax return.
Give particular attention to detail about various deductions.
For example, do you have a business home office? If so, you provide your home utilities. This includes only costs to maintain normal use of the home – which is heating and cooling the house, not home telephone and cable television.
Mortgage interest is reported by your lender on Form 1098, so provide that form to your accountant.
Property taxes are an income tax deduction in the year they are paid, not the year assessed. If you paid a 2010 property tax assessment in January of 2011, it’s not deductible until you prepare the 2011 tax return another year from now.
If you started a new business in 2010, list the income along with the ordinary and necessary expenses you incurred.
If you purchased or sold a rental property, provide the settlement statement from the closing. Then list the rental income you received and categorize expenses you paid.
If you received money for any reason that was not a gift, it is probably taxable income. List the amount and the nature of the income.
Provide every Form 1099 you receive.
Don’t Perform Calculations
Don’t attempt to perform calculations for your tax return.
For example, if your business has a home office, just provide the total square feet for your home and for your office space. Then list your housing expenses for utilities, repairs, insurance, maintenance, homeowner association dues and other expenses of maintaining your home.