It is not welcomed with the joy that greets winter holidays, yet as December yields to the New Year, a less festive season commences: income tax season.
Tax time doesn’t have to be met with dread, though. By keeping in mind some smart guidelines provided by local tax experts and being careful, you can get through this time with much less stress. That’s true even with the “thousand-year flood” that the region suffered in October, which will complicate some returns.
Some simple, careful preparation for tax time will help people get through everything more easily. One of the first things to do is to make sure you have all your records of income. Make sure you have all of the secondary sources of income that need to be listed, such as income from brokerage accounts or other interest and investment dividends, according to Doug Neal, a certified public accountant and owner of The Neal Firm, CPA, P.A. The Internal Revenue Service gets its own copies of those documents, so if you miss one, it’s unlikely to go unnoticed. “One of the things that will cause a red flag is if you leave that out,” he says. “It’s a really easy catch for the IRS.”
Be sure that your receipts are in order — and in the right tax year. Expenses such as property tax payments are deductible in the year that they are paid. If you wait to pay in the next year, it needs to be deducted in that tax year, Doug says. There is even a tax strategy for people to pay both tax payments in the same calendar year, then itemize their deductions that year. This “bunching strategy” can be beneficial, he says, if a taxpayer is close but not over the standard deduction.
“You want to list all of your charitable donations that are deductible and make sure you have proper documentation,” says Daniel Crowson with the accounting firm of Burkett Burkett & Burkett, CPAs, P.A. “If you’re subject to an IRS audit, you may be requested to provide three years worth of charitable contribution documentation,” Daniel says.
“If you have been making a regular charitable contribution without documenting it, such as putting cash in the church collection, it’s time to step up and get organized with an annual receipt from your place of worship and proof of payment,” says Doug. “The IRS is giving more scrutiny to smaller donations than it used to, including such things as donated clothing. If the IRS asks for documents, you will need more than just a piece of paper saying ‘one bag of used clothing,’” he says. Groups such as The Salvation Army provide useful pricing guidelines for donated items on their websites.
Another deduction to make sure you are ready to document is out-of-pocket medical expenses, Doug says. Make sure you have check receipts or bank card statements for your out-of-pocket spending. Care providers such as pharmacies can also provide a helpful year-end summary of your spending with them.
As you go into the tax preparation process, Doug recommends what you might think of as an unlikely ally: the IRS itself. Its website contains numerous good explanations and even tips on savings, and he highly recommends its guidance, especially for those taxpayers who will prepare their own returns or use tax-preparation software. “The IRS website is a great resource,” Doug says.
The region’s flooding could provide several challenges for tax preparation. The first is basic: documents could have been destroyed by the water. Daniel explains that the IRS will likely be dealing with such issues on a case-by-case basis. Those who have damaged documents will need to spend some time getting replacements from employers or account providers, and that’s best done months before its time to do taxes.
Because of the Federal Disaster Declaration, there has been an additional deadline extension for those who were yet to file their return for tax year 2014. If a taxpayer had received a six-month extension until Oct. 15, 2015 to file, that deadline has been moved to Feb. 16, 2016.
As for the flood damage itself: the value of those losses contributes to a tax deduction, but that deduction could disappoint some homeowners, especially those in the top income brackets.
“It starts with your estimate of the flood’s damage to the home, whether from an insurance company or government inspection,” Daniel says, “minus any reimbursements received. From that number an automatic $100 per event is subtracted. Beyond that, a calculation is made based on the taxpayer’s total adjusted gross income: 10 percent of that amount is deducted from the loss amount to derive the deduction.”
For some higher-income homeowners, this will come as a surprise. As a hypothetical example: a homeowner has $150,000 in uninsured flood damage but an adjusted gross income of $500,000. Their deduction would be $99,900, not the whole amount of their loss. “I think some will be a little surprised that they cannot deduct the total loss,” Doug expects.
Owners of flood-damaged homes will have another decision to make: whether to take the deduction on their taxes for 2015 or to go back and file an amended return for their 2014 taxes. Some costs might even have to be estimated because work is still under way. Daniel’s advice: it’s easier to aim low in your estimates, then go back later to raise them if necessary. The rules for property losses through disasters or theft and tax returns are spelled out in IRS Topic 515 on its website.
Getting it Done
You’ve gotten to the end of your paperwork, a joyous occasion! But there still are a few things to do. First, check the math, whether it’s yours, your tax preparer’s or a computer’s. Also check to make sure that all of the ID numbers are correct; it’s easy to transpose two digits while entering a whole set of Social Security numbers — or your bank numbers for a direct deposit of your refund.
Getting your taxes done brings a sense of relief, but as you finish up, it’s the best time to get your system set up for a smoother tax year next time. Whether you arrange a filing system for sorting paper documents or one that uses a computer, setting up a better system now will help keep you organized during the year and ready to go next time. It also helps to avoid one of the biggest problems: having to go back and get replacement documents in the crunch of the next tax season.
“Whatever fits your personality, just do it and get organized,” Doug says.
As much as you may want to forget it, taxes will be due again next year.