Getting The Most Out Of Your Tax Pro
BY DONALD JAY KORN
FOR INVESTOR’S BUSINESS DAILY
Posted 1/5/2007
The calendar may say 2007. But you’re not yet finished with last year. You still have to file your 2006 tax return.
If you don’t feel up to tangling with the Internal Revenue Code on your own, you’ll probably hire a tax preparer. Maybe you’ve already used a professional to prepare your tax return for many years.
By doing some advance work on your own, you’ll make life easier for your tax pro. And you’ll increase the chance that you’ll legitimately lower your tax bill.
You might wind up paying a lower fee too. Your likely first step is to schedule a face-to-face meeting. Don’t wait too long. As the April 16 filing deadline approaches, it can get harder to set up quality time with your tax adviser.
One tactic is to schedule a meeting for late this month or early February. You likely will have most if not all of your 2006 paperwork by then.
And your tax pro may have more time than in the early spring.
After you’ve scheduled the meeting, begin to organize. Don’t just dump a box full of documents on your tax preparer’s desk.
That will force you and your tax preparer to waste time sorting out your records. And your adviser might have to spend more time afterward, figuring out where everything belongs.
The more time he has to devote to such sorting chores, the higher your fee is likely to be.
But if you organize beforehand, your adviser may have more time to give you advice on taxes and financial planning. That can save you money on your 2006 return or further down the road.
The clearer the picture of your finances you present, the more focused that advice can be. You might learn whether you should invest in taxable or tax-exempt bonds, for example. Or whether a traditional IRA or a Roth IRA is the better choice.
It can help your adviser see whether you’re going to be subject to the alternative minimum tax.
If so, he might suggest that you avoid private activity bonds. Those fund housing projects, hospitals, and the like. Under the AMT, interest paid by such bonds is taxable, not tax-exempt. Also, you should beware of tax-exempt bond funds that hold private-activity munis.
Come Prepared
You may use the time to ask questions too. You can get a consultation along with a start on your 2006 tax return.
To get such benefits, go into the meeting with a calculation of last year’s income. Specify what came from your job, from your investments and from other sources.
Do the same with your expenses. Organize your records to show business-related outlays, charitable contributions, estimated tax payments and so on.
Have your documents ready to back up your math.
“Many accounting firms provide clients with an organizer to fill out in advance,” said David Kahn, managing director in the New York City office of the accounting firm RSM McGladrey. Completing those forms can help you assemble the information you’ll need.
You can use last year’s tax return as a guide so you won’t make vital omissions.
If you track your finances on a computer software program, that will help you pull your records together.
When you meet with your tax pro, bring in a disk from your program in case data are needed. Call first to make sure the preparer’s office supports your file format.
Gathering data and filling out your tax preparer’s organizer are not the only steps to take before your meeting. You also can track the cost basis of any assets you sold in a taxable account in 2006.
Say you sold some stocks last year. Go over your records to figure out when you purchased those shares and how much you paid.
“Don’t forget to add any reinvested dividends to your cost basis,” Kahn said. They will reduce your taxable gain or increase your capital loss.
Suppose you bought stock in ABC Corp. 20 years ago for $50,000. Over the years, you’ve received $31,000 in dividends and reinvested them all in more ABC shares.
If you sold all of your ABC shares last year and received $120,000, you’ll have a $39,000 long-term capital gain. That would count $81,000 as your cost basis: $50,000 paid upfront plus $31,000 in reinvested dividends.
If you didn’t count the reinvested dividends, you’d have a lower cost basis and a higher tax bill.
Higher Cost Basis
“Go through the same exercise for mutual fund shares you’ve sold,” Kahn said. Even if you moved from one fund to another in the same family, that’s a taxable event.
With mutual funds, add to your basis reinvested capital gains distributions as well as reinvested dividends.
Many brokerage firms and mutual fund companies will provide reports to you on the cost basis of securities you’ve sold. But you might have to do some homework on your own, especially for old holdings and for securities you’ve transferred among different firms.