Organize Your Paperwork to Reduce Tax Payments (0209)

Feb. 9, 2005

Organize Your Paperwork To Reduce Tax Payments

Although 2004 has passed, one thing you can do now to reduce your 2004 income taxes is to get organized.

That’s what members of the California Society of CPAs (www.calcpa.org) advise. They note that clients who have conscientiously organized their tax-related paperwork before meeting with them not only have a better chance of getting all the deductions they are entitled to, they also likely will get a lower bill from their tax preparer.

Nowadays, many tax preparers supply a tax organizer to their clients. The organizer usually is a software program that prompts a client to fill in the blanks with appropriate dollar amounts and other information.

Sacramento CPA Cameron Hess says that such organizers help client and preparer sort through information in an orderly fashion. “While a taxpayer may feel that the organizer makes him do the work of the tax preparer, the reality is that the organizer gives the tax preparer vital information to help him find ways to minimize the client’s taxes. The tax preparer also will be able to work far more efficiently, thereby reducing billable time.”

If your tax preparer hasn’t given you a tax organizer, there are other ways to prepare your tax paperwork. Harold Katz, a Los Angeles CPA, recommends using a pad of lined paper. Label each page with a different category, such as interest income, dividend income, rental income and so forth. Then list appropriate information on each page, being sure not to write on the back of any page.

“If you are self-employed, alphabetize the 1099s you received from the companies you worked for,” Katz adds. “And make sure you have a schedule of your capital gains or losses from your brokerage house. If your broker hasn’t supplied the information, list the date you acquired a stock, the total cost of the purchase (including the broker’s commission), the date sold and net selling price realized. Make sure you tell the tax preparer about any stock splits, dividends or other unusual transactions.”

CPA Michael Cohen of Santa Ana says clients also should prepare any questions they may have before meeting with a tax preparer. “As you go through your organizer, jot down questions about any items you may be unsure of. For example, are annual fees for IRAs deductible? (They are.) When you meet with your tax preparer, go over those questions with him or her. Usually this process will help tax preparers find additional items to deduct from the client’s overall tax bill.”

Of course, CPAs urge taxpayers not to wait until the last few weeks before April 15 to get organized. It should be a yearlong process.

Harlan Levinson, a West Hollywood CPA, suggests taxpayers use accordion folders available at many drug and office supply stores. “They make it easier to organize receipts and statements throughout the year,” he notes.

Mitchell Freedman, CPA, PFS, of Sherman Oaks recommends a financial management program like QuickBooks for self-employed or small business owners or a simple computer spreadsheet for individuals that should be updated regularly. “I often do mid-year projections for my clients in which I look for legitimate ways they can use during the following months to further reduce their taxes. By having the information provided in their organizing program, I have a better grasp of their current situation and, thus, will have a better idea of what they will need to do before the year is over.”

Hess agrees, “Taxpayers who organize before year-end have far more options regarding ways to reduce their taxes. Post Dec. 31 tax planning is far more limited than advance planning.”

And Hess practices what he preaches: “I organize my own invoices two or three times during the year to identify tax-related information. This makes me aware of my income and expenses and helps me to find ways I can use before the end of the year to minimize the taxes I will owe.”