As a part of the continuing Idea$ 2014 series, the month of March is dedicated to taxes. Specifically, this topic will address organizing tax documents, types of information to communicate to your paid preparer and ways for taxpayers to DIY if so inclined.
The basics
Business returns for C Corporations (Form 1120) and S Corporations (Form 1120S) are due on March 17, 2014 (typically this is March 15, but since that falls on a Saturday this year, the due date is pushed to the next Monday). Other returns including Partnerships (Form 1065), Fiduciary/Trust (Form 1041) and Individuals (Form 1040) are due on April 15, 2014.
If the taxpayer cannot file by these dates, an automatic extension can be obtained. The extension for corporations and partnerships extends the deadline to September 15, and the extension for individuals and trusts extends the deadline to October 15. However, it is important to note that this is an extension of time to file, not time to pay. If a taxpayer expects to owe tax on the return, a payment should be made with the extension in order to avoid penalties and interest.
Income
Common income documents include:
- W2's - taxpayers that work for an employer should receive this showing their income and withholding amounts.
- 1099's - these are catch all documents for interest (1099-INT), dividends (1099-DIV), capital gains (1099-B), self-employment income (1099-MISC), social security (SSA-1099) and retirement income (1099-R).
- Schedule K-1's - will be received if the taxpayer has an interest in a partnership, S-corporation, or trust.
Deductions
Common deduction documents include:
- Tax payments for real estate and personal property
- Mortgage interest (Form 1098) - this form will include mortgage interest paid and possibly real estate taxes if they are paid through escrow
- Charitable contributions - for both cash and non-cash contributions, the taxpayer should have a receipt from the organization.
- Medical expenses not reimbursed from a flexible spending account or other insurance program
- Tuition, fees and student loan interest
- Expenses for dependent care
- Contributions to retirement plans
Why the rush?
A taxpayer may wonder, if the return is not due until the middle of April, why get in a rush to organize their documents in March? If the taxpayer is using a paid preparer, then it's safe to assume the preparer is working on several returns at one time, which can create a time lag between when information is submitted and the return is done. If the taxpayer expects to owe tax, the earlier the return is done, the better they will be able to do cash flow planning to make a tax payment by April 15. On the other hand, if the taxpayer expects a refund, then the same holds true in that the earlier the return is done, the earlier the taxpayer gets their refund. Finally, it is always safe for the taxpayer to leave some time in case there are questions or additional documents that need to be obtained.
D.I.Y
Taxpayers that have simple tax situations or are familiar with preparing tax returns already might want to prepare their own taxes. There are a variety of options for taxpayers that want to go this route. Most of the programs on the market now are easy to use and will walk the taxpayer through the return in an "interview format". The most popular programs are TurboTax and TaxACT, both of which are available on CD or as an internet download. There are pros and cons to the DIY method. The pros are that it is relatively inexpensive ($25-$50 for software and efiling), the returns can be done at the taxpayers convenience, and the taxpayer does not have to share sensitive personal and financial data with anyone else. However, the cons are that the taxpayer could report an income or deduction item incorrectly and helpful, reliable information is hard to come by on the internet. Both of these could result in the taxpayer paying too much tax or filing an incorrect tax return. Depending on the complexity of the taxpayer's situation, a professional tax preparer should be consulted.