This blog was prepared with the assistance of Peter Weitsen, CPA, partner at WithumSmith+Brown, PC.
Now that tax season is behind us (except for taxpayers with extensions), here are some ways to simplify the process of preparing tax returns in the future and perhaps reduce clutter.…
- Always do the utmost to have your tax return filed on time. Filing for an extension takes up extra time and requires additional calculations. Extensions typically don’t provide extra value to you and usually can be avoided. They also force you to “live in the past” until the return is finally filed. Your energies should be focused on tax planning and reduction for the current year, not on continuing to agonize over completing last year’s return.
- Try to consolidate your brokerage accounts with one brokerage. The more accounts you have, the greater the number of tax statements you’ll receive, unnecessarily complicating the process. If you have substantial investments and want to decrease exposure with one brokerage, then use two. Of course, if you have a “strategic” reason to maintain multiple accounts, perhaps to maintain relationships and get advice from various brokers, then this advice may not apply to you.
- If you have accounts or stock positions with inconsequential amounts of money, consider selling them or donating them to a charity if you want to avoid the payment of taxes on the sale. (See my blog dated April 2, 2018, 10 Smart Ways to Give Charitable Donations.)
- If you have stocks registered in your individual name, consider transferring them to a brokerage account. That will reduce the number of 1099s that will have to be entered on your tax return. That also applies to any Dividend Reinvestment Plans (DRIPs) you have. If you have certificates of deposit (CDs) from multiple banks, consider consolidating them at one bank or buying the CDs through your brokerage account. However, be careful not to exceed the limits on insurance coverage (generally $250,000 per depositor, per insured bank, for each account ownership category).
- If you have mutual funds with multiple fund families and they are spread over a number of different funds, each fund will need to be reported separately on your return. Consider transferring these to a brokerage account if you can do so without extra cost. Alternatively, if they are not substantial compared to your total investments, consider liquidating them.
- If you maintain custodial accounts for minor children, try to choose investments that will not trigger the so-called Kiddie Tax. A method to accomplish this: Invest in low-dividend stocks or annuities with deferred payouts.
- If you use an investment manager, review the investments that constitute your portfolio. If the manager has included investments too small to have significant effects on your total returns, consider asking the manager why they are included and whether it makes sense to eliminate them.
- If you have stocks registered in your name and also a deceased person’s name, change the designation to just your name. Even though the Social Security number is yours, this will facilitate transfers upon your death. Alternatively, include the name of someone the shares can be transferred to upon your death.
- Try to minimize your taxes by shifting higher-yielding fixed-income investments to tax-deferred accounts and lower-yielding stocks to your individual name.
- If you invest in public partnerships that typically send K-1s late—forcing you to complete your return quickly to meet the deadline, or file for an extension—consider getting out of them if they involve small amounts in relation to your entire portfolio. Also, out-of-state partnerships that do not file with your state might preclude you from e-filing in your state. Not investing in these will also simplify your tax reporting. The same applies to hedge funds with 30-page K-1s.
- Investing in foreign stocks with withholding will require extra forms to be included in your return. If you have a few of these, it will take some unraveling when the information is transferred from your brokerage statements.
- If you have children working summer and vacation jobs from which they will not have sufficient income to require income tax, especially at the state level, have them fill out a W-4 that indicates that there should be no withholding. Usually, many of these tax returns, particularly state returns, might not have to be filed, but if there is withholding tax, you would need to file to receive the refund. Occasionally the tax-preparation fees are greater than the refunds, so consider forgoing those returns if they are not required to be filed.
- Be organized. The better prepared you are, the easier it will be to complete your return. Also, this will leave energy to plan and figure out how to save taxes rather than using up your energy to get your information entered properly on the prep software or forms. Being organized also will reduce your anxiety as you get ready to prepare your return. A simple suggestion is to keep a file folder or envelope in which you can place any information that you will need for your return… as well as a folder on your hard drive for all digital information that you receive and will need for the prep process.
- If you use a tax preparer, consider using the tax organizer that the preparer provides. Also, do not submit information piecemeal—wait until you have all of your data. Consider ahead of time what form of delivery you would like for the completed return—either portal or paper—and let the preparer know. And keep all filing instructions and forms that are on paper together until you are ready to file the returns.
- If you will be paying estimated taxes, set up a reminder system so payments are made by the deadlines. Keep the instructions, vouchers and envelopes together. If your estimated taxes are relatively small, consider making all four payments in April to cover the entire year.
- When you receive completed returns from a tax preparer, look them over as soon as possible. Do not wait until the due date to review the returns, ask questions and/or point out possible errors.
- Prepare a projection of future taxes using the prior year’s return as a benchmark and enter major changes as they occur. Your final return should be compared to the projection. By reconciling any significant differences, you will get a better understanding of how your taxes are calculated.