Unless your taxes are stone simple, it makes sense to use an experienced pro to prepare your returns so you neither underpay nor overpay. But it also makes sense to keep your preparation fees as low as possible by taking some easy steps in arranging your affairs…and in communicating with your tax preparer during tax season and year round…
- Be aware that anything you do to reduce the time your preparer spends working on your return can reflect itself in lower fees and a speedier turnaround. For that reason, being organized and submitting everything at one time will make it easier for the preparer and will reduce their number of “touches” (the number of times they have to work your return into their workflow). Here’s something clients often omit in their submissions: Their cost basis for all sales of capital-gain items. Be sure to include yours.
- Complicated transactions that you’ve participated in will take your preparer longer, of course. These come in various forms. Two examples: Investments in publicly traded partnerships or hedge funds that generate multipage K-1 forms with information that will need to be reported on your return. Some of these forms can be up to 30 pages, and anything beyond two pages will add significant extra preparer time, often at a higher level reaching to the top tax person or a partner, which will push fees up. Why am I telling you this? Unless your investments involving complex transactions are significant in relation to your overall portfolio, they might not be worth your time or the money you’ll spend to have a preparer wade through all the paperwork…and you should consider exiting these investments to save money. Note that any liquidations of such investments this year will need to be reflected on your 2019 tax return, so you have at least two more years (2018 and 2019 tax years) of paying a preparer to handle them.
- Investments in foreign securities increase preparation time because of withholding of foreign income taxes. The same is true if you have mutual funds with investments in foreign securities. Again, if this is not a significant part of your investments, and you want to streamline tax prep, consider getting out of them. Important: I am not suggesting that your tax-prep expense tail should wag your investment dog. If your investments of any kind are significant for you, then keep them and don’t be overly concerned about the tax preparation fees because that will not be weighty in relation to your entire investment situation.
- If you are in an investment club, consider whether it is involved with complex but relatively insignificant investments that add to your prep time and cost…and if so, see if you can have the club exit these investments so your K-1s will not be delayed and you won’t have to deal with the above nonsense for relatively small amounts.
- If you own certain complex investments in retirement accounts, income from these investments could cause taxes within those accounts even though income from other sources doesn’t. Again, an opportunity to consider streamlining if it doesn’t materially affect your investment goals.
- Investments in federally tax-exempt bond funds provide relatively simple 1099s, but your preparer probably will need to look at the attachment sheets that give the percentages of taxable income allocated to each state the interest was from to assign proper tax treatment to each. A suggestion is to either buy individual bonds or buy a fund with bonds from a single state, possibly your state of residence.
- Many federally tax-exempt bonds pay interest subject to the Alternative Minimum Tax (AMT). Watch for this, and if you are subject to the AMT, consider staying away from them or factoring that complexity and cost into your net benefit.
- The more accounts you have, the more tax statements you will receive, increasing the handling by your preparer. Consider consolidating your brokerage accounts. If you have bank certificates of deposit from multiple banks, consider using fewer banks for CDs as these reach maturity. Or buy CDs within a brokerage account that will provide a single 1099 with the taxable information from all the accounts. If you have stocks or bonds registered directly in your own name, consider transferring them to a brokerage account. Many brokers will arrange for these transfers for you – just bring them the stock certificates or bonds. Doing this will also simplify receipt of dividends and interest, reducing your need to personally receive and handle them. Ditto for transferring dividend reinvestment plan accounts.
- Going forward, call your preparer’s attention to anything unusual that happens during the year during the year so it can be discussed, analyzed and worked on during a less hectic period. Anything that can be done before the most hectic periods of tax season will get greater attention, concentration and focus from your preparer—so when your return is actually worked on, your “outlier” issue will be much easier and quicker to drop into the process.
Examples of the kinds of transactions to bring to your preparer’s attention even before they happen: taxable sale of a residence or sale of a vacation home or rental property…receipt of employer stock or options or sale of exercise of them…employment termination payments…consulting payments…charitable contributions of property of any type valued over $5,000 either singly or when added together…sale of a business or partnership interest…an inheritance or sale of anything that was inherited or received as a gift…marital separation negotiations…winning the lottery (before you claim your prize).
- If you have a sole proprietorship or own rental property, ask your preparer to review the year’s transactions in November or December—don’t show up the following March with a full year’s activity that might need to be reviewed or worked on then. (You would of course follow up your partial-year review with whatever final transactions occurred in the final part of the year.)
- If you manage a partnership or S corporation with other investors, verify that your preparer has the most current addresses for the other owners. Also, submit the information as early as you can so the return can be completed and K-1s distributed before the nonactive owners get antsy and start calling for them, and do not tell them to call the preparer instead of you. Calls to your preparer (to get the other owners off your back) will add time to the preparer and cost for you.
- If you typically file for an extension, getting your information together early, such as February or early March, would enable your preparer to get the extension done before the last-minute crunch that precedes April 15. Also, don’t forget to have the first or the first three installments of your 2019 estimated tax prepared at that time.
Anything that can reduce the preparation time, or shift some of the work to a less busy time, will serve to reduce your tax-prep fees. If in doubt, call and speak to your preparer as early as you can when something extra occurs.
For more information, check out Edward Mendlowitz’s website, or click here to purchase his book, Managing Your Tax Season.