Having just completed the 2015 tax filing season, I have been reflecting on some of the situations that caused me and my team to spend more time on preparing tax returns this year. The cost of tax preparation is based on the amount of time needed to prepare the return, so identifying places where changes can be made throughout the year can help save my clients money next year.
1. Numerous small, non-cash donations
For non-cash donations over $500, the IRS requires form 8283 for all contributed property for the year. Each donation needs a description as to the name and address of the organization receiving the donation, what was donated, the date of the donation, the original cost, and the current value.
When someone has multiple small contributions that add up to more than $500, the time necessary to enter and review this information for each donation is increased. One way to cut down on the fee cost is to give less often but in bigger bundles, whenever possible.
2. Involvement in investment decisions
Over the last several years, I have seen an increase in the number clients who are invested in limited partnerships (the K1 forms list a client’s proportionate share of the business activity).
Many of the K1s are for ownership interests of less than one percent and, therefore, have rather insignificant amounts, but with many line items. Each K1 has to be accounted for separately, and each line item usually requires an entry on different places on the return. Even with tax software, this is a lot of small work.
When you are asked about your interest in a particular investment, do not shy away from asking what the tax recording requirement might be. In this case, one such cost is the time it takes for your tax preparer to enter and review all that data. Consider whether the investment is worth that extra time (which, again, translates to extra fees).
3. Investments in tax-exempt products
“Tax-exempt income” usually means income is tax exempt for federal purposes. States will still tax that income—if it’s not income from their state, as is the case with municipal bond interest income.
If your investment advisor is asking you whether you would like to participate in a portfolio of tax-exempt bonds which are invested in various states, know that extra time will be needed to single out those bonds coming from your state (so that the rest of the income can be added to your state income tax return).
4. High-volume trading
High levels of trading can also have an adverse effect on the tax preparation cost. We can include a “See statement attached” notice for the numerous activities, but it still takes time to review all the statements and make sure that the cost basis information has been provided for everything.
If you got married or divorced during the previous tax year, extra time will be needed to prepare your return. It should be no surprise that a change in your marital status will require more time spent preparing your return.
6. Self-prepared financial reports
With easy access to bookkeeping software, many businesses have someone in-house to keep track of the cash in and out. However, this information often cannot be used as-is to prepare tax returns. You might think the reports will help make the tax preparation process quicker, but be prepared for it to be the reverse.
Please feel free to contact me with any questions about how to save money by reducing your tax preparation time next year.
Susan A. Moussi, CPA, CFP®, CDFA SMD Tax & Divorce Financial Planning Consultants, Inc. Phone: 614.429.4172 firstname.lastname@example.org