Do you ever wonder how your accountant would like you to prepare for tax season? Their secret wish list for every client? Good news! We’ve thought about it and compiled a list of steps every taxpayer can take to make their accountant’s life – and their own – easier.
Key takeaway: Don’t wait until the day before a deadline to share any significant updates or critical files. Communicate and prepare well in advance.
1. Gather your tax documents
As the end of 2021 approaches, you’ll begin to receive many documents needed to file your tax return. Designate a place to store these documents safely. Then, as you receive your 1099s, W-2, IRS or state correspondence, put it all there. We recommend getting into this habit throughout the year. Collect receipts, expenses, payments to contractors, etc., and store it all in one place. By the time you need to file your taxes, you’ve eliminated a lot of time spent tracking down these files.
You’ll also want to review charitable contributions you made throughout the year. Gather all documentation and lists and make sure the fair market value of each donation is clearly stated. If you’re missing any written notices from the organizations you donated to, reach out and ask for it. For 2021, you can claim a $300 or $600 deduction on cash donations, depending on your filing status, even if you don’t itemize. Learn more here.
Pro tip: digitally storing files is best.
2. Organize your estimated tax payment details
If you made estimated tax payments in 2021, compile that documentation. Make sure you have the dates and amounts for every taxing authority – federal, state, and city.
3. Review your 401(k) and IRA contributions
Look at how much you’ve contributed to your 401(k), individual retirement account (IRA), or other retirement plans. Can you contribute more, or have you hit the maximum contribution amount?
If you can contribute more, consider doing so before filing your tax return. It’ll help reduce your taxable income. You can contribute up to $19,500 to a 401(k) plan and $6,000 to an IRA in 2021. View more contribution limits here.
4. Max out your HSA contributions
If you contribute to a health savings account (HSA), try to maximize your contributions for the year, especially if you make HSA contributions via payroll deductions. Why? This method saves you from paying the federal payroll tax on those contributions.
For 2021, the maximum annual contribution – including employer contributions – is $3,600 for singles and $7,200 for families.
5. Complete monthly bank reconciliations through the current month
Regular bank reconciliations allow you to submit your tax documents earlier. Once your December bank reconciliation and month are closed out, you can focus on filing your tax return. If you delay the reconciliations and monthly close, it’ll delay your ability to file your return and any potential refund.
6. Ask your auditor and tax preparer if they need any new documents
If your accounting firm gives you a list of documents it may need to perform an audit or prepare your tax return, ask them if they need anything new for 2021. Being proactive can help streamline your audit and tax return preparation.
7. Send documents early
Why wait? If you’re ready and have all your documents, send them to your accountant. They’ll never say no to receiving your files early.
You may also notice that your return is filed quicker, you have more time to ask your accountant questions, and your accountant’s response time is faster. If you wait until the last minute, you may have to file an extension, delay a potential refund, and compete with others for your accountant’s attention.
8. Create a list of any major financial or operational changes
Did you make any big financial or operational changes throughout 2021? Changes could include doing business in new states or jurisdictions, selling products online, buying or selling a business, and real estate transactions. Also, did you receive a Paycheck Protection Program (PPP) loan or an economic injury disaster loan? Do you qualify for the employee retention credit? If so, your tax strategy may change.
You can discuss these changes with your accountant. Some may impact your audit or tax return preparation. Some may not. Make sure to communicate these changes well before filing deadlines.
9. Talk about new accounting standards
If you implemented a new accounting standard, your accountant might need more time to analyze those changes. If you didn’t, it’s a good time to check in with your accountant to see if any new accounting standards are on the horizon. Do they affect you? How? Can you adopt them early?
10. Create a plan to prepare account reconciliations to support your general ledger’s account balances
Ideally, you should reconcile the accounts within your balance sheet throughout the year. If you have accounts that haven’t been reconciled, be proactive. Review the accounts and resolve issues before tax season. This will help save everyone time.
11. Discuss the latest tax changes
Thanks to the COVID-19 pandemic, many tax provisions were passed, extended, or revised to help businesses through the pandemic. You can qualify for new tax credits, deduct business meals at 100%, and more. But, you’ll want to take advantage of these tax incentives before they expire.
Schedule a time to talk with your accountant about the latest tax changes and any on the horizon. You may benefit from additional tax savings.
NONPROFITS / CHARITABLE ORGANIZATIONS
12. Make a list of donors, distributions, etc.
In addition to numbers 5-8 listed above, make a list of donors who donated more than $5,000 and include the names and addresses of charitable organizations that received distributions. Also, share any changes made to the board of directors in 2021 with your accountant.
If you have a private foundation, the foundation must distribute the 2020 undistributed income by Dec. 31, 2021, to avoid the additional excise tax on undistributed income.
Those are our tips on how to prepare for the 2021 tax season! If you check off any item on this list, it’ll help streamline the tax process and your audit. Trust us, your accountant will appreciate it.
Originally published 12/2/2020. Updated 11/29/2021.
Have questions about how to prepare for the 2021 tax season? Let’s talk!