Tax Season Retrospective for Clients

Many clients tell me that a problem they have with tax season is getting everything together and they wish they were better organized. Here are some easy ways to become better organized and also become more aware of your tax and financial situation.

Tax information comes up all year long, not just during the filing season when you receive the 1099s, K-1s, W-2s and all the other data you need. Set up a file folder, envelope, or box to put all tax-related information as it comes in. Also, set up a folder on your computer for digital data. Do not designate a tray near your desk – you want this information kept confidential. As information is received or arises, put it there. This should include charity contribution acknowledgment letters, unusual expenses you incurred that might be deductible or that you should mention to your tax preparer, invoices for purchases for which you would have to pay use tax, employment or other contracts you executed, compensation benefits you received or restricted stock or stock options you were granted during the year. Also include designations of beneficiary forms you signed. Further, include copies of the W-4 forms you provided to employers and independent contractor agreements.

Anything of an ongoing or permanent nature can be transferred to a more permanent file after your tax return is completed and filed. Having all your new documents together when you have your return prepared can jog your memory and could lead to a tax benefit.

You can also keep your estimated tax vouchers in there, as well as any carryforward tax information. Examples are non-reported wash sale transactions, especially where you are holding the replacement shares for a longer period than anticipated, the cost basis of securities you inherited or received as a gift, nondeductible contributions to a traditional IRA, or receipts for major improvements to your residence.

When your return is filed, put all your documentation into a box or envelope and mark on it “Do Not Discard until after April 15, 2027” or any date that is 3 years later than the later of the date you filed your return or its original due date. Do the same with digital files.

If you have multiple brokerage accounts, consider consolidating them with one broker. This reduces the “paperwork” and tax reporting forms. It can also give you a screen with one look to review your accounts and portfolio. If you still have individual stock shares, transfer them to your brokerage account. If you have DRIP accounts, many of the companies now charge a fee when they reinvest the dividends. Terminating these accounts by transferring the shares to your broker will simplify your tax reporting and the added correspondence (either by postal mail or digital) and those added fees.

When you have a brokerage account, you will still get direct correspondence (and sometimes phone calls) from the companies you invested in. You can request that your broker no longer provide your information (you would go paperless) and phone numbers to the companies. This would eliminate that extra correspondence, but it would also eliminate the quarterly and annual reports. If you rely on these financial reports, then do not make this request. If you only read the annual reports, you can download the 10-Ks when they are made available. Nothing is perfect – just make it as less bothersome for yourself as you can.

Taxes should not be managed once a year. A suggestion is to have your preparer send you a worksheet with a 3- or 4-year tax return comparison and review it periodically. Another suggestion is to arrange a meeting once every two years during a slow time for your preparer for a line-by-line review discussing the potential for tax savings or financial and investment planning suggestions. Your tax return is a wealth of information and is a great summary of much of your financial affairs. Include in this meeting a review of your retirement accounts, add to it your goals, and try to have a determination if you are on target to achieve them. This is not part of the normal services so ask what the cost would be beforehand. These meetings create great value far above the costs, so do not skip having them biannually.

Now that tax season and whatever rush or anxiety you felt about it is over, do a retrospective of the full experience. Look at your organization and preparation, the interaction with your preparer, the results and how you felt about the entire situation. If you feel good about it and secure in your tax and financial situation, then good for you and you should be commended. Treat yourself to an ice cream soda! However, if you do not feel this way then consider what changes you should make so you would get that good feeling.

This is serious stuff and needs serious treatment and consideration. Do something about it if you feel changes are in order. In any event, making some of the changes I suggested can remove some unpleasantness.