This article includes a general checklist to guide you in your tax preparation as you organize your income tax information. In addition, there are select items listed below to consider for your 2021 individual income tax return:
- Tax Questionnaire: Please complete the questionnaire, as the questions help to identify any changes or activity that will impact your tax return, as well as address new tax developments. If you have not received yours yet please reach out to the Parsec Tax Services team.
- Foreign bank accounts and virtual currency: The IRS has specific regulations for reporting foreign financial assets and virtual currency. Please disclose any holdings of these types of funds.
- Charitable contributions: Individuals who typically use the standard deduction will benefit from qualified charitable contributions on their 2021 income tax return. Please be sure to list your charitable contributions and maintain documentation, as they will be deductible up to $300 per single taxpayer, and up to $600 for married filing jointly. This provision has not yet been extended to tax year 2022.
Here Is Your Information Gathering Checklist:
Well-organized records can make the process significantly easier for all involved. One way to tackle this chore is to create a checklist of the documents and information needed to complete your return. As you gather the documents, start to organize them in a file by the following categories and check them off the list.
Prior Year’s Tax Return:
Use last year’s tax return as a starting point to create your checklist. Although you may have new sources of income or different deductible expenses for the current year, this is usually a fairly comprehensive list of needed documents such as Form 1099 or 1098. It will also serve as a reminder of information you may need to determine from bank statements or receipts such as medical expenses. If you are using the same tax preparer you used to prepare your 2020 return, your preparer will probably provide you a “tax organizer” showing 2020 income and deductions reported on your return and provide space to fill in 2021 amounts. This may give you a more user-friendly way of reviewing your 2020 returns for needed information.
Sources of Income:
This category generally includes wages, dividends, interest, income and deductions from partnerships, S-corporations or trusts, retirement and rental income. You may receive a Form W-2, 1099, or K-1 that indicates the amount of income reported to the IRS. For other types of income, such as alimony received, you may need to determine the amount to report from bank statements.
- Cost Basis on Securities Sold: For any securities sold in 2021, you should consult your custodian’s (Schwab, Fidelity, TD Ameritrade, etc.) Form 1099 to retrieve realized gain/loss information. This is considered your official purchase/sale record for tax purposes. In 2011 new regulations went into effect that require custodians to track and maintain cost basis for securities purchased by account holders, and to report the cost basis of sold securities to the IRS. Any securities purchased prior to this law are not considered “covered securities” and will not be reported to the IRS. You will see these delineated as such on your custodian’s Form 1099. However, the taxpayer is still responsible for reporting accurate cost basis on these “non-covered” securities.
- Form 1099: Form 1099 will be mailed to you directly from your custodian, hopefully, by mid-February. It includes information on dividends and interest, and gain/loss information on securities sold throughout the year. Sometimes corrected 1099s are generated and mailed out later. If you misplace your hardcopy 1099, you may access it online at your custodian’s web site any time after it has been published. You’ll use your regular custodian website credentials for this.
- Schedule K-1: If you own any master limited partnerships in your investment accounts you should receive a K-1 in mid-March or later. If you want to retrieve the information sooner, you can check www.taxpackagesupport.com to see if the information is available. Some K-1s can come as late as June. Be sure you’ve received a K-1 for each limited partnership you own prior to filing your taxes.
Adjustments to Income:
These are direct reductions to taxable income that commonly include deductible IRA contributions, alimony paid (applies to divorce or separation instruments executed before 1/1/2019), Health Savings Account (HSA) contributions, SEP, SIMPLE or other self-employed pension plan contributions and self-employed health insurance payment records.
If you itemize deductions rather than taking the standard deduction, you may need to collect source documents indicating the amount of mortgage interest paid (Form 1098), investment interest expense, real estate and personal property taxes paid, medical expenses, and charitable contributions to be reported on Schedule A.
Tax credits are a direct reduction of your tax bill so take a few minutes to research available credits. You may be able to claim the American Opportunity Credit if you have a child in college or a Residential Energy Credit if you have made any major “green” home improvements.
Basis of Property:
This is also a good time to review and update the cost basis of investment property and your personal residence. Improvements made during the year may have increased the basis so collect and file those valuable receipts. You should provide your tax professional with the detail of improvements to investment property.
Federal and state taxes you have already paid may be found on your W-2 but if you pay quarterly estimated taxes during 2021, you will need to document records of payment. If you have time, you might confirm payment amounts and dates from your bank records. Errors in reporting estimated tax payments account for many of the notices of adjustment our clients receive each year from the tax authorities.
While this is not a comprehensive list of documents, expenditures and information needed to complete your tax return, it is a starting point from which you can develop your own, one that reflects your unique life circumstances. Start organizing now and maybe — just maybe — tax season won’t be your least favorite season of the year.