I am knee deep in tax stuff this time of year. How about you? Are you done with taxes or do you still have them left to complete?
I thought I’d take a break from the mind-numbing work to share how I prepare for mine.
As you probably know, I use a CPA to do the hard work. And I have some good reasons why I do.
The highlights of my process:
- I track EVERY expense and income item through Quicken and have for 22 years. So I begin my tax process by downloading a summary of what I made and spent. It goes into a spreadsheet and is usually about 3,000 rows long.
- I make a copy of the spreadsheet (so I keep the original) and go to work on the copy. I eliminate every category/line that has nothing to do with taxes (food, vacation, etc.). I’m left with 600 or so lines that have some tax implication.
- I organize these 600 into categories and summarize both the income and expenses from them (a lot of cutting and pasting as well as adding up expenses and income.) I put these in a nice and neat summary sheet.
- I then go through all the paperwork. Income and expense forms that I’ve received in the mail are put in a file to accumulate through the year. I take them out and go through them to make sure everything is included in my summary sheet. I make corrections on the sheet just in case the actual document records something different than what I have in Quicken.
- There are always one or two loose ends that I have to track down — an income form for this, an expense receipt for that, and so on.
- Once all that is done, I organize the paper into files — income, deductions, real estate, blog earnings and expenses, etc.
- I then write a 2-3 page letter to my CPA with bullet points that summarizes everything. I highlight anything that needs her attention and raise questions on various issues for her to consider. Note: even though I have her do the taxes, I still need to know and understand the tax laws as many of the suggestions/ideas/direction for our filings come from me.
- I print out the letter and the spreadsheet summary sheet, combine them with the paper files, pack them up and mail them to my CPA (who is in Michigan — the same one I’ve used for years). Up to this point I probably have 10 hours into the project.
- I then email her to let her know the package is on the way. She confirms receipt by email when it arrives.
- She takes two weeks or so with it and then usually sends me back a list of questions. I answer those, she makes adjustments, then sends me electronic returns to review. There are six in total: returns for my wife and me and for each of our children (federal and state for all of us.) FYI, our federal return is about 100 pages by itself. I review and if they are ok we give her our approval and she files them.
- A week later we receive hard copies in the mail along with my original documents. If we owe money we write out our checks and send them in. If we are owed money, it’s sent directly to our checking accounts.
Yes, I have to do all this even though I use a CPA. I figure it saves me a ton of money versus having her dig through receipts.
I’m sure many of you have much simpler processes. Any tips or tricks you’d like to share with the rest of us regarding preparing tax returns?
photo credit: cafecredit via Flicker (license)
Tom Murin says
I categorize everything in Quicken when I enter it, if at all possible. If I am not certain what the item is for (due to the wife and kids usually) I leave the category empty and update it later (usually within a couple of weeks). The uncategorized items show on my reports as the first line item for expenses so they jump right out at me to update. Perhaps you could do more on the front end with the data? I email my tax stuff to my CPA as PDF attachments. I have a great scanner (Fujitsu Scansnap S1300) – so it is pretty easy to convert the paper to PDF. If he has any questions he’ll me an email. When he’s done he gives me the numbers and will e-file the returns after I give the OK. I’m amazed at how quickly I get my refunds with e-filing.
ESI says
My stuff is organized in Quicken as well. So I can eliminate most categories (like car insurance, food, clothes, etc.) The rest I slice and dice within a spreadsheet.
I’m wondering if scanning everything would be easier or more time consuming. I wouldn’t have to mail it once done, but I would have to scan 100 individual documents or so and that would take some time. Something for me to consider for next year. Thanks for the suggestion!
I too am amazed at how fast the returns come back.
George says
+1 for the Scansnap. It is an amazing scanner. Makes dealing with paper so much nicer.
Erik @ The Mastermind Within says
Would it be possible to categorize your transactions throughout the year vs. the end of the year? You would be spending possibly 45 minutes a month vs. 10 hours in a few days.
At the end of each month, we (personal finance people) are pulling together our income statements and balance sheets, so going one step further to categorize wouldn’t be too bad, especially since most of it is at the front of your brain. Thoughts?
ESI says
Maybe I wasn’t clear above.
All of my transactions are in categories because Quicken puts them that way. When I “organize them into categories” I take several lines and summarize them together for ease of use by my CPA.
For instance, I may have 30 different lines for charitable contributions. But they all may be to four charities. So instead of sending her 30 lines, I combine them into four lines for ease of use.
Another example: I have hundreds of lines for expenses for my rental properties. I sort these by category and give her one summary line (i.e. one maintenance cost per place versus 20 difference maintenance lines/charges, etc.)
I think doing it throughout the year would actually take more time. I don’t do a monthly report of any kind other than to check net worth (which is automated) and update my retirement budget (which is a quick update on a spreadsheet.)
FullTimeFinance says
We haven’t had anything business related as of yet. As such through this year I continue to just use turbo tax. The most complicated thing we have are some 0 coupon Bonds (OID), foreign stock (foreign tax exemption), and RSUs (why oh why do they not report the basis correctly for these on tax forms). I suspect next year as my wife begins to freelance more and we have business expenses we’all use a CPA. For now I manually enter everything and then have my wife review. Finally I check numbers against previous years as a lot of the more complex issues are fairly regular.
Mrs. Mad Money Monster says
I’m so glad I read this this morning. I have been doing my own taxes for years, but since I got married I am hesitant to do our joint taxes because my husband is self employed and has had many business ventures with different clients and lots of travel this year. We have an appointment with a CPA to do them for us, but after this post I’m going to try to organize everything up front to save on costs. Thanks!
George says
I finished mine up last weekend. I just use TurboTax and I mark charity in Mint / describe it in a spreadsheet. I save proof of charitable donations in a digital folder, and likewise with any other tax-relevant documents. Since I live in a state with no income tax, there isn’t much else for me to track. I get all my digital tax forms through websites / email, and a few in the mail. Normally I spend about 2 hours doing taxes and I’m done, but I spent a little extra time doing taxes this year because of a consulting gig I did. I’ve never had to deal with that situation before, so was learning about it. Since Turbo Tax has everything from the year before, it saves tons of time to not have to re-enter things.
I also support doing what you can throughout the year to make it easier.
Coopersmith says
My taxes are simple enough that tax software is works for me. It take me longer because I do go through every tab and go through the questions to see if something new applies to me. It also educates me on future possibilities in retirement.
I like the software as I did a simulation seeing that my son is no longer a dependent and thought I was OK with taxes but that simulation proved to be wrong as I also forgot about losing college tax credit so I owe more than I thought I would. I might do something when my wife retires.
Making Your Money Matter says
Your CPA must love you for giving everything to her so organized already! I worked as a CPA in tax for several years and definitely appreciates this (plus the less time your CPA has to spend, the less you pay-win win!).
My process is similar but I’ve implemented a more electronic system lately. I include detailed breakdowns as categories when I track my expenses (I use YNAB) and tag things as tax expenses. For example, if I contribute to different charities they each have their own budget line. I have a separate category for personal property taxes, real estate taxes and each over thing I need for taxes. It makes it so simple to be able to quickly pick up these totals for the year, compare them to my receipts. I also like to run my tax projections several times a year, so I like to keep it as clear and simple as possible.
In addition, I use a digital filing system for all of my financial paperwork and that includes my tax information. When I have something tax related, I put that document in a digital file called “current year taxes”. So many things can be obtained online (W-2, mortgage interest statements, interest statements, etc).
We currently do have a firm that prepares our taxes (only because we are still wrapping up tax related expenses due to an expat assignment and the company pays for it), and its so easy to zip my entire current year tax folder and upload it to their secure portal.
If I have just one suggestion for you about your process (which I think is awesome!) it would be to embrace a digital system for your documents.
Financial Panther says
I’m still in the midst of figuring out how I’m going to handle my taxes this year. I’ve handled them myself every year simply because I’ve always just been a regular employee without much to worry about. Last year was my heaviest side hustle year, and I’m not quite sure how to handle deductions in order to maximize my income., With most of my side hustles, I can handle the deductions and everything, but I’m not quite sure how to handle my Airbnb income (I rent out a room in my house, which complicates things a little bit, because very little is used exclusively for the Airbnb). It seems like I should be able to deduct something for utilities, mortgage, home repairs that I had to make, etc, but I’m just not quite sure how to handle that.
I’ve got my records, just need to figure out how to use them!
Jenzer says
Does Quicken not have reporting capabilities? It’s been over 15 years since I’ve used it, so I don’t remember what features it has. By “reporting” I don’t mean having Quicken export all your data to a spreadsheet, but having it compile and summarize your numbers for a given time period. That would save you multiple hours of tedious work.
If Quicken reports aren’t available, what about using the SUMIF function in your spreadsheets so that you don’t have to slice, dice and summarize manually? You could write formulas using SUMIF that would total up your income and expense numbers for each category relevant to your taxes. That way, you could leave the raw data as is — no more deleting and resorting necessary. The formulas would just ignore the irrelevant data for categories like “food” and “clothes.”