Don't hand your tax pro a box of clutter

The bill may be a lot less if only you'll first organize those financial documents

Your Money

February 22, 2004|By Joanne Cleaver

Here's an easy way to net $300: Spend three hours organizing your financial documents before you trudge off to your accountant, tax adviser or financial planner.

Doing your own homework is putting cash in your own pocket.

Accountants and planners are tired of sheepish clients showing up carrying shopping bags overflowing with tax receipts, insurance forms, and other documents that are crucial to tax forms.

Why pay a skilled professional to sort it all out? "Pay yourself the fee," said Deborah Feldman, president of financial advisory firm Leonetti & Associates Inc. in Buffalo Grove, Ill.

Certified financial planners' fees average $120 an hour, and certified public accountants' fees range from $80 to $270 an hour.

If you choose a tax preparer who charges a flat fee and then dump a pile of loose paperwork on her desk, you will be flagged as a high-maintenance client.

The next time around, you'll still pay a flat fee - but it will be higher, to cover the time it takes the preparer to straighten out your files.

Advisers at Leonetti & Associates were so weary of clients dumping heaps of papers on their desks that in 2001 they started offering a workshop on organizing financial forms called "Bag Lady or Money Bags?" Even the messiest clients get - and stay - organized when they realize sloppy files can result in late, inaccurate filings, penalties, fees and the inability to defend themselves in case of an IRS audit.

Here are tips from advisers who counsel their clients in the ways of coming into expensive meetings as prepared as possible:

Create a crib sheet. Use last year's 1040 federal income tax form to create a `to-do' list for this year's annual agony. Set up folders for each line item on the federal tax return form and put the relevant papers in each file. This gets the papers in the same order that your accountant will review them.

Double-check. Are line items from last year's 1040 form the same for this year? If you have added or dropped dependents, moved or changed any critical identifying information, then create a file with supporting documentation.

Hard evidence. Make sure you have an actual receipt - not just a canceled check - for each charitable donation of $250 or more. Keep proof of all donations in a single file.

Duplicates. Make copies of each piece of documentation on a single side of 8 1/2 -by-11 paper. Copies are cheap, accountants aren't. But accountants often find themselves spending five minutes, then 10, then an hour making copies while organizing a client's file, said Harold Katz, a CPA with Los Angeles firm Katz, Fram & Co. Don't make important notes or copies on the reverse sides of the papers because accountants don't automatically look there for additional information.

Stock records. Create a file that collects all buy-and-sell orders for stocks, bonds and other investments. For each purchase, you should have the date you bought it; the cost, including commissions; the date and price that you sold it; and the net gain or loss on the transaction. Keep a file of these transactions for each year. Keep these files permanently. This will enable you to prove your capital gains and losses for investments, which usually span several tax years.

Withholding records. Keep your year-end pay stub. There may be deductions on that stub - such as union dues or charitable donations you had subtracted from your paycheck - that are important when calculating your taxes.

Go electronic. As you are going through your papers, set up a spreadsheet in Excel or Quickbooks where you can summarize everything you own (your assets) and everything you owe (your liabilities). This will enable you to calculate your net worth and can be used as a guideline for setting financial goals for the new year.

Interest payments. Likewise, as you go through your papers, make copies of all summaries of interest that you have paid. Interest paid on mortgages and home equity loans is tax-deductible, but interest on all other consumer loans is not. By creating a summary sheet, you will see how much you are paying, after taxes, in interest.

Review notes. Review all handwritten statements and notes to be sure that you have clearly written numerals. (Better yet, enter them into a computerized spreadsheet.) If a tax preparer can't read your handwriting, you have no hope for a correctly prepared return.

Verify income. Review all your income sources to be sure that you have a 1099 form for each. The 1099 documents interest income, dividends, disbursements from retirement plans, and other nonemployee compensation.

Joanne Cleaver is a Chicago-area financial writer.

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