Preparing Our Taxes Will Be A Cinch, Paying Them Won’t

The good news: our tax preparation efforts are coming together without a major hitch. The bad news: we owe taxes….again.

How We Typically Prepare Our Income Tax Return

Every year, I get quite worked up and nervous about one thing in the same way that a dental appointment frazzles me. It’s that annual visit to our tax guy, our enrolled agent.

I get nervous because of the work involved in piecing together our income tax return, and because of the anticipation of our final tax totals. It helps that I’ve had this enrolled agent since I was single, when I was using EZ Forms. Hmmm… now that I think of it, that was over 15 years ago and I’ve kept him close all this time. You can say that we have grown old together. He’s the only other guy I know who has stuck with me through financial feast or famine.

Why’d I use an enrolled agent over a CPA? That was because they’re supposed to be the only type of tax professional that seemed to have some additional certification for handling taxes. In reality, they are “required to demonstrate to the IRS their competence in matters of taxation before they may represent a taxpayer before the IRS. Unlike attorneys and CPAs, who may or may not choose to specialize in taxes, all Enrolled Agents specialize in taxation. They’re the only taxpayer representatives who receive their right to practice from the federal government, while CPAs and attorneys are licensed by the states.” That was straight out of the National Association of Enrolled Agents web site.

Our tax guy has a few things going for him. He has his own blog which he maintains to keep in touch with his clients beyond the quarterly newsletters and reminders he mails out. Like many other professionals out there who’ve decided to go web 2.0 with their service or business, he’s keeping up with the times. Another perk he provides his clients is a “tax organizer” that he sends to us where we are asked how our past year went.

Sample questions include: Did you get a divorce last year? Were there any new additions to your family? Did you buy an investment property? And so on and so forth.

This tax organizer allows us to enter our financial data in convenient boxes. Again, the tax guy lives in the 21st century since we use a secure online application to do the entries. If I fill this up with a limited amount of hassle and make his job easy, then I get a discount. In general, this is supposed to save us time when we have our face-to-face annual tax preparation and consultation meeting, during which we then simply spend the time to get our tax data blessed or find out if we need additional adjustments, have points of contention or have missing information that need follow up.

So thanks to this guy, I have been able to file my taxes much more smoothly than I would otherwise. Our taxes have been somewhat convoluted the last half a dozen years or so because of itemized deductions we were attempting to take as well as some stock and mutual fund sales and exchanges that always required cost basis information.

Speaking of which, you tell me why these fund companies and brokerages drag their feet over mailing out a cost basis form. Frustratingly, these cost basis statements are as rare as hen’s teeth. My two fingers can point out how many I’ve ever received. It should really just be a straightforward matter to get such forms automatically, but apparently for many institutions, they’re only sent to you if you ask for it. Why so? Is it because of the cost of furnishing them? I’ve asked our tax guy his thoughts about why they don’t simply provide cost basis hand outs and he said “because they don’t have to.” I’m hoping their web sites simply have the information buried somewhere and I’ll just have to dig it out. Otherwise, I’ll have to bug a few service representatives. With my track record, wish me luck on that.

What’s Our Tax Verdict?

After 4 folders of receipts, statements, documents, forms AND a completed tax organizer, it turns out that this year, I only need to follow up with two pieces of missing information. After the financial roller coaster that we lived through last year, I’m just relieved that all my paperwork wasn’t amiss and that I only need to hunt for: my stock trade cost basis, and some occupational deductions for our home business. I should be able to get those in four shakes.

So all in all, what were our additional tax events for 2006?

(1) the digerati spouse quit, causing us to sell all his stock options in a very short span of time
(2) we started a few home businesses and a consulting service
(3) we did some minor stock trades that incurred both a profit and a loss (well ain’t that a wash?)

I’m expecting to pay more taxes this year because of taxable event #1. I’m also wondering whether the dreaded AMT will bite us this year, which I won’t know till the return is completed. Chances are it probably will, despite the fact that this family of four is coasting on only one income now.

Still I’m heaving a preliminary sigh of relief over one small victory, that we’ve accounted for 90% of the tax data that needed to be collected. Now if only our taxes fall within our expected and budgeted range, I’ll then say this was a reasonable tax year if there ever is such a thing. Otherwise, you can bet I’ll be shrieking about it here.

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Categorized under: Money Management, My Money Report