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Tactics to Use When Preparing 1040s

welch julie 16Be Alert for Digital Documentation

Now that companies are going digital, many W-2s and Form 1099s are available digitally. This is a blessing since they may be more readily available when they are needed. However, it puts a bigger burden on you to assure you have all of the information when preparing a tax return since it may not be in the stack of information provided by your client. A good practice is to watch for documentation from payors listed on the prior year return and ask the client about any new bank and investment accounts.

Learn the Theory By Preparing Tax Forms By Hand

Does anyone really prepare tax returns without using tax software anymore? There are so many complexities and computational issues to consider when preparing tax returns, that using tax software is almost a necessity. However, to gain a real understanding of a concept, actually preparing a few of the forms “by hand” provides you more insight and a better understanding of the law in that area.

Take Form 8960 for the net investment income tax as an example. The tax software will plug numbers in for you. However, you really need to read the form and understand all of the adjustments and exclusions to calculate the proper tax and keep clients from paying unnecessary amounts. Even preparing a Schedule D for capital gains and losses manually helps you understand the netting process and how any capital loss carryovers work. Really understanding how the form works generally helps you understand the law. This in turn helps you to be able to understand planning issues and make recommendations to your clients for minimizing taxes. However, preparing the actual tax returns using tax software is highly desired, especially since many tax software packages will provide helpful hints and diagnostics of items needing more attention.

Reconsider Filing Status and Exemption Deductions

Filing married, filing separately rather than jointly, filing as head of household rather than single, or letting a child claim the dependency exemptions may reduce the family’s overall taxes.

• If a married couple has significant medical expenses subject to the 10% of adjusted gross income (AGI) floor or unreimbursed employee business expenses subject to the 2% of AGI floor, filing separately may reduce the overall tax by lowering the floor for deductibility. A couple with $100,000 of AGI and medical expenses of $7,000 receives no tax benefit from their medical expenditures due to the $10,000 ($100,000 x 10%) floor. If the spouse who incurred the medical expenses had $30,000 of AGI, then that spouse could deduct $4,000 ($7,000 – ($30,000 x 10%)), saving the couple over $1,000 in tax.

• Head of household filing status does not require that one be a single parent. Providing over half the housing costs of a parent who does not live with the client or over half the costs of most dependent relatives who live with the client for more than six months is enough to obtain the increased deductions, lower tax rates and higher phaseouts allowed to head of household filers.

• If the AGI is over $155,650, a client may be receiving a reduced benefit from the exemption deduction for their children, and the client is receiving no benefit from the education credits the government allows. If the child provides over 50% of his or her support, allowing the client’s children to claim their exemptions, particularly if they are in college with over $15,000 of earned income, may increase the family’s overall cash flow. Additionally, this may help their higher education financial aid opportunities.

Taking advantage of these strategies requires thinking now about who should pay the medical or college costs, how much a child needs to earn and how much support needs to be provided to exceed the 50% requirement for the exemption deduction.

Look for special situations that might have beneficial tax treatment. Examples of special situations include the following:

• Ministers

• Self-employed individuals

• Real estate professionals Watch for things that aren’t on the tax return that should be.

• Required Minimum Distributions, - If a client is over age 70 1/2, be watching for Required Minimum Distributions or know why the client may not have any.

• Qualified Charitable Distributions – if someone over age 70 ½ made a qualified charitable distribution (QCD), be sure it is properly reported as a QCD and assure that no charitable deduction was taken for that amount.

• Energy credits – the residential energy credit of up to $500 in one’s lifetime was reinstated retroactively to the beginning of 2015 through 2016. Also, ask the client about remodeling or energy efficiencies they have made to their home.

Use available resources.

• www.irs.gov has forms, guides, frequently asked questions (FAQs) on many topics.

• Many vendors have checklists available to help guide the tax return preparation to be sure all items have been considered

Protect Yourself From Identity Theft

One of the big issues facing the IRS right now is identity theft and the related scams. As tax return preparers, we need to be vigilant in watching for any signs of theft or fraud. The IRS recently issued a warning for tax return preparers regarding a new phishing scheme that mimics software providers and tries to trick recipients into clicking on a bogus link.

Remember to Renew (or get) Your PTIN

Preparer tax identification numbers (PTINs) are required for anyone who prepares or assists in preparing federal tax returns for compensation. The renewal and annual payment can be made online.

These tactics can help when preparing individual 1040s.


Julie Welch (Runtz) is the Owner of Meara Welch Browne, P.C. She graduated from William Jewell College with a BS in Accounting and obtained a Masters in Taxation from the University of Missouri-Kansas City. She serves as a discussion leader for the AICPA National Tax Education Program. She is co-author of 101 Tax Saving Ideas.