Tax Time, How QuickBooks Helps You De-stress
The reasons for putting off tax preparations are endless – and understandable. But when we procrastinate on this tedious job, tax filing deadlines mean marathon sessions grappling with tax records. Not only is this unpleasant, but it also makes it more likely you’ll make potentially costly mistakes on your return.
Conscientious daily work habits – including a diligent eye on tax issues – can help prevent this painful scenario. QuickBooks offers many built-in tools to help you minimize the tax-time terrors.
Stay on Top of Your Receivables in QuickBooks 2011
Even if your sales are up, slow customer payments may be damaging your cash flow. If you often come up short when it’s time to pay your tax obligations, it may be that you’re not chasing down your receivables adequately.
QuickBooks Pro and Premier 2011 added a number of features to help with this. The new Customer Snapshot gives you instant access to key customer information – things like open balance, number of days to pay, and recent invoices and payments.
A new vertical pane next to transaction forms displays an overview of your interaction with the customer or vendor. Beyond saving the time you used to spend looking up historical information, this feature can alert you to collection opportunities. A new Collections Center also automates e-mailed collection notices.
Figure 1: QuickBooks Pro and Premier 2011 display vertical panes next to transactions to help you catch unbilled items and open balances.
If you’ve got any questions about these newer versions of QuickBooks, give my office a call.
Older Versions’ Cash Flow Tools
Previous versions of QuickBooks also help you maximize customer payments. Enter an invoice for a customer who has outstanding time charges and/or costs, and a dialog box reminds you of that.
Figure 2: If you’re invoicing a customer who already owes you money, QuickBooks will remind you – and include the past due balance in your current form.
Also, QuickBooks’ integration with Microsoft Word makes short work of collection letters. Open the Customer Center, then click Word | Prepare Collection Letters and follow the wizard. The Payment Snapshot (Company Snapshot | Payments) is a page you should visit daily; its tables and graphs spell out who needs nudging.
Intuit also offers solutions that let you accept payments online, so you don’t have to wait for checks to arrive in the mail. Talk to us about which one might be best for you and how to get started with it.
Keep Documents Close
However you store receipts and other tax-related paper, it can be frustrating to match paper to QuickBooks data. QuickBooks 2010 introduced the ability to attach scanned documents to any screen that has the Attach icon. Using this tool faithfully will reduce the time and frustration associated with your tax preparation. Prices start at $9.95/month for one attachment per list item or transaction; 30-day free trial.
Figure 3: Click on this icon to attach a scanned paper document to a QuickBooks item.
Use “Classes”
QuickBooks uses the accounts assigned to your transactions to categorize your tax-related data. You can also slice your data in additional ways by using classes to break out account balances by filters, like by departments, consultants, or locations. But you must use it faithfully for it to be effective.
To get started with classes, first make sure that you’re set up to handle them. Click on Edit | Preferences, then click the Accounting tab and Company Preferences. Click on the box next to Use class tracking if it isn’t already checked, and on Prompt to assign classes if you want QuickBooks to remind you before you save an unclassified transaction.
Figure 4: Make sure your Company Preferences are set to accommodate class tracking.
Next, go to Lists | Class List, and then click the Class tab in the lower left corner. Select New. Type your new class name in the field that appears and check the Subclass of box if you want to make this a subclass. Assign these classes in transactions where appropriate, and you’ll have neatly categorized data for the Profit & Loss by Class, Profit & Loss Unclassified, and (new in 2011) Balance Sheet by Class reports. Classes can also be displayed in other reports.
Built for Tax Reporting
Unfortunately, QuickBooks can’t prepare your taxes for you – but these tools help shape your data so tax deadlines are less stressful and your returns more accurate than in the days of pencil and paper.
QuickBooks organizes data in the background by, for example, assigning your transactions to the appropriate accounts, so your reports tell the right story. Another helpful feature includes the ability to print 1099s, W-2s, and W-3s.
QuickBooks’ design encourages you to look at tax-related issues every day, which can be a very good thing come filing time. Take advantage of this – along with our expert advice – and you can be more confident and less frantic during your periodic interaction with the IRS.
Financial Tips
You can avoid headaches at tax time by keeping track of your receipts and other records throughout the year. Good record-keeping will help you remember the various transactions you made during the year, which in turn may make filing your return less, ummm, taxing.
Records help you document the deductions you’ve claimed on your return. You’ll need this documentation should the IRS select your return for examination. Normally, tax records should be kept for three years, but some documents – such as records relating to a home purchase or sale, stock transactions, IRA, and business or rental property – should be kept longer.
In most cases, the IRS does not require you to keep records in any special manner. Generally speaking, however, you should keep any and all documents that may have an impact on your federal and State tax returns:
- Bills
- Credit card and other receipts
- Invoices
- Mileage logs
- Canceled, imaged, or substitute checks or any other proof of payment
- Any other records to support deductions or credits you claim on your return
Good record-keeping throughout the year saves you time and effort at tax time when organizing and completing your return. For more information on what kinds of records you should keep, check out my page Tax Strategies for Individuals and or Tax Strategies for Business Owners. Use the guides listed on the mentioned pages to learn how to lower your taxes with legitimate tax saving strategies and to find perfectly legal tax deductions that you may be missing.
A few other tips.
Asset Allocation Adjustments
Review the asset allocation of your portfolio. Increases and decreases in the value of your portfolio can upset the asset allocation you consider optimal. Should you shift some stock investments into or out of bond investments? Should you shift some funds into tax-free investments?
Health Spending Checkup
If your employer has a flexible spending arrangement (FSA), determine the balance left in the plan. Your plan may allow you to carry over a year-end balance for use early in the following year.
If your plan doesn’t allow unspent money to be carried over, then you may want to incur discretionary medical, dental, or optical costs prior to year-end. If you do not participate in such a plan, find out if one is available at your company. Also find out if you are eligible for a Health Savings Account.
Review Budget vs. Actuals
Compare September income and expenditures with your budget. Make adjustments as appropriate to your October expenditures. Make sure you have invested your planned savings amount for September.
Estimate Your 2010 Tax Liability
Total up your taxable income, capital gains, and deductions through this date. Estimate the amounts expected through year-end. Determine where you stand, and what steps, if any, you should take prior to year-end to minimize your tax liability. Please feel free to call us for help.
Are You sure you are Having Enough Withheld?
How are you supposed to know? This is a re-post for your tax planning needs. A few easy steps and some light planning can help you figure this out.
What you need to know:
If you fail to estimate your federal income tax withholding properly, it may cost you in a variety of ways. If you receive an income tax refund, it essentially means that you provided the IRS with an interest-free loan during the year. By comparison, if you owe taxes when you file your return, you may have to scramble for cash at tax time–and possibly owe interest and penalties to the IRS as well.
When determining the correct withholding amount for your salary or wages, your objective should be to have just enough taxes withheld to prevent you from incurring penalties when your tax return is due. (You may owe some money at the time you file your return, but it shouldn’t be much.) You can accomplish this by reading and understanding IRS Publication 505 and IRS Publication 919, properly completing Form W-4 (and accompanying worksheets), and providing an updated Form W-4 to your employer when your circumstances change significantly.
Form W-4 helps you determine the proper withholding amount
Two factors determine the amount of income tax that your employer withholds from your regular pay:
1) the amount you earn
2) the information you provide on Form W-4.
This form asks you for three pieces of information:
1) The number of withholding allowances you want to claim: You can claim up to the maximum number you’re entitled to, claim less than you’re entitled to, or claim zero.
2) Whether you want taxes to be withheld at the single or married rate: The married status, which is associated with a lower withholding rate, should generally be selected only by those taxpayers who are married and file a joint return. Other people (including those who are married and file separately) should generally have taxes withheld at the higher, single rate.
3) The additional amount (if any) you want withheld from your paycheck: This is optional; you can specify any additional amount of money you want withheld.
When both spouses work and have taxes withheld at the married rate, they sometimes end up with insufficient taxes withheld. If this happens to you, remember that you can always choose to withhold at the single rate. In addition, you can determine the proper withholding amount by completing Form W-4’s two-earner/two-job worksheet.
Complete the worksheets to claim the correct number of allowances
To understand Form W-4, you must understand allowances.
Think of allowances as cash in your pocket at the time that you receive your paycheck. The more allowances you claim, the less taxes are taken from your paycheck (and the more cash ends up in your pocket on payday).
The following factors determine your number of allowances:
1. The number of personal and dependency exemptions that you claim on your federal income tax return
2. The number of jobs that you work
3. The deductions, adjustments to income, and credits that you expect to take during the year
4. Your filing status
5. Whether your spouse works
To claim the correct number of allowances, you should complete Form W-4’s worksheets. These include a personal allowances worksheet, a deductions and adjustments worksheet, and a two-earner/two-job worksheet. IRS Publication 505 (Tax Withholding and Estimated Tax) explains these worksheets.
Check your withholding
To avoid surprises at tax time, it’s a good idea to periodically check your withholding. If you accurately complete all Form W-4 worksheets and don’t have significant non-wage income (e.g., interest and dividends), it’s likely that your employer will withhold an amount close to the tax you’ll owe on your return. But in the following cases, accurate completion of the Form W-4 worksheets alone won’t guarantee that you’ll have the correct amount of tax withheld:
1) When you’re married and both spouses work,
2) If either of you start or stop working
3) When you or your spouse are working more than one job
4) When you have significant non-wage income, such as interest, dividends, alimony, unemployment compensation, or self-employment income, or the amount of your non-wage income changes
5) When you’ll owe other taxes on your return, such as self-employment tax or household employment tax
6) When you have a lifestyle change (e.g., marriage, divorce, birth or adoption of a child, new home, retirement) that affects the tax deductions or credits you may claim
7) When there are tax law changes that affect the amount of tax you’ll owe
In these cases, IRS Publication 919 (How Do I Adjust My Tax Withholding?) can help you compare the total tax that you’ll withhold for the year with the tax that you expect to owe on your return. It can also help you determine any additional amount you may need to withhold from each paycheck to avoid owing taxes when you file your return. Alternatively, it may help you identify if you’re having too much tax withheld. If you find that you need to make changes to your withholding, you can do so at any time simply by submitting a new Form W-4 to your employer.
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