Jeff Schnepper

The Basics

Prepare for your tax preparer

The 'envelope system' gets you organized, helps you and your preparer find tax savings -- and offers peace of mind. Here's how to put it to work.

By Jeff Schnepper

You don't have to pay a penny more in tax than the law requires. Unfortunately, as Walter Wriston, the legendary former Citicorp chairman, once pointed out, "All the Congress, all the accountants and tax lawyers, all the judges and a convention of wizards cannot tell for sure what the income tax law says."

What can you, a nonexpert in taxes, do in the face of such overwhelming complexity and convolutions? Find an expert.

No one person knows all the answers. The last person I knew who really comprehended the details of the tax code was Wilbur Mills, chairman of the House Ways and Means Committee from 1958 to 1974.

Assuming you've found someone sufficiently competent to do your tax return properly, how do you prepare for him or her? This is an important question. Remember, a tax return isn't supposed to be fiction in numerical form. You've got to give your preparer the right numbers to put on the paper or in the electronic file.

That means that you have to put together the information. But because you're not the tax expert, you shouldn't be the one deciding what's allowable as a deduction and what's not. You have only three basic jobs:

  • Gather the numbers that substantiate your deductions.

  • Compile the numbers in tax-related categories.

  • Summarize the categories and get the final numbers to your preparer.

I recommend that my clients use what I call the "envelope system," which allows you to do all three easily and simply. This is what you should have been doing all along. If you haven't, I highly suggest you start doing so immediately for your 2009 return. You should also be using it to get organized for your 2010 return.

Putting the envelope system to work

First, find and save all your receipts. I want you to picture dead presidents on those receipts -- they represent real dollars in your pockets. You wouldn't walk out of a store without your change; don't leave without your receipts. These are more important now because the Internal Revenue Service is demanding more documentation for charitable donations. You need some form of written substantiation for all charitable contributions. So, if you’re just throwing cash into a collection plate, you’re making a donation -- it just isn’t deductible. So, give them a check, or use an envelope where you can get a receipt.

As you get your receipts, put them in a shoe box or a special file. (If you haven't started, start now!) Each month (or every couple of months), break down checks and receipts into categories and create an envelope for each category.

You'll have an envelope for charitable contributions, another for investment expenses, another for medical expenses, property taxes, mortgage interest, etc. If you can't think of a category, make up a descriptive name and use that. Your preparer can translate it into deductible classifications.

Put the related checks (or the carbons if that's what you have) or copies you download from your bank's Web site in their appropriate envelopes. Add up the receipts, add up the checks (don't double count) and put the sum of that category on the outside of the envelope. Those are the numbers you give to your tax preparer.

Continued: The system is easy

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