Tax Time: How to Prepare Your Tax Return

By this time of year,  many people are ready to file their tax return and (hopefully) get a refund.  Let's take a look at the alternatives available for filers:

Complete Your Return Manually

Seriously, if you are single with no children, all your income is from employers who issued W-2s and you don't have any investments or retirement accounts, you can probably complete a 1040 EZ manually in less than 30 minutes.  The only problem with this is that you'll have to file by mail, which will delay your refund.

Use Online Software

There are a variety of online programs that allow ordinary people who are not accountants to accurately complete most tax returns.  If your adjusted gross income is less than $64,000, you have access to a variety of commercial programs via IRS Free File.  You must enter the program via the IRS website, not the program's website, in order to use them at no cost.  The companies may (will) try to "up sell" you but the basic return will be free.

If your income is more than $64,000 or you need specialized forms you may need to upgrade to paid versions of the programs.  Nevertheless, unless your financial situation is extraordinarily complex, you should be able to complete your own return with online software.  

Besides price, the main advantage to completing your own return is that by the time you are done  you have a clear understanding of where your money is coming from and how it is being taxed. Some very intelligent people have told me that their mortgage payment is tax deductible and that's why they keep making it, rather than paying off the house.  The mortgage payment isn't deductible, only the interest is--and it is only truly deductible if it and your other deductions are more than the standard deduction of $12,600 for a married couple who files jointly.  

If you do not qualify for IRS Free File, different programs have different costs and features.  Turbo Tax is the most robust package and in fact your W-2, 1099 or other tax document may have their logo on it along with a data entry shortcut.  Turbo Tax allows you to take photos of many forms and import them, possibly saving you time on data entry.  Turbo Tax is also often the most expensive program.

On the other end of the spectrum is FreeTaxUSA which never charges for federal returns and charges only $12.95 for a state return.  The interface of FreeTaxUSA is not as fancy and it lacks Turbo Tax's import features.

The main thing to watch out for with the online programs is the up-sell.  Many of them lead you though a long and involved interview/data entry process which prepares the proper forms.  However, the "free" return you signed up for does not include many of your forms and you only learn the true cost of your return when you go to save or file it.  They are betting that you won't want to do all that work again and will just pay the money.  

The online packages all offer e-filing as part of their service. 

Use Packaged Software

If you don't like the idea of  your personal financial information being on some company's website, you can purchase programs like Turbo Tax or one from H &R Block.  .  They can be downloaded or bought in a store on a disc.  The price may or may not include efiling.  

Before purchasing a package, review the contents to make sure the package you buy includes the forms you need. 

Once you have downloaded and installed the software, you don't have to worry about Internet connections so your may be able to move more quickly through unneeded screens. 

Most packaged software allows you to prepare more than one return per license so if you have multiple family members who need returns, they should be able to share the software.

 Use a Storefront Preparer

When many Americans think taxes they think H&R Block, even if they've never used H&R Block's services.  H&R Block and similar seasonal storefront tax preparation services hire relatively low wage help and train them to complete tax returns by using software similar to that listed above. 

While some of these people actually learn something about taxes during their training and tenure, according to Glass Door, the average seasonal hourly tax preparer makes $10-15/hour and at that rate, you aren't getting much expertise. They use a computer-generated interview to fill out forms.  If your taxes are simple enough to entrust them to H&R Block, Jackson Hewitt and the like, they are simple enough to prepare on your own computer for less money. 

Use a CPA or Enrolled Agent

If preparing your taxes takes real accounting, then hire a CPA.  The CPA will be able to compute your profit and loss for rental properties or business ventures.  He or she will be able to advise whether certain things are deductible, and will be able to give you advice about how to save money on taxes next year, even if he or she can't reduce this year's taxes.  

Enrolled Agents are non-CPA tax professionals.  They, along with attorneys and CPAs can represent you in front of the IRS.  

If all your income is reflected on tax forms issued by business or brokerage houses, a CPA is probably overkill, unless you just plain don't want to fool with it.  However, it has been my experience that the most time-consuming part of preparing your taxes is gathering the information needed, and you have to do that whether you are going to do your own taxes or farm them out to someone else. 

While there are people who have complex tax situations which require the advise of a professional, the vast majority of Americans are perfectly capable of preparing their own tax returns. 

*Part of Financially Savvy Saturdays on brokeGIRLrich and Super Saving Tips*

Should I Do My Own Taxes?

Now that most tax forms have been issued, most Americans are either preparing to do their taxes or get them done, or are putting off doing them or getting them done.  Those who are expecting a refund are generally in a bigger hurry than those expecting to write a check.  Nevertheless, we all need to attend to this chore in one way or another.

So, Should I Do My Own Taxes?

Without hesitation I will say "Yes" you should, unless you have done it yourself recently, or unless you are wealthy enough that the time it takes to work through your return is more valuable than any money you might save.  However, I do not necessarily suggest that you file that return.

But I'm Not a Tax Professional; How Would I Do a Tax Return?

The same way most tax professionals do, with software.  Most of the big tax preparation software companies offer free online versions, and that is what I use.  If you go to most of the storefront tax preparation offices, you are going to work with a preparer who knows little if anything more about tax law than you do.  Those people ask you questions as prompted by the computer and fill in the answers you and/or your documents give.  They are not qualified to give legal advice or accounting advice.  They fill out forms.  You can fill out forms on your own computer.

I Don't Know--Are You Sure I Can Do It?

Yes, I'm sure.  I've done our taxes most years since we've been married (27 years), and I did my own before that.  I started with the tax form and the instruction book, moved to software from the computer store, and, for the last few years, to online software.  The software asks the questions; you answer them.  What is your name?  Social Security Number?  Your spouse's name?  Children?  How old?  Were you employed?  By whom?  Did you get a W-2?  Enter the information here.  While some of the steps are different between different programs, basically they all lead you to enter all the necessary information.  All the questions can get annoying, but the programs have been set up as a collection of "if-then" routines.  If you have children, then it asks their ages, and if one is childcare age, at some point it will ask you for your childcare expenses.  If one is college age, at some point it will ask for your tuition expenses.  Work your way through the program of your choice.  I've used Turbo-Tax, Tax Act and H&R Block's online program.  I often use two in one year to see if the results are the same; if they aren't, I try to figure out why (typing errors are the usual answer). 

I Know I Want a CPA to Do My Taxes, So Why Should I Do Them First?

There are good reasons to use a CPA to do your taxes.  If you have rental property and are figuring depreciation and deductions or if you have a business and are trying to decide of certain expenses are deductible, or if you want advice on what you can do next year to reduce your taxable income (which is different from increasing your refund)  from the business, a CPA or tax attorney may be worth the cost. If you have non-standard investments, the tax software may not know how to handle them.  However, for most people who are paid an income that is reported on a W-2 or 1099, and who have investments for which they receive tax forms from the investment company, a CPA isn't going to be able to save you any money over the computer.  If you don't believe me, do them yourself on the computer, and then get the CPA to do them.  What's the difference?

What about if you really do have a good reason to give the job to the CPA?  Do them yourself anyway, at least every few years.  Why?  Because I think every adult needs to know how their income taxes are determined.  Maybe you can really get this information from your tax form, and understand it, but given the large number of people who pay data entry clerks to do their taxes, I question how many people really understand the system.  If you understand the system, you can do a better job of making it work for you--even if that means being better prepared to question your CPA as to get the best advice from him or her.  

You Said the On-line Versions Are Free:  What's the Catch?

They make their money from the "freemium" model.  The software is free to use, but along the way they offer you the chance to buy various upgrades.  Most people can complete a return without them.  Some offer the federal return at no cost but charge for the state.

Note:  Since writing this article I have become aware that the IRS has deals with several companies that require them to offer free Federal filing, if your income is under $62,000 and if you enter the software via the FreeFile link.  Check the information on this page carefully before you start your return to make sure you are dealing with one that fits you.  I did my son's 1040EZ on one that wouldn't let me free file because of his age.  Since the form was simple, I just re-did it on another service, but had it been more complex I probably would have paid the money just to have it over with, which is what I suspect they hoped I would do.  

When Should I Get Help?

When you realize you are in over your head, that's when.  No one but you knows when that is but if you have filled out the forms, answered the questions and you can't get the error messages to turn off, or if you owe far more than you thought you would, asking for professional help may be the only answer, but see a professional--a CPA, tax attorney or enrolled agent-- not a data entry clerk at a storefront tax preparation service.  A few years ago my autistic son was in an expensive program at a school for the developmentally delayed.  It is a program that, had he made it to the top of a waiting list, tax dollars would have paid for.  However, we did not want to wait, so we paid the fees.  I wanted to know if they were deductible.  I read everything I could find about the subject, and I still wasn't sure--I was leaning toward saying they were not, but I wasn't sure, and the amount of money at stake was substantial, so I asked a CPA.  He too researched and looked at it a couple of different ways, and when it was all said and done, said that no, the expense was not deductible.  Even though he did not get the answer I wanted, I do not think I wasted my money.  On the other hand, the rest of the return he did matched the one I did, so I felt confident doing my own return the next year.  

Who Should Be Able to Do Their Own Return?

If your income is all accounted for on W-2 and 1099's, if your investments are all in things that issue yearly tax forms and if you do not own a business, then  you are unlikely to have problems with your tax return.  If you do not own a house or a business, you are not likely to be able to itemize your deductions and should be able to complete a simple tax form.  Complete your return on one of the online services and, if you paid someone to do your return last year, compare them (actually comparing your return to last year's is a good way to catch any omissions in any case).  What is different?  I'm not talking about exact numbers--a person who earns exactly the same from one year to the next is probably rare--but look at the lines.  Did last year's return have an entry on line 19?  Why?  Does this year's return?  Why or why not?  Do that for each line.  For most people, filling out tax returns is tedious, not hard--and by the time  you've gathered the information for the tax preparer (whether that person is a data entry clerk at a storefront service or a high-priced tax attorney) you've already done half the work.  

You probably can do your own taxes and you should have an understanding of how your taxes are computed, which is information best learned by completing a tax return. Try it, even if you do decide to hire someone to do the final copy.

*Part of Financially Savvy Saturdays on brokeGIRLrich, A Disease Called Debt and Femme Frugality*

For Where Your Treasure is....

Used with permission

One thing many of us would like to do in retirement is to give money to charity, including our churches.  Another thing many of us would like to do is to avoid paying taxes.  IRA Qualified Charitable Distributions can help you do both.  

One you reach 70.5 years of age, the law requires you to take (and pay taxes on) a certain portion of your IRA accounts.  One way around that requirement is to have the distribution sent directly to a qualified charity.  By way of example, if your goal was to donate $2400 this year to your church, and your minimum required distribution was that amount or more, you would tell the custodian of the IRA to send the $2400 directly to the church.  If you itemize your deductions, there may or may not be an advantage to this, since charitable donations are deductible,  but if you take the standard deduction, this technique allows you to not add this money to your income.  Unfortunately, this technique cannot be used by younger people who have inherited IRAs from which they are taking minimum required distributions.   Ask your tax advisor if this is a good idea for you, or run the numbers yourself.  The IRS rules are here. While it says it is only valid through 2014, to me it has the looks of something that is haggled over and then renewed yearly.  

Wandering the Web

I plan to write a "Wandering the Web" post weekly, linking to articles that caught my eye during the previous week.  I invite you to comment on the articles or on my choices of articles, or about any finanicial articles that have caught your eye this week.

Social Security will be the base for most retirees.  This article gives Four strategies to boost Social Security benefits.

Stocks and bonds are backbone of most people's investements, but are there other alternatives?  This article discusses hedge funds. 

I've recently begun investing in peer-to-peer loans.  30 experts give their three top tips for people considering this invesment.

Most of us are looking for good advice, but recongizing bad advice can be as important as taking good advice.  Here are eight pieces of bad advice. 

Used with Permission

We have all heard the jokes about adult kids living in their parents' basements.  Unfortunately, supporting adult children (some of whom clearly don't need it) has made saving for retirement difficult for some parents.  

Like most other things, retirement works better if you have a plan.  Here is a "to-do" list.

Saving for retirment is tough enough if you make good money.  If you don't there is a tax credit that can help.  

That's all for this week.