Read these 24 Tax Preparation Tips tips to make your life smarter, better, faster and wiser. Each tip is approved by our Editors and created by expert writers so great we call them Gurus. LifeTips is the place to go when you need to know about Taxes tips and hundreds of other topics.
When you pay someone to do your income taxes (a “paid preparer”), ask them if they will be your IRS contact. This means that if the IRS has any questions regarding your tax return, the IRS can contact them with the concern. If you decide to do this, simply check the “yes” box in the Third Party Designee area of your income tax return. By having this designee, you are authorizing them to receive copies of any IRS notice or letters (i.e. correspondence) relating to your return. You also are authorizing your designee to call the IRS with any questions about the refund or processing of your return. Your designee will also be responsible for any math errors on your income tax return.
Certified Public Accountants, or independent public accounting firms, are usually third party designees. They maintain client files and handle all IRS tax concerns regarding their tax clients. As an example: every time a client receives an IRS Notice, the CPA (or his/her office staff under their direction) contacts the IRS regarding the matter. The client does not have to contact the IRS personally. The IRS Notice is then put into the client file.
What is a "Tax ID number"? For an individual (and sole proprietor), this is your social security number. For a business owner, this is the Employer Identification Number. This number is used to set you apart from other taxpayers.
Employees . Your employer has until January 31, 2007, to send you the W-2 form from the previous year, which details your earnings and withholdings. If you have not received this form by February 15, 2007 – call the IRS for help.
Other Income . For income you received other than wages, it will be reported on IRS Form 1099. This will include: interest, self employment income, dividends, capital gains, unemployment compensation, social security benefits (Form SSA), state and local income tax refunds, and sale of home. Also, if you received any distribution income from your pension, insurance contracts, or retirement plans – you need to report this income. Most of this information will be on a IRS Form 1099. Your paid preparer will need these documents to figure your total income.
Expenses . For expenses, you will need to take any receipts, cancelled checks, along with any summary statement you have prepared. Summary statements are prepared when you have multiple entries making up an amount, and the details are too cumbersome. For instance, mileage statements. If you have used your vehicle for business purposes throughout the year (and are claiming actual usage), you need to keep track of this. A Summary Statement will list your beginning and ending odometer readings, and the breakdown in total. You do not need to take all your month-to-month mileage logs into your paid preparer. Do have them available, however, if your paid preparer has any questions.
Last year's tax return. Another item you will need to take to your accountant/paid preparer is your 2005 tax return. Your preparer will need this to compare your current year figures to. By checking last year's income tax return, your preparer may notice items that were missed on this year's. The person may also question any noticeable changes. It basically is a second check for them.
In conjunction with your other other social security income tax payments, you must include tax-exempt interest when you are preparing your social security income tax preparation. Also, if you are married and filing a joint return, you have to use the total of your spouse's income, your income (other than Social Security), plus your social security and equivalent tier 1-railroad retirement benefits when figuring the taxable portion of the benefits. There is a worksheet in the Form 1040 or Form 1040A in the instruction book for base amounts and other taxable information. There are instances where you're SSI and/or your Disability Benefits are taxable.
In regards to SSI income tax preparation, you must first look at the base amount you are filing against the total of one half of your social security payments in addition to all of your other income.
You will need to estimate your taxes if, for instance, you are self-employed or make large gains on your investments. The IRS wants its money every quarter instead of waiting for a yearly return to be filed. When a company pays your wages you do not have to worry, but if you are self-employed, you must estimate social security, Medicare taxes, and income taxes every quarter. If you try to postpone the estimations until the dreaded April 15th, the IRS will charge penalties and interest. Beware - if you do not estimate your taxes correctly you will receive a penalty even if money is due you!
Whether you choose tax preparation services or online tax preparation there is a form you can file to ask for an extension of time - and there are no restrictions, so all taxpayers qualify. You might want to carefully review the free qualifications before starting. Check on states and income levels as each company has their own criteria for preparing free-filing forms.
If you live in a state that has a sales tax but no state income tax, such as Florida, Nevada or Wyoming, you actually can deduct sales tax paid throughout the year. American Jobs Creation Act of 2004 gives taxpayers in certain states that have no income tax the option to claim state and local sales taxes paid when they itemize deductions. Use the IRS estimation chart to assist you if necessary. Please remember that this option is available for 2005 federal returns only.
Butterflies are free and for some taxpayers, so is filing your taxes! If you are a taxpayer with an adjusted gross income of $50,000 or less, you are eligible to file with Free File. Free File is online tax preparation and electronic filing that has created a partnership agreement between the IRS and the Free File Alliance, LLC. So, if you meet this one little guideline, yes you can file free…with e-file.
When it comes to taxes, simple is better. Finding the simplest forms for your situation are advisable, because making a mistake that could cost you a delay in processing your taxes and any due refunds. The Federal Tax Return Preparation form that is the simplest is 1040EZ. Form 1040A has additional items not covered in the EZ. Use Form 1040 when you itemize deductions and report complicated investments and other income. Note: The income limit for Forms 1040EZ and 1040A has increased to taxable income of less than $100,000.
If you can't pay your taxes, the IRS will set up a payment plan and mail out the paperwork for you to sign. You even get to choose the monthly payment day as long as it's between the 1st and the 28th. Or download Form 9465 from the IRS website and mail it in. You will receive a response within 30 days. You do have the option of filing an extension using Form 4868. Regardless of which one you choose, don't blow it off! The penalty for not filing is 5% per month up to a max of 25% of balance due. Did you know you could file an extension and pay taxes at the same time? There are two IRS-approved credit card services. One is Link2Gov offering extension payments and the other is called Official Payments. There is a 2.49% convenience fee for using either service.
Is there a checklist for preparing my income tax preparation?
Although this list is not “written in stone”, it might save you time and remind you what documents you will need for filing.
For personal data you need: social security numbers for you and your dependents. Employment and Income forms will consist of W-2s, pensions/annuities, alimony if applicable, jury duty, prizes/awards, Scholarships/fellowships, state/local income tax refund and gambling and lottery winnings.
Homeowners will need mortgage interest and form 1098 for all homes. If you sold your home or other estate, use Form 1099-S. Don't forget moving expenses. Renters will need there yearly receipts.
Documentation on all financial assets including interest, dividends, proceeds and retirement plans. Liabilities include Auto loans, student loans and early withdrawal penalties on CDs etc. Remember charity donations, IRA and such, job hunting, child care and even last year's tax return fees!
Income tax preparation just might go a little more smoothly following this list.
Whether you plan on using tax preparation services or doing it your own, online tax preparation will make your life much easier. Keep everything in color-coded files and you can keep all those labeled envelopes together by placing them into a large manila folder. Better yet, try a large coupon book or accordion folder that you can buy at a local office supply store. A filing system will make your income tax prep a lot simpler. As you get receipts, tuck them into an appropriate envelope labeling them as rent/mortgage interest, property taxes, medical expense, investments, charitable donations and so on.
In order to calculate your estimated taxes you can use your prior year adjusted gross income. Suppose it was less than $125,000 - then you can pay either 90 percent of this year's or 100 percent of last year's income tax liability. After you estimate your taxes for the term, make sure you divide this amount into fourths and pay appropriately. Note: If you are a farmer, change the 90 percent shown above to 66.67 percent. There are many different rules that apply to farmers so you might want to refer to IRS Publication 225: Farmer's Tax Guide.
Two well-known tax preparation services include H&R Block and Jackson Hewitt. To meet growing needs, H&R Block is no longer focusing just on tax preparation but on comprehensive financial services as well. The company offers brokerage services, annuities, mutual funds, and IRAs available in centers and on its Web site.
Jackson Hewitt is the second largest tax preparation service company with over 5,400 offices in 49 states and the District of Columbia. Specializing in electronic filing they provide full service, individual federal and state income tax preparation as well as other related financial products.
Oh and of course let's not leave out the major contact source, Mr. IRS himself!
The earlier the better. It is never too soon when it comes to preparing for the tax season. The government and tax professionals always encourage taxpayers to get a jump on their Federal Tax Return preparation, especially since filing early avoids the last minute rush. Here are some steps to get ahead on your taxes:
• Have all the records you need including W-2s and 1099s. Don't forget to save a copy for your records.
• Make sure you have all the correct forms. Did you know they are available around the clock on the IRS Web site.
• Do not rush! Take a break, walk around and clear the mind! Mood music any one? For heaven sake don't stress - you're likely to make silly mistakes.
• Double-check, and then triple check all your calculations and make sure the Social Security numbers you're using are correct.
Remember: the IRS is there to help. Try IRS.gov or call toll free at 1-800-829-1040.
Not every taxpayer will need to pay someone to prepare their income taxes. However, many times tax information that needs to be reported is too complex for an individual or business to handle. Some guidelines to follow in determining whether you need a paid tax professional are as follows:
The IRS offers a free tax preparation program for military personnel and their families. The program is known as VITA – Volunteer Income Tax Assistance. In addition to providing military personnel and their families with free income tax return preparation, this program also provides other services. Taxpayers can receive tax advice and tax assistance, also. This program is found worldwide at various military sites. So, this is an in-person tax preparation program. The tax offices are located within various military installations.
Tax preparers are volunteer military personnel who specialize in the needs of military-related individuals. In other words, they are trained and equipped to deal specifically with military issues and concerns regarding the tax laws. This program is a combined effort of the U.S. military and the IRS. The IRS supplies the software and training of the volunteers who will be preparing the tax returns. In turn, the military provides the space and equipment necessary to run this program. They also provide, of course, the volunteer military personnel.
If you are a military personnel and/or family member and are ready to take advantage of this program, be certain to have all your tax documents and identifying information with you. For more information on income taxes regarding the military, refer to IRS Publication 3 – Armed Forces Tax Guide. This guide will come in handy during your income tax preparation.
Many times, you may find that while preparing your income tax return, it is easier to “round off” your numbers. This means that instead of having cents, the figures you prepare your tax return with will have only whole dollars. If the figure involved is below 50, round it down to the next lowest dollar. If the figure involved is above 50, round it up to the next highest dollar. For example, if the figure is $7.49, you would round it down to $7.00. If the figure is $7.51 you would round it up to $8.00. Be certain that if you choose to use “rounding off”, that you do it throughout your tax return and schedules. You cannot round off one portion and not the next.
There are a variety of tax preparation firms available to help you with your in-person income tax returns. The ones mentioned in this tip all charge a fee.
Other paid tax preparers you may be interested in are the following: CPAs. Certified Public Accountants are licensed to practice their profession (public accounting) through various State Board of Accountancy's. Public accounting firms range in size from small to large, international ones. Or, CPAs can operate private practices. Local CPAs are great for small-to-medium local businesses, and individual taxpayers. The larger international firms handle clients that are out of the scope of our discussion. Before hiring one, check with your local state to ascertain the validity of the license. CPAs derive a great deal of their income from individual income tax preparation. They take continuing professional education in tax laws, are expected to remain current with tax laws, and can help you find a variety of ways to save taxes. Also, they can help you plan for future tax years.
Enrolled Agents . An enrolled agent is the designation given to an individual who has passed an arduous test given by the IRS. This individual knows the tax laws, how to implement them, and how to maneuver around the Internal Revenue Code. As with any tax professional, they must keep up to date with current tax laws. Many Enrolled Agents start their own private practice after retiring from the IRS. All paid tax preparers can be found via networking, in the phone book, online, listed in your local newspaper, etc.
Many times, it is worth it to pay for someone to prepare your income tax return. This is especially true when you have a large amount of income from various sources and numerous corresponding expenses. And, if you are unsure about how to handle any area of the tax law, a paid professional will save you time and frustration. A paid preparer will, hopefully, know the ins and outs of the Internal Revenue Code. Their main goal should be to help you learn about the tax laws, how they affect you, and help you save money. Be sure to check the credentials of any tax professional you want to hire. Check their license, ask for their resume, check with the Better Business Bureau. In other words, be informed about the firm or individual you will be trusting with your financial information.
Check references. Call around to check into their general character. Are they community involved? Do others speak highly of them? These are important characteristics. When choosing a paid tax preparer, you also need to interview the person to qualify them. Their answers and how they suit your needs will determine which paid preparer to choose. Some questions you may want to ask them include:
Here is a checklist to follow to make certain you have included everything possible in your income tax return. Many of these steps may sound very common sense-like, but you would be amazed at the amount of income tax returns that the IRS has to follow up on due to incorrect or missing information. This, in turn, delays income tax refunds. Have these items checked off prior to sending off your tax return – in person, electronically, or by mail:
Okay, you estimate your taxes and are now ready to pay them. Consider this: You might want to try paying your taxes monthly instead of quarterly. You will find smaller payments can be more manageable creating less stress on the pocket book and less stress on you. You also might want to try an EFTPS (Electronic Federal Tax Payment System) instead of snail mail. No checks will be misplaced and you'll get an instant receipt of payment. One final suggestion would be to keep a record of all your estimated tax payments so you could use them for the upcoming year.
If you recently purchased a new home or piece of property, you can deduct the interest from your closing costs. However, origination fees and/or points paid on a refinancing must be amortized over the life of the loan, whereas if you purchased a home, they are deductible. No other closing costs are deductible. Did you know it is better to file a joint return even when your spouse's income is significantly less than yours?
When hiring a personal finance tax preparation planner take into consider the following:
- Tread carefully - Make sure you check the credentials of the person who claims to be a tax planner.
- Choose a planner who not only does personal finance tax preparation but investments and services you can use throughout the year.
- Try interviewing more than one tax planner and ask for and check references.
Make sure you and the planner are on the same levels regarding your finances, goals and what risk you're willing to take. So before you go to anyone --know thy self!
Some tax preparation services provide free tax income tax preparation. There usually are stipulations and qualifications that taxpayers must meet in order to use the free services. If you visit the IRS website, there are links to service providers who allow you to prepare and submit your tax return for free.
Another free income tax preparation program offered by the IRS is known as VITA – Volunteer Income Tax Assistance. Specially trained and certified community volunteers across the country are preparing tax returns for those who either cannot afford it themselves or are unable to do it themselves. There are centers/sites throughout the United States. Usually located in local communities, they are found in libraries, grocery stores, etc. To qualify for the VITA program, you would need to have a gross income of less than $39,000. Also, your tax return needs to be basic in nature. They can, however, help you if you qualify for some special credits such as an Earned Income Credit, Child Tax Credit, and Credit for the Elderly.
The TCE (tax counseling for the elderly) is another free tax preparation program offered by the IRS. Of course, it concentrates on the tax needs of the lower income elderly population. This program involves trained volunteers from local nonprofits assisting senior citizens with their basic income tax return preparation. The program also offers tax advice and assistance. The volunteer tax preparers associated with this program are usually retired tax professionals who receive grants to perform these services on a nationwide basis. The TCE has a special program titled TaxAide, which is run in conjunction with the
AARP (American Association of Retired Persons). More information on this program by be obtained via the AARP website or the IRS website.