Taxes are Taxing
A few months back I wrote a blog about how doing taxes was getting easier and easier (see it here). Well, the basic idea I was discussing is still valid: fewer and fewer people have complicated tax returns. Increasing standard deductions are the principal reason. One thing hasn’t changed, and that is the fact that the government wants everyone to file electronically.
Let’s face it, an electronically filed return is easier to keep track of, it creates a permanent copy, and the chance of an error being made through transcribing the return is just about nil. I know many folks still like the old fashioned paper return. My wife works at the library, and she tells tales every January (and again around April 15th) about people who rush in after the doors open to pick up tax forms. And how they argue when they are told that they won’t be out until close to the end of January, and the state forms are often not available, and some specialty forms are never pre-printed.
You don’t have those problems with an electronic return. You do need access to a computer, however. But, you don’t need to buy a program or pay an online filer in many cases. Many, if not most, individuals can file online for free from a variety of vendors. And you can do your Indiana return for free in almost every case, too. So don’t let the federal provider charge you for the Indiana return before you know your options. I suspect every state has an online filing capability, but I am only familiar with the one for Indiana.
I am an advocate of people doing their own tax returns, even if they do have to buy a program or pay an online vendor. It’s quick and generally easy. After all, I use a computer program to prepare tax returns for my clients. If you do your own return, you have a better understanding of how your finances interact with the tax laws. You see first hand how taxes take money from your pocket. If you just have a tax preparer do the return, you may only pay attention to the amount of your refund, rather than the amount of the total tax bill. What do I mean?
Back in the early days of the income tax system, everybody paid when they filed their return. You filled out the form and sent a check for the full amount of what was owed. Two things quickly became apparent: (1) people owed more than they thought, and (2) the government needed money all year, not just in April. So the withholding system was created. An estimated amount of what you would owe, broken down by your payroll schedule, was withheld from your pay. Then, when you filed your return, you either got a refund, or paid whatever amount was still owed. Does this sound familiar? From the taxpayer’s standpoint, it’s the same thing as installment payments. From the IRS standpoint, it’s a steady cash flow.
Sorry, I got off track. What I want you to understand is that it really isn’t that difficult to do your own taxes, most of the time. And given the opportunities to do them for free, it’s worth checking into. And certainly, even paying an online service $50 or $100 to help you fill out and file your tax return is not unreasonable, given that the average tax refund this year was over $3000. That’s an excellent return on investment.
But (you knew there was a “but” coming soon), there are some things you need to be careful of. Let’s talk about three of those things.
- You are on your own to understand what the tax application is asking you for. Sure, a W2 is pretty well known and easy to understand. What about a 1098T? Lot’s of important info on that form and are you sure you put it in right? My best example of not understanding what the program was doing is one I’ve written about before. I was doing a return for a client and the program told me that what I had reported was going to result in additional tax. I knew that was not right, but I could not find the way to tell the program how to do it the right way. I eventually did make it correct, but that’s not the point. If you were doing your own return and got that message, would you have known it was wrong, or would you simply have gone along with the program and paid the additional tax. The IRS will not turn down a higher payment, even if it was unnecessary.
- If you call the helpline that every tax application offers, are you sure you are giving the representative the right information? I understand that they will ask you questions. They are professionals and can help. But they do not know your tax history. They don’t know about a tax event previous to the current year. They don’t know about the plans your son Johnny has made to take a year off from college before going on. They don’t know about dozens of other things that can make a difference. They may make an effort to find out, but they do not know you or your family, so that effort will not be as well informed as possible.
- When you get a letter from the IRS about the tax return you filled out yourself, will you be better able to fix it than you were to file it in the first place? My experience is that most queries from the IRS are simple errors. The IRS gets a report of income, but your tax return contained information that reduces that income, for example. A simple matter to clear up, if you know what they are after. Again, they are under no obligation to reduce your tax bill, and gladly accept all payments.
There are other things, as well. Did you know that there are at least three different ways to reduce taxes for college costs? How about issues with investments? These are just a couple of other things that might make a difference to you if you do your own taxes.
So what you really need is someone you can consult with, plan with, get to know and let them get to know you. That way, no matter who actually prepares the return, the underlying facts are available to ensure that the return minimized your tax bill, legally.
And this doesn’t even begin to deal with the issue of how well have you prepared your records. It’s often not just what you receive in January (W2s, 1099s, 1098s and so forth), but what other records you have kept that can reduce your taxes. Things like mileage logs, purchase records, gambling bets, and so forth. And these must be prepared before the end of the year in question.
I try to do what I can in these blogs and other publications and events. But it depends on you to make sure you have put together what you really need to make this effective. But if you have a complicated situation, or if you have a business–especially if you have a business–nothing can compare to the peace of mind you get by working with an experienced tax preparer. Someone like me!
Want to share some stories about self-prepared returns gone wrong. Don’t be embarrassed. We know the stories you tell will be about a “friend” and their experience.