Preparing Your Tax Returns
April 15 is fast approaching, and you have taxes on the brain. You know you have to get a return prepared and in the mail, but you've been putting it off. Preparing a tax return is one of those things we tend to build up in our minds as a big deal, when it doesn't have to be. It's like painting the living room. You know it's a one-day job, but the longer you think about it, the bigger a task it seems to be. Eventually, it's like a monster looming over you. When you finally get around to painting the room, you wonder why you turned it into such a project in the first place.
For an IRS booklet on preparing an individual tax return, call 1-800-TAX-FORM and request Publication 17, Your Federal Income Tax. Find the IRS online at www.irs.gov.
I Can Do That!
If your financial situation is not very complicated, then you probably can prepare your tax return yourself. In fact, it's probably a good idea to do it yourself, because it forces you to learn a little about the tax codes and to become more familiar with your personal finances. Seeing in black and white what you earned, what you invested where, and what deductions you're eligible for can give you a better understanding of where you stand financially.
The IRS tax return instructions contain an introduction that gives you basic directions on how to fill out the return. If your return is not at all complicated, you should be okay using just those instructions. If you want more information, you can get it for free from the IRS.
If you want more than IRS information, plenty of books are available to help you with your taxes. We've listed a few here, but you can find many more in your library or local bookstore. Be sure you get the most recent books you can find, because tax laws change constantly:
- The Complete Idiot's Guide to Doing Your Income Taxes, by Gail Perry and Paul Craig Roberts
- The Motley Fool Investment Tax Guide 2002, by Roy A. Lewis and Selena Maranjian
- J. K. Lasser's Your Income Tax 2004, by the J. K. Lasser Institute
- Kiplinger Cut Your Taxes, by Kevin McCormally
- Taxes for Busy People: The Book to Use When There's No Time to Lose, by Robert A. Cooke
If you're going to do your own taxes, just be sure that you don't wait until the last minute. It's much more likely that you'll end up frustrated and making mistakes if you do.
Help! I Need Somebody (Not Just Anybody)
If you decide not to do your taxes yourself, there are plenty of people around who will do it for you. If you look in the Yellow Pages, you'll see the names of a bunch of people who will prepare your tax return. But they call themselves different things. There are tax preparers, enrolled agents, certified public accounts, and tax attorneys. How do you know whom to pick?
Different people who work with taxes have different levels of expertise, beginning with a tax preparer and ending with a tax attorney. The more expertise someone has, the higher his or her rate generally will be. If you're filing a simple tax return, there's no reason you need to hire a tax attorney to do it for you.
Nearly everyone has a friend or relative who prepares taxes. Maybe you know a CPA or someone who works part-time during tax season for H&R Block. Don't assume, however, that just because you know somebody who works with taxes, that he or she is qualified to prepare your taxes. Good friends do not necessarily make good tax preparers. And do you really want your friend or relative to know all the personal financial information that your tax return includes?
Let's have a quick look at the different categories of tax help, so that you can decide which one is right for you:
- Tax preparers As a group, tax preparers have the least amount of training. They don't need to be licensed, and many of them work part-time. H&R Block is a well-known company that prepares taxes. The people who work for Block are tax preparers. Preparers are normally reliable if your tax return is fairly straightforward, and they won't break your budget. They usually charge about $125 for a basic tax return.
- Enrolled agents Enrolled agents are licensed and can represent clients in front of the IRS in the event of an audit. Enrolled agents generally have more training than tax preparers, and they're required to participate in continuing education. As a group, they charge more than tax preparers.
- Certified public accounts (CPAs) CPAs undergo a lot of training and must pass an exam to receive their credentials. They have to complete continuing education courses each year in order to remain certified. If your taxes are complicated, because you have your own business or for other reasons, you might need a CPA. CPAs usually charge about $150 an hour, so you could be looking at a hefty bill.
Dollars and Cents
If you hire someone to do your taxes and you feel that they're not doing a good job for you, get someone else to look at their work. Anyone, even a hotshot CPA, can make a mistake—and unfortunately, his or her mistake could become your problem. If that does occur, a reputable CPA should be willing to pay any penalties.
- Tax attorneys You probably will never need a tax attorney to complete your tax return, unless your financial life gets incredibly complicated, with all kinds of legal ramifications. If you do need one some day, be prepared to pay, big time! Many tax attorneys charge up to $350 an hour.
If you find someone whom you like and trust to prepare your taxes, consider yourself lucky. There are many excellent people around, and finding one makes your life a little easier. Once you find someone, try to stick with him or her, if you can. They'll have your files in case you ever get audited, and there's a lot to be said for continuity.
Websites and Software To Help You Prepare Your Taxes
An increasing number of Americans are relying on their personal computers to help complete their tax returns. There's more and more tax-preparation software coming out all the time, and it can provide some real advantages. The programs provide great information and guide you through your return preparation, clearly answering your questions. We recommend at least doing your return on your own with a tax prep software package, and then having it checked by a professional. See how close you get to being correct!
The tax forms you need are contained in the software, so you don't have to zip down to the post office to get them, only to find out the post office has been out of them for a week. The software enables you to file your return electronically, and the IRS sends you a confirmation when the return is received.
Tax-preparation software programs generally aren't very difficult to work with. They merely require you to enter or even directly download the information requested, and the programs zap your info into the appropriate tax form. Two popular tax software programs are Intuit's Turbo Tax (or Turbo Tax for Macs for Macintosh) and Block Financial's Kiplinger Tax Cut. You can file your tax return online using Turbo Tax for the web. It's on the Internet at www.turbotax.com.
Here are some websites to check out for information and tax advice:
- Quicken.com Taxes at www.quicken.com/taxes
- Smartmoney.com Tax Guide at www.smartmoney.com/tax
For another online tax preparation program, go to this site:
- Secure Tax, located at www.securetax.com
Tax forms (and accompanying instructions) are also available on the IRS website at www.irs.gov. These forms are a convenient means of filing your tax return.
Dollars and Cents
Don't overlook your state income taxes when working online. There are software programs for state taxes, too.
Regardless of how you decide to prepare your tax returns, make sure that you check everything before you send them in. Prepare the returns and then put them aside for a few days. Bet you'll find some mistakes when you come back refreshed and look them over again. According to the IRS, a high percentage of completed forms contain mistakes. Also, make sure that you start far enough in advance, so you don't end up in a panic on April 1.
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Excerpted from The Complete Idiot's Guide to Personal Finance in your 20s and 30s © 2005 by Susan Shelly and Sarah Young Fisher. All rights reserved including the right of reproduction in whole or in part in any form. Used by arrangement with Alpha Books, a member of Penguin Group (USA) Inc.
To order this book visit the Idiot's Guide web site or call 1-800-253-6476.