February Topic - Taxes Tips

Tax season is here again. The vast majority of Americans look forward to receiving money back at this time. Most of us have our money spent before it is in our hands. Often people take the trip they had not had money for the previous year, put it towards upgrading their home or perhaps add it to a savings account as an extra cushion. Whatever the case may be it is a time of the year that most Americans enjoy. However, I think that I speak for the majority of people when I state they dread all the paperwork that is involved, Every year people are confused as to how to handle their taxes. Should you hire someone or attempt to do it yourself? If you do it yourself what deductions might you be missing? How about software programs they offer to help with your taxes? It gets very overwhelming. In this newsletter we will discuss all aspects of filing your taxes. It will give you a brief overview of each option.

01.  Having someone prepare your Taxes
02.  Using Tax Software
03.  Checklist to avoid common errors when filing taxes
04.  Questions and Answers
05.  Tax Terms 101

1. Having someone prepare your Taxs

Depending on your tax bracket, you will hire a tax accountant, try filling them yourself, or purchase a tax software program. It is very common to hire someone to do your taxes. After all many of us do not have time to sit down and figure it all out while trying to juggle our everyday lives. It is often well worth the fee that the tax preparer charges just to get it done correctly. You assume that when you go to someone to do your taxes that they are doing everything legitimate.

This may not always be the case. You'll want to take extra precautions to ensure that the tax preparer is doing everything correct because you are responsible if that person inadvertently breaks the law. There are ways to prepare yourself and make sure that the person you are hiring and trusting is going to do the best job for you.

It is imperative to go with someone who is accredited. Typically a certified public accountant, tax attorney or enrolled agent is up to date with all tax changes and laws. In most cases they are required to take continuing education credits which reinforces what they already know plus any changes or additional information that may be helpful. I have seen many advertisements that offer free tax filings if you make under a certain amount. Communities offer them for low income families. You can obtain this information through local papers or even advertisements. Talk to the professional that you choose to do your taxes with about their background and find out how long they have been doing this profession and if they belong to any professional organizations. It may sound like trivia, but generally preparers who belong to organizations are very dedicated to what they do.

Next, rely on any references. If you do not know anyone who uses them do not hesitate to ask the preparer for some references. This person should not have any problem with their references being contacted. If there is a hesitation on their part that should be a signal to you that they may be trying to hide something. Regardless of the references you'll still want to comparison shop. The goal is to feel confident that the preparer is not overcharging for the services being preformed. Compare the fees and rates that each person charges for their services and do not feel guilty to question the preparer on a certain fee.

Finally, find out if this preparer can be reached after April 15. You want to have some accessibility to this person should you have a question after you filed. Most of the larger businesses are somewhat accessible but if you choose to go with a private firm or person be sure to have contact information for that person in case you should have a problem or concern.

2.Tax software

With the technology today many people do everything with a click of the button including taxes. There are so many computer programs out there promising to make doing taxes easier and quicker but how do you know which one is best for your needs. Well there are a few general guidelines that you can follow to help you sort through them.

First, determine your needs. If you go to a retail store and look at the back of each tax software package, it will tell you what the program is capable of doing. Most of the software offers different versions depending on what features you want. There is a basic that is usually priced around $19.99 and a deluxe around $49.99. The deluxe generally offers financial planning and projections into the next year. Everyone has a specific situation when doing taxes, but generally there are two types of filer's. First you have the person who knows it all, but is not so good at math. This is the person who knows exactly what to do but can not solve a math problem too well.

This person needs a program to speed things up and check on the mathematical calculations. If you are this type of filer make sure to look for a program with steps that can be skipped over and not a lot of explanations. Then you have the person who has no idea what to file or where to begin. You will want a software program that explains everything. Look for a program that will take you step by step through the whole process. Regardless of which software you choose be sure to look at the technical requirements. You do not want to get home and realize that your computer will not be able to install this particular program.

Next, be sure to comparison shop. There are many options out there like Tubo Tax, and Tax Act, It can be very confusing as to which will fit your specific needs. When looking at tax software there are some things you do not want to overlook. Are the forms that you need included in this software? Are you able to complete more than one form? Is there an additional fee for electronic filing? If so, what is it? Compare different products and choose one that fits your specific needs. Now, that you have the perfect product and are ready to begin start at the beginning.

Even if you have been filing for 25 years read the introduction and familiarize yourself with the product. It could save you a lot of time and frustration another suggestion is to make sure that all updates are applied by running the program update feature. This feature goes to the web and updates any new changes on either the program itself or tax laws that impact the program. Be sure to locate the help link in case you should need it once you start. Most programs offer phone or online help. Once you have completed your taxes be sure to run the review.

It is just like a spell check that you would do in a word processing program. Sometimes things that they flag are actually not errors so be sure to look at everything and correct any errors that you may have. Finally save all your work. Always be sure to save it just in case you do run into any problems down the road. Most programs offer auto save features. Be sure to see that it is turned on. Some programs save every five minutes whereas others save before you exit. A huge marketing feature that is offered is each year when using the same software it offers an import feature.

The import feature will automatically bring over your information such as your social security number, name and other important information. This is a big time saver for the taxpayer. Check your software to see what it offers.

3. Checklist to avoid common errors when filing taxes

Be sure all social security numbers are entered correctly on the form.

Check only one filing status

Do all of your income, deductions and credits add up?

When showing a negative amount be sure to put brackets around it.

Sign and date the tax return, when filing jointly both signatures are required.

If you are employed by more than one job only file one return. Combine the wages and withholdings onto one form.

In a case where you owe money enclose the check or money order with your social security number, tax form and tax year written on it.

When specifying direct deposit for your return double check your banking and route number to be sure it is correct.

Keep a copy for your records.

Did you figure the tax correctly? Did you use the correct column if you chose to use the tax tables?

4.Questions and Answers

Who must file?
Everyone who is a citizen or resident of the U.S. or Puerto Rico under the age of 65 who has a gross income of $8,200 must file a tax return. If you are above the age of 65 and have a gross income of $9,450 you must also file.

What determines my filing status?
Your filing status is determined by your marital status, and family situation. It is based on December 31, the last day of the tax year.

I am self employed what do I do?
You must file if your net earnings were $400 or more. It is actually to your advantage to file because you then become eligible for social security benefits.

Is there a deadline for filing taxes?
Yes. This year's deadline for filing 2005 taxes is April 17. Normally the deadline is April 15 but since that would be a weekend it is extended to the 17th.

Can I get an extension without getting penalized?
Yes. If you need an extension you must file form 4868 for an extension until October 16

I owe money how do I pay?
You may pay by check, money order, or credit card. For those who file electronically you should also be able to pay at that time.

Are there any common mistakes that I should be sure not to make?
Yes. Always be sure to check your math. A simple math error can cause you many problems when filing. Be sure that your social security number is stated clearly on each page of your tax return. Do not forget to claim all dependents and be sure that if someone is claiming you then you may not claim yourself. Remember to attach all W-2 forms. If they are not attached at time of filing it will delay the process and your refund.

Finally make sure that you keep copies of everything that you send the IRS just in case they do not receive it.

If I do my taxes myself how long should I anticipate it would take?
The IRS estimates it takes the average taxpayer 13 hours to complete form 1040.

I recently adopted a child and was wondering if I get a tax credit?
Yes, if you have adopted a child under the age of 18 last year you can usually get a tax credit up to $10,630. This number should include any travel, legal or adoption fees that you may have been charged.

Does a child under 14 have to file a return?
If the child's only income is interest and dividends the parent or guardian can include the child's earnings on their tax return.

If my spouse and I file separately must I include both of our social security numbers on my tax return?
Yes. If you are married you must include both of your social security numbers on each tax return.

For more Frequently Asked Questions, you can click onto the official IRS web site link. http://www.irs.gov/faqs/

5.Tax Terms

Additional Child Tax Credit
A refundable tax credit available to those who have 3 or more children. Regular child credit exceeds tax liability minus other nonrefundable credits.

AGI
Adjusted Gross Income. The income you receive throughout the year. This does not include alimony payments, some business expenses, and some moving expenses. This will be your first step in calculating your final federal income tax bill.

Annuitant
A person who receives a pension or annuity.

Asset
An item of useful or valuable property

Credits
Credits will reduce your amount that you owe. They are actually more valuable to you than deductions since they reduce the amount of tax you owe rather than reducing the amount of taxed income.

Deductions
The Internal Revenue Service allows you to have expenses subtracted from your AGI, which are referred to as deductions. These deductions vary from person to person however commonly they may include interest paid on a student loan or home equity loan, contributions made to a qualified retirement account, and alimony payments.

Standard Deduction
This term refers to a set amount of money that a taxpayer may deduct from their income. This deduction is available to all who file and is determined by the filer's status. Remember these amounts change each year due to inflation. It can be easily found on the tax forms. By using this standard deduction it allows the taxpayer to avoid having to itemize each item such as medical bills.

Itemized Deduction
These deductions are used to lower your AGI. They may include but are not limited to medical bills, mortgage interest, and money given to charity. Some must meet IRS limits before they can be claimed. You must file form 1040 and detail your deductions.

Exemption
The Internal Revenue Service lets you subtract a certain amount depending on how many people count on your income. Exemptions can be claimed for yourself, your spouse, and your dependants. The exemptions are factored in as well as the deductions to come up with your total AGI.

Open Year
A taxable year for which the statue of limitations has not yet expired.

Owner-Employee
A self employed person.

Progressive Taxation
A system where higher tax rates are applied as income increases. The tax brackets range from 10 percent to 35 percent.

Real Property
Also referred to as real estate. May include lands, buildings and structural components.

Taxable Income
Your gross income after all deductions and exemptions have been made. This is the amount that you will be taxed on.

Vested Benefits
Benefits owned by the taxpayer.

Voluntary Compliance
Taxpayers voluntary comply with the tax laws and report their income honestly.

Widower
A man who has not remarried following the death of his wife.

Withholding
This method allows you to pay as you go along. In other words money is taken out of your income for taxes before you receive your check. This money is then placed into an IRS account and you are then credited for the amount when you file.

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Newsletter 02
Rev.1
February, 2008