- Should You Go DITY (Do It Yourself) or Use A Paid Preparer – This is perhaps the most important decision you will make this tax season: whether to do your own taxes (and that includes having Cousin Jane or Uncle Bob – none of whom is a tax professional – do it for you) or pay someone else to do it for you. You may take this for what you will, but unless you really know what you’re doing (and by that I don’t mean just being able to input numbers in TurboTax!), you want think twice about going the DITY route. Sure, you may save on the front-end by trying to do it yourself ($50.00 or less for TurboTax versus $150–$200 average for a paid preparer), but when you factor in the real costs involved – your time spent (it could take you several hours, possibly even days, to get it right when a professional might have finished it in a matter of one or two hours); missed deductions and credits, misunderstood and/or misinterpreted tax rules/regulations, omitted and/or incorrectly input information (inadvertently or otherwise) and a host of other possible mis-steps that could all result in the IRS rejecting your returns, accepting them but making changes to increase your tax bill or reduce your refund, or (and here is the big one) opening up your return for audit a year or two after you file it, the big question then comes: was it worth the $50.00–$100.00 that you saved to do it yourself?
- Choosing the Right Preparer – For those who opt to have someone else prepare their returns for them (generally a wise decision), the next most important decision you will make has to do with whom you select to do the return preparation. Let’s get one thing clear here: there is a difference (and a very important one at that!) between a tax return preparer and a tax professional. It is critical that you understand this difference, and also know that while anyone can pretend to be a tax preparer, not all those out there – with signs in windows, or nailed to tree trunks or telephone poles, or plastered on their vehicles – professing to be “tax preparers” and promising just about everything under the sun if you came to them to do your taxes, not all of them really, truly know what they’re doing on the tax return, much less be classified as tax professionals. As one well-respected and very knowledgeable tax practitioner puts it, with “a poster in one window (touting) that the preparer would ‘Pay You $100 To File Your Taxes’” and “other signs (promising) free food and beautiful girls”, there are so many odd promotions out there “that should make you think: Am I going to a club or getting my taxes done?”. Bottom-line, make sure you check the credentials of the person you're trusting with the preparation of your tax returns, and at the very minimum, ensure that they have a PTIN (Preparer Tax Identification Number), which is a 9-digit alpha-numeric code – starting with a P – that the IRS issues to all tax professionals that have officially registered with them to prepare tax returns.
- Gathering Your Tax Documents – It is important to put together all the necessary records and information that will be needed for the preparation of your returns. This matters whether you’re doing it yourself or using a paid preparer. Obviously Forms W-2 and 1099 are big players here when talking about income, but it is also important to have documents showing proof of any other income you report (including how that income was calculated if it is not that obvious). Equally important – even more so – is having all the necessary back-up records to support any deductions and credits that you claim on the return. One cannot down-play the importance of ensuring that the information you put on your return with regards to income, deductions and tax credits is accurate: long after your returns are filed the IRS may decide to audit them, in which case you will be asked to provide proof of the deductions and credits that you claimed on the return. (In some instances you may even be asked to show proof of your income if it was not the type reported on standard forms. i.e., Forms W-2 and 1099.) Thus, not only do you need to have these documents and records ready for getting your taxes done; you also need to keep them safely for a while – at least 3 years, generally – after the returns are filed. Also, remember to keep a copy of your return before you file it: use the print function in your tax software to print a copy before submitting the return for e-filing if you do it yourself, and if you use a paid preparer and they are e-filing, insist on getting a copy of the return from them.
- Credits and Deductions – If you decide to do your own returns, be sure to claim only the deductions and credits that you are correctly eligible for (what legitimately you qualify for) on the return, and if you use a paid preparer (or have Uncle Bob help you with it) it wouldn’t hurt to ask them to give you a quick run-down of what deductions and credits they reported on your return for you (and also how those were determined).
- The Affordable Care Act – Another thing that will impact the returns of most people this season and is therefore important to know about is the Affordable Care Act (ACA). While the law will not necessarily present any difficulties for most taxpayers, many people will still be caught in its web either because they received a government subsidy to purchase health insurance for 2014 under the Act, or because they did not have health insurance coverage during the year as mandated by the law and therefore would have to pay the required penalty. The pertinent information will have to be provided – including any major changes such as marriage, divorce, birth of a baby or change in address or name that may have occurred in your life during the year – so that any determinations involving tax credits (for health insurance subsidies) or penalty applicable under the health-care law may be correctly made on the return.
- Fraud Alert – Throughout the tax season and beyond, beware of fraudsters and scammers who would try to steal your identity and use it to do any number of things, including filing false tax returns and receiving tax refunds in your name. Each year the Internal Revenue Service (IRS) releases a list of common tax scams that it names the “Dirty Dozen”, and over the past few years identity theft, telephone scams and phishing have ranked high on that list, with scams pulled by con-artists posing as tax preparers ranking right underneath those. Don’t fall prey to any of these tax fraud traps, and one of the easiest ways for that to happen is for you, the taxpayer, to be greedy and/or overly aggressive in your attitude towards the fulfillment of your tax obligations: either trying to get a bigger tax refund than you rightly deserve or a much smaller tax bill than you should correctly pay. Once the tax scammer sees that, you’re already half-way to being fully in their web, and who knows where that would end you? Be wise and protect yourself.
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