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Can You Trust Your Tax Preparer?

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My tax preparer is a life saver. Ever since I formed my LLC and began investing, my taxes have been a bit on the complex side. As a result, an accountant prepares my tax returns each year (one for the business, and one for my husband and me, plus our state tax return). This makes my life easier, since I don't spend hours filling out the forms and tracking down the latest information on tax law changes.

I'm fortunate because I trust my tax preparer.

My accountant will represent me to the IRS free of charge if I'm audited, and he makes it a point to go over the return with me before we send it in. I'm pretty sure that he's doing what he should, and he keeps to the requirements of a CPA.

Not everyone is so lucky, though. A relative of mine recently found out that his tax preparer was engaging in some shady practices. Now he's being audited, and the tax preparer is refusing to represent him — unless he pays even more.

After reading a recent article on CNN Money, it seems as though my relative isn't alone. Apparently there is a rash of poor tax preparers that can land you in hot water.

Lack of Regulation

While many of us grumble at the regulatory requirements of bureaucracy, there reality is that, in some cases, regulation can protect you. Regulations that require lenders to disclose your “real” interest rate before you sign on the dotted line, and that require transparency as to the full cost of your loan, can help you better understand your commitment. This protects you and allows you to make informed decisions, since, in the past, lenders had taken advantage of the general public's ignorance on some topics in which they lack expertise.

One of the issues with tax preparation is that there aren't many regulations that require tax preparers to be properly licensed in some states. According the CNN Money article, there are 46 states that have more regulations for hairdressers than tax preparers. In many cases, a brief course is all it takes to become a tax preparer. And, technically, I could start offering my services as a tax preparer. All I have to do is fill out your tax return.

However, it's not just a lack of expertise that can be problematic. Your tax preparer might be making honest mistakes due to a lack of knowledge, and that is frustrating, but it isn't malicious. What's hard is when you run into tax preparers who are little more than scammers. They engage in questionable tactics to save you money (as with my relative) so that you will keep coming back, with little regard to IRS guidance.

Others are outright scammers, stealing your identity and promising huge tax refunds. These refunds are usually the result of adding fake children to boost your EIC and exemptions, deducting things that shouldn't be deducted, and engaging in other activities. When these things happen, you are charged penalties and could be in bigger financial trouble.

Carefully vet your tax preparer. Solid credentials are a good start, but they aren't everything. Be wary of preparers that charge a percentage of your tax refund, rather than a flat fee, and watch out for those that talk of “special government programs” and “grants” you can apply for through your tax paperwork. Such things don't exist. If you feel uncomfortable with your tax preparer, heed your gut and go elsewhere.

Tax Issues to Consider During Retirement

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When most of us plan for retirement, we think ahead to how we will generate the income needed to sustain our desired lifestyle. We add up costs, and try to determine if we are saving enough each month for a nest egg that meets our needs.

However, many of us forget that it's important to consider the cost of taxes. Your tax situation can have a big impact on whether or not you ultimately reach your retirement goals.

Here are some of the tax situations that can affect your tax bracket, and affect your overall wealth:

Distributions = Taxable Income

Unless you have a Roth account, your retirement account withdrawals count as taxable income. Depending on how much you withdraw each year, you could see an increase in what you owe. Your distributions could put you in a higher tax bracket.
Tax Issues In Retirement
If you have relatively modest retirement needs, then this usually isn't a huge problem. Modest living can mean that you end up in a lower tax bracket during retirement. However, if you are still meeting debt obligations, and if you are pursuing expensive hobbies or travel, you might need to withdraw more money in order to meet your requirements. This means higher taxes, especially if you continue to work during retirement on top of withdrawing money from your account.

Required Minimum Distributions

Maybe you don't necessarily need to withdraw a lot of money from your retirement account. Once you reach the age of 70 1/2, though, what you require during retirement might not matter so much. You have to take required minimum distributions (RMDs) from every retirement account except a Roth IRA.

These RMDs are figured based on your life expectancy and the size of your nest egg. If you don't take the required amount each year, you are hit with penalties. However, taking the RMDs can lead to putting you in a higher tax bracket.

Rolling Your Retirement Account To A Roth IRA

Almost all of these tax issues can be solved by rolling your qualified retirement account over to a Roth IRA. You don't pay income tax on your Roth IRA withdrawals, and you aren't forced to take RMDs with a Roth IRA.

However, rolling over your retirement account comes with its own tax consequences. While anyone, at any income level, can roll over a qualified account, there are still tax hits. First of all, if you have your money in a deferred account, you haven't paid taxes on your contributions, so you will have to remedy that situation. The IRS will consider the amount you roll over as income, and you will be taxed at your marginal rate.

You can roll all of the money over at once, and pay the taxes to get it over with, or you can roll over a portion of your retirement account a little at a time to spread out the tax impact. Before making the decision, consult a knowledgeable financial professional about the tax implications. You should work out a plan that helps you minimize your taxes in retirement.

What To Know About the Taxes Of The Self-Employed

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Being self-employed gives you the opportunity to work for yourself and control your income. But if you’ve always worked as an employee, becoming an independent contractor or business owner changes the way you complete your taxes.

Before, your employer deducted taxes from your paycheck and paid a portion of your Social Security tax. Those days are over, and you’re now responsible for your own tax bill. Although most self-employed people do owe the IRS at the end of the tax year, understanding various tax breaks can help you get a refund.

Reporting Your Taxes

Single and joint tax filers with no dependents or business deductions can file a 1040 EZ form. This is the simplest tax form to complete, in which many filers are able to file their own taxes. As a self-employed person or an independent contractor, you’ll need to report your gains and losses on a 1040 form. Throughout the year, keep accurate records of your earnings as well as deductible business expenses. Two additional tax forms are associated with the 1040 form. You’ll use a Schedule C to report your business income and expenses, and a Schedule SE to determine your Medicare and Social Security tax. Due to the complicated nature of this particular tax form, hire an accountant to handle your income tax preparation.

Biggest Tax Items

You might put off starting your own business due to tax fears. However, there are several deductions and tax breaks to help lower your tax liability.

1. Self-employment tax deduction. This is an extra tax in addition to your income tax. This is how you pay Medicare and Social Security taxes. For some, this extra tax discourages self-employment. However, the IRS views self-employment tax as a business expense, thus allows self-employed people to deduct half of this expense from their income.

2. Home Office. Regardless of whether you rent or own your house, if a room in your house is used exclusively for business purposes, you can take a home office deduction. Provide your income tax preparer with the square footage of this space and he’ll calculate your deduction. With the home office deduction, you’re also eligible to deduct a percentage of your property taxes, utilities, homeowner’s insurance, mortgage and home maintenance expenses.

3. Health insurance premiums. If you’re not eligible for health insurance through your spouse’s employer, you can deduct the total of all premiums paid for health insurance, dental care and long-term care.

4. Meals and entertainment. If you meet a business associate for a meal, or take a client out to lunch, keep accurate receipts. These are common business entertainment expenses and you’re eligible to deduct 50% of these expenses.

5. Interest on loans and credit cards. Did you take out a business loan to start your business? Do you have a business credit card used exclusively for business expenses? Interest incurred on a business loan or business credit card is tax deductible.

Not familiarizing yourself with eligible tax breaks can result in a higher IRS bill. Speak with a tax professional to learn your options. The ability to reduce your tax liability can take the stress out of self-employment.

Home Business And Taxes: Doubling Up On Tax Day

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When Tax Day rolls around, those who owe taxes are often a little disgruntled. But, if you have a home business, you need to be extra careful if you owe. Don't forget that you actually have two tax payments to make: What you owe from underpaying the year before, and your first quarterly estimated tax payment for the current year.

Quarterly Estimated Taxes

When you have side income, you might need to pay estimated quarterly taxes. If you are making regular income throughout the year, and not having it withheld by an employer, the IRS expects you to pay quarterly. A traditional employer pays taxes quarterly — including the amount of money withheld from your paycheck for the purpose. And if you are making income on the side, you are expected to pay quarterly as well.

Over the course of the year, this can be a helpful state of affairs. You make your quarterly payments, and you don't have to worry about coming up with the money to pay a huge bill on Tax Day. At least that's the theory. You still need to plan carefully, though, or else when Tax Day rolls around you could find yourself in trouble.

Two Tax Bills Due on Tax Day

When I first started with my home business, I got on track with quarterly tax payments, and began making them faithfully. However, as my income grew, it was plain that the quarterly tax payments weren't enough to cover my total tax bill. I usually owed a couple thousand more at the end of the year. That didn't seem too bad — provided I was prepared for it.

However, one thing I didn't prepare for was the fact that the quarterly estimated payment for the first quarter of the current year is due on Tax Day. So, instead of making one tax payment, I actually needed to make two tax payments. And that didn't even count the bill owed for my state taxes.

One year, I discovered that, with what I owed the IRS from the previous year, plus the quarterly tax payment, plus state taxes, I had almost $8,000 due on Tax Day! While I was prepared to pay some of it, I had been so focused on paying what I owed at the end of the year that I forgot about my new quarterly estimated tax payment. The result, unfortunately, was raiding the emergency fund as a way to help pay what was owed.

It's true that many of us would rather owe the government, rather than get our own money back, without earning interest, through a tax rebate. However, there does need to be a level of preparation. And, if you are making quarterly estimated tax payments, it's important to consider that they may not be enough to cover what you owe throughout the year — especially if your income is growing. On top of that, remember that your first quarterly payment will be due the same day as your previous year's tax bill. Plan ahead for that reality, or you could find yourself stuck.

Should You Itemize Your Tax Deductions?

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For years, my husband and I just took the standard tax deduction, and were happy with it. After all, that deduction is fairly hefty. Then, my home business started making money (and our contributions to our church rose correspondingly), and we bought a home.

Now, suddenly, we had a higher amount that we could deduct — and it was more than the standard deduction. We started itemizing our tax deductions.

should you Itemize deductions

Do Your Deductions Amount to More than the Standard Deduction?

It may seem like a pain to add up all of your deductions, but it can pay off in the end. If your itemized deductions add up to more than the standard deduction, your taxable income will be lowered by that much more. Some of deductions that you can itemize to help you reduce your income by a little bit more include:

  • Uninsured medical and dental expenses: If you paid out of pocket for medical and dental expenses, these can be deducted. Your expenses must exceed 7.5% of your Adjusted Gross Income, though, if you want to deduct them. For some, though, who have high deductibles, and for those who don't have dental insurance and had major work done, this can be a real help in offsetting some of the costs.
  • Interest and taxes on your home: The mortgage interest that you pay is tax deductible. Additionally, your property taxes are deductible. Unfortunately, as 2011 expires, so, too, does the tax deduction for PMI premiums paid. But, you can still get a fairly hefty deduction for interest and taxes on your home.
  • Unreimbursed employee business expenses: If you spent a great deal out of pocket on behalf of your employer, for business-related items, and you were not reimbursed, you can receive a tax deduction for that. Make sure that you keep good records of the expenses incurred, including receipts.
  • Miscellaneous deductions: In some cases, you might have large, unreimbursed expenses that don't readily fall into any category. With proper documentation, you can deduct these as well, but you might want to consult a tax professional before you do.
  • Uninsured losses due to theft or casualty: If your home was hit by a disaster, or if you have had a theft, you might be able to itemize those deductions. First of all, any theft or casualty tax deduction has to be on expenses that were not covered by your insurance company. If you insurance company paid for repairs, you can't deduct that amount. You can only deduct the amount using a formula provided by the IRS on losses not taken care of by insurance.
  • Charity donations: Large charity donations to qualified non-profits can be deducted as well. If you make large enough donations, it can overwhelm your standard deduction.

There are other eligible tax deductions as well. You don't need only one of the above to exceed your standard deduction in order to benefit from itemizing. You can add up as many items as necessary to get your total. It's this total that matters when determining whether or not you have more than the standard deduction. And, if it looks like you will have a larger number than the standard, it's a good idea to itemize in order to increase your tax efficiency.

Tax Preparation Checklist: All The Things You’ll Need At Tax Time

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Tax time is quickly coming upon us as we move into the new year.  A lot of people actually look forward to tax time because they plan on getting a big refund around this time -and it's often used as a time to splurge on vacations, big screen TVs and more!   While I personally try to work out my withholding so that it comes out about even with no refund and no taxes owed, the fact is most people don't do that.  In fact, the average tax refund for 2010 was around $2,892, so a lot of people will be ready to file as soon as they can. They want their money!

So today I thought I'd get everyone ready for the day that they finally plan to file by giving a tax checklist you can use – so you have everything you need in one place on tax day.

tax preparation checklist

Tax Preparation Checklist

When you're filing your taxes there is a ton of information that you'll need to have at the tip of your fingers when filing.  There are a lot of blank spaces on that tax form!  In fact,  there are 165 blanks on tax form 1040, 127 on Form 1040A, 94 on Schedule C, 77 on 1040EZ, 55 on Schedule A,  and 44 on Schedule B!  Do you have all of that information ready to go – ready to fill in all those blanks?    Here are some of the pieces of information you'll need.

Tax Information To Have Handy

  • Tax returns for the last two years
  • Birth dates and occupation(s)
  • Change of address (if you moved)
  • Bank name, routing and account numbers (for refunds or payments)
  • Spouse name and social security number
  • Dependents names and social security numbers
  • W2s and 1099s for all income and compensation
  • 1099 Interest, 1099 dividends, 1099 Misc, 1099C cancellation of debt, 1099G unemployment compensation, 1099R distribution from IRA, 401k, etc.
  • Last year’s state tax refund
  • Health care costs if they were greater than 7.5% of AGI
  • State and local income tax, car sales tax
  • Charitable contributions
  • Theft and casualty losses
  • Home office deductions
  • IRA contributions or retirement plan contributions
  • Student loan interest
  • Moving expenses
  • Student tuition fees
  • Estimated federal and state tax payments
  • Energy efficient home improvement tax credit info
  • Credit for child and dependent care info
  • Education credit info
  • Child tax credit/adoption credit info

So there’s a good start on the information that you should have handy when filing your taxes this year.

What Does It Cost To Prepare And File Your Taxes?

How much it costs to do your taxes will vary pretty widely depending on how you file.  You can hire someone to file for you, file a paper form yourself (does anyone do this anymore?), or use a software like TurboTax like I do.  32% of people did in 2010 used a software to file, so you'd be in good company if you did that.   Your amount of income made can also have an impact as there is free-file available for some lower income folks.

  • Hiring a CPA or company:  On average around $230.
  • Tax preparation software: About $18-60 on average, depending on which software or site you use.
  • Doing it yourself with paper forms, or using low income free file:  Free.  Click here read up more on free tax filing options.

Why Would You Ever Pay Someone To Do Your Taxes?

There are quite a few situations where it would make sense to hire a professional tax preparer to help you with your taxes.   Here are a few:

  • You’re self employed, have your own business and a complicated tax situation.
  • You got married or divorced in the past year, and your situation is changing.
  • You’ve  bought or sold investments during the year, or received a large windfall.
  • You just don’t do well with complicated topics like taxes.
  • You think you could save a lot of money using tax strategies you don’t understand.

These reasons are only the beginning of why you might want to hire someone to do your taxes.  What other reasons can you come up with?

Do you think we missed anything on our tax preparation checklist? Did we leave anything off the list – what would you add?  Any other tax time tips for the rest of us?