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Answers To The 7 Questions Everyone Asks During Tax Season

Well. its that time again….  We all scramble to find our receipts and tax documents to get prepared to file the dreaded tax return.  I remember growing up in Chicago and my parents’ tax preparer coming to our house each year.  He did their tax return on our kitchen table.  We were always warned that this was the night of all nights for us to be quiet and be on our best behavior.  I watched the tax guy set up his adding machine and unpack his sharpened pencils.  When he was finished I would hear my parents discussing with excitement what the tax refund would be.  As a kid, I had no idea what was going on.  Little did I know what fun I was missing out on.

Being a financial guy, I regularly hear from my friends and acquaintances each year about their preferred method of filing their tax return.  Most people still utilize the services of a tax preparer and do not brave the completion of  a tax return on their own.  I can certainly understand that choice, especially with the complex nature of our tax code.  While many have a regular tax guy like my parents, others simply end up at their local shopping plaza and use one of the major retail tax preparation firms.  Today, I will address some of the most frequent questions that I am asked during tax season.

1.  Can You (Or Should You) Consider Preparing Your Own Tax Return?

If you have a fairly simple tax situation and basic computer skills, you could likely prepare your own tax return using a program such as Turbo Tax.  You can buy Turbo Tax and download it directly to your computer.  The basic product will cost about $30.  My reason for suggesting that people consider preparing their own return has never been just about a way to save money on a tax preparer.  I believe that going through the process of preparing your own return provides a valuable education.  My experience has been that individuals that do their own returns tend to find more deductions throughout the year.  The reason for this is that they learn what deductions they are eligible for and are more likely to track these expenses each day.  Turbo Tax has an excellent deduction finder which presents a series of questions. Based on your answers, you will be directed as to how to take the appropriate deductions.  Be sure and save your receipt for your tax preparation software; that is just as deductible as the cost of paying a preparer to do your return. 

If you know your marginal tax rate, you can put a dollar figure to every deduction you take the time to record (and keep receipts for).  For example, if your marginal tax rate is 20% and you remember to keep that Office Depot receipt for $20 you just earned $4 (assuming this was a qualified business expense).  While keeping careful track of deductible expenses is a good practice, it makes no sense to waste a nickel just to qualify for a write off.  I have had friends tell me that they bought a new cell phone, computer, or other unnecessary item and justified the expense strictly on the basis of the tax benefit (they didn’t really need the item, but used the tax deduction as an excuse to buy it).  Using our example of a 20% marginal rate, there is no wisdom in needlessly spending $100 to get a $20 tax deduction.   

I personally use Turbo Tax, but I hear good things about TaxCut as well.  Both Turbo Tax and TaxCut provide an electronic filing option.

2.  How Much Should It Cost To Pay A Tax Preparer To Do My Return?

The cost of having your return prepared will vary based on its complexity.  Those with a very basic tax return should expect to pay $150 to $200.  Self employed individuals and those that own rental properties can anticipate paying $500 or more.  The national brand name services such as H & R Block offer convenience, while a CPA or accounting firm will provide more experience and expertise.  This is probably one of those services that may not be best to shop for solely on price.  Most of the preparers at the national firms have minimal experience and may have completed just a several week training.  This is not to suggest that they are incapable of preparing basic tax returns.  The problems tend to occur when something out of the ordinary comes up.

Some of the perks you might consider in your decision is the satisfaction guarantee.  The national services typically offer to reimburse you for penalties and interest if they make a bona fide mistake.  They will also assist you if you end up facing an audit or being questioned by the IRS about your return.  I have personally maintained a Pre Paid Legal membership, which has an audit defense benefit that is second to none.  

3.  What About those Free Volunteer Services That Do Tax Returns?

There are IRS sponsored programs staffed by volunteers that provide free tax preparation and counseling for low to moderate income individuals, the elderly, and active members of the military.  Free Tax Return Preparation

I can’t seem to locate much information that describes in detail how much training these volunteers have.  This type of program is probably fine for those that have simple tax situations.  If you have anything beyond a very basic tax return this is probably not a good option.

4.  What Should You Do If You Don’t Receive Your W-2’s?

I am writing this blog on Feb 10.  Based on this date, you should have received your W-2’s by now.  If you have not received them, you should contact the payroll office of the company that you worked for in 2008.  In most cases, they will be able to quickly resolve the issue.  If the company has gone out of business or you are otherwise unable to get a satisfactory resolution, your next call should be to the IRS.  Believe me, the IRS would love to hear about a company not sending out W-2’s as required.  If you are ultimately not able to obtain a W-2, you will have to file your tax return without it and use your paycheck stubs as the basis for your figures.

All of those other important documents such as 1099’s, 1098’s (mortgage interest), are supposed to be out by now as well.  Brokerage firms have about another week to mail 1099 B’s.  Follow the same procedure if you do not receive any of these other docs you need to prepare your return (call first and then follow up with the IRS if you don’t get satisfaction).

5.  What About Free Online Tax Return Preparation?

TaxAct promotes a free online tax preparation service.  It appears to be a very basic stripped down version of their more complete packages.  I am sure there are also some back end fees for electronic filing, etc…  If you are going the route of preparing your own return, I would suggest that you spring for the $30 or so it will cost to buy the level of program that has some meat to it.

6.  What Is Your Opinion Of Refund Anticipation Loans?

Unless you are in an absolute emergency, wait for your refund and avoid the ridiculous costs of a refund anticipation loan.

7. Are The Stimulus Payments Received in 2008 Taxable?

Notwithstanding all of the rumors to the contrary, stimulus payments received in 2008 are not taxable.  There is a question that appears on this year’s return on the 2008 stimulus payment.  This is for information purposes only and will not affect your tax liability.

Tax Websites

Other than the IRS Website the other website that is a great resource is Tax 

I am very interested to hear how you may have fared with a retail tax preparation service.  If you have had a good or bad experience, please use the comments section below to give us a report.

Helping you make the most of God’s money!

James L. Paris
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