Chapter 12
Keeping Up with and Researching Tax Strategies and Rules
IN THIS CHAPTER
Preparing your own income tax returns
Using and interpreting IRS resources
Utilizing software and guides
Surfing the Internet for tax assistance
Seeking help from experts
By the time you actually get around to filing your annual income tax return, it’s too late to take advantage of many tax-reduction strategies for that tax year. And what can be more aggravating than — late in the evening on April 14, when you’re already stressed out and unhappily working on your return — finding a golden nugget of tax advice that works great, if only you’d known about it last December!
Be sure to review all the important tax-planning issues discussed throughout this book that you need to take advantage of in future years. In the event that you’ve waited until the last minute to complete your return this year, be sure to thoroughly read this book after you file your return so you don’t miss out next year.
Whether you’re now faced with the daunting task of preparing your return or you’re simply trying to increase your tax intelligence during the year, you’re probably trying to decide how to do it with a minimum of pain and taxes owed. As you find out in this chapter, you have several options for completing your return and gaining knowledge. The best choice for you depends on the complexity of your tax situation, your knowledge about taxes, and the amount of time you’re willing to invest.
Privately published tax-preparation and advice books such as this one are invaluable when they highlight tax-reduction strategies and possible pitfalls in clear, simple English. Such books help you complete your return accurately and save you big money. The amount of money invested in a book or two is significantly smaller than the annual cost of a tax expert. This book covers the important tax-preparation and planning issues that affect the vast majority of taxpayers. A minority of taxpayers may run into some nitpicky tax issues caused by unusual events in their lives or extraordinary changes in their incomes or assets. This book may not be enough for those folks. In such cases, you need to consider hiring a tax advisor, which I explain how to do in Chapter 13.
The Benefits of Preparing Your Own Return
You already do many things for yourself. Maybe you cook for yourself, do some basic car maintenance or home repairs, clean your own home, and so on. You may do these tasks because you enjoy them, because you save money by doing them, or because you want to develop a particular skill or have control over these issues.
Sometimes, however, you hire others to help you do work for you. Occasionally, you may buy a meal out, do more involved maintenance on your car or hire someone to make a home improvement. And so it can be with your annual income tax return — you may want to hire help, but you may end up, like many people, preparing your own return.
Doing your own income tax return is an especially good option if your financial situation doesn’t change much from year to year. You can use last year’s return as a guide. You may need to do some reading to keep up with the small number of changes in the tax system and laws that affect your situation (and this book can help). Given the constant changes to various parts of the tax laws, you can’t simply assume that the tax laws that apply to your situation are the same from one year to the next just because your situation is the same.
Another benefit of preparing your own return is the better financial decisions that you make in the future by using the tax knowledge you gain from learning about the tax system. Most tax preparers are so busy preparing returns that you probably won’t get much of their time to discuss tax laws and how they may apply to your future financial decisions. Even if you can schedule time with a preparer, you may rightfully worry about paying for the personal tutorial you’re sitting through.
Doing your own return should be your lowest-cost tax-return-preparation option. Of course, this assumes that you don’t make costly mistakes and oversights and that the leisure time you forgo when preparing your return isn’t too valuable!
You don’t have to go all or nothing in terms of preparing your own return. Consider having a tax professional prepare your return every few years as a sort of second opinion to verify that you’re preparing it correctly and not missing out on any tax savings strategies. Or if you have concerns, you can schedule an out-of-tax-season consultation with a professional.
Using IRS Publications
In addition to the instructions that come with the annual tax forms that the good old IRS prints every year, the IRS also produces hundreds of publications that explain how to complete the myriad tax forms various taxpayers must tackle. These free materials provide more detail than the basic IRS publications and are available in printed form by mail if you simply call and order them from the IRS (800-829-3676) or digitally through the IRS’s website (www.irs.gov; see the later section “The Internal Revenue Service” for more on what the site has to offer). Examples of these pamphlets include
- Publication 17: “Your Federal Income Tax” is designed for individual tax-return preparation.
- Publication 334: “Tax Guide for Small Business” is for (you guessed it) small-business tax-return preparation for individuals who use Schedule C or C-EZ.
- Publication 583: “Starting a Business and Keeping Records” is also an excellent resource.
Additionally, the IRS provides answers to common questions through its automated phone system and through live representatives.
If you have a simple, straightforward tax return, completing it on your own using only the IRS instructions may be fine. This approach is as cheap as you can get, costing only your time, patience, photocopying expenses, and postage to mail the completed tax return (unless you choose to file electronically). Unfortunately (for you), IRS publications and employees don’t generally offer the direct, helpful advice provided in this book. For example, here’s something you don’t see in an IRS publication:
STOP! One of the most commonly overlooked deductions is … . You still have time to … and whack off hundreds — maybe thousands — of dollars from your tax bill! HURRY!
Another danger in relying on the IRS staff for assistance is that it has been known to give wrong information and answers. When you call the IRS with a question, be sure to take notes about your phone conversation, thus protecting yourself in the event of an audit. Date your notes and include the IRS employee’s name you spoke with, employee number, office location, what you asked, and the employee’s responses. File your notes in a folder with a copy of your completed return.
The IRS also offers more in-depth booklets focusing on specific tax issues. However, if your tax situation is so complex that this book (and Publications 17 and 334) can’t address it, you need to think long and hard about getting help from a tax advisor; see Chapter 13 for details.
IRS publications present plenty of rules and facts, but they don’t make finding the information and advice you really need easy. The best way to use IRS publications is to confirm facts that you already think you know or to check the little details. Don’t expect IRS publications and representatives to show you how to cut your tax bill.
Buying Software
If you don’t want to slog through dozens of pages of tedious IRS instructions or pay a tax preparer hundreds of dollars to complete your return, you may be interested in computer software that can help you finish your IRS Form 1040 (see Chapter 7) and supplemental schedules. If you have access to a computer and printer (unless you choose to file electronically), tax-preparation software can be a helpful tool.
Tax-preparation software also gives you the advantage of automatically recalculating all the appropriate numbers on your return if one number changes. Tax programs can be helpful in doing complex calculations such as determining whether you’re subject to the alternative minimum tax or calculating allowable real estate passive losses. The best tax-preparation software is easy to install and use on your computer, provides help when you get stuck, and highlights deductions you may overlook.
Before plunking down your hard-earned cash for some tax-preparation software, know that it has potential drawbacks.
- A tax return prepared by a software program is only as good as the quality of the data you enter into it. (Of course, this drawback exists no matter who actually fills out the forms; some human tax preparers don’t probe and clarify to make sure that you’ve provided all the right details, either.)
- Subpar tax software programs may contain glitches that can lead to incorrect calculating or reporting of some aspect of your tax return.
TurboTax is a leading program and does a solid job of helping you through the federal tax forms. TurboTax Home & Business is designed for sole proprietors and single owner LLCs, and TurboTax Business is intended for S corporations, partnerships, C corporations, and multiple-owner LLCs.
Accessing Internet Tax Resources
In addition to using your computer to prepare your income tax return, you can do an increasing number of other tax activities via the Internet. The better online tax resources are geared more to tax practitioners and tax-savvy taxpayers. But in your battle to legally minimize your taxes, you may want all the help you can get! Use the Internet for what it’s best at doing — possibly saving you time tracking down factual information or forms. The following sections describe some of the better websites out there.
On the Internet, many websites provide information and discussions about tax issues. Take advice and counsel from other Net users at your peril. Don’t rely on the accuracy of the answers to tax questions that you ask in online forums. The problem: In many cases, you can’t be sure of the background, expertise, or identity of the person with whom you’re trading messages. However, if you want to liven up your life, and taxes make you mad, a number of political forums enable you to converse and debate with others. You can complain about recent tax hikes or explain why you think that the wealthy still don’t pay enough taxes!
The Internal Revenue Service
When you think of the Internal Revenue Service — the U.S. Treasury Department office charged with overseeing the collection of federal income taxes — you probably think of a bureaucratic, humorless, and stodgy agency. Difficult as it is to believe, the IRS website (www.irs.gov) is well organized and relatively user-friendly.
The IRS site also has links to state tax organizations, convenient access to IRS forms (including those from prior tax years), and instructions. To be able to read and print the forms, you need Adobe Acrobat Reader, which you can download for free from many Internet sites, including the IRS site or the Adobe website at www.adobe.com. To download forms from the IRS site, start browsing at www.irs.gov/forms-instructions.
You can complete your tax forms online at the IRS site using Adobe Acrobat Reader. The IRS site even features a place for you to submit comments on proposed tax regulations, with a promise that the comments are “fully considered.” Is this the IRS we know and love?
Tax preparation sites
A number of websites enable you to prepare federal and state tax forms and then file them electronically. Many of these sites allow you to prepare and file your federal forms for free if you access their site through the IRS website. Just go to www.irs.gov and click the “File” and then the “Free File” links to see whether you qualify. If you access a tax-preparation site directly instead, you may have to pay a fee for a service that would be free through the Free File program.
If you don’t want to use Free File, a reasonably priced alternative worth your consideration can be found at CCH’s eSmart Tax website (www.esmarttax.com), where you enter data on interview forms and calculate your tax. The premium edition, for $58.95, is designed for small business owners and self-employed folks. (State tax filing is an additional $39.95.) The service also includes tax support from professional tax advisors.
Keep in mind that if you’re simply after the tax forms, plenty of the sites mentioned in this chapter offer such documents for free, as do some public libraries.
TaxTopics.net
A number of sites on the Internet claim to be directories — collections of all the best stuff on the Internet on a particular topic. However, many of these sites lack objectivity and expertise. The worst of these sites simply provide links to other sites that are willing to pay them a referral fee.
TaxTopics.net is a comprehensive Internet tax resource compendium organized with links by topic. It appears to be run by a California CPA and is the best tax directory resource I’ve found online.
Research sites
For true tax junkies, the U.S. Tax Code On-Line (www.fourmilab.ch/ustax/ustax.html) is a search engine that enables you to check out the complete text of the U.S. Internal Revenue Code. Hyperlinks embedded in the text provide cross-references between sections at the click of a mouse. And, if you really have nothing better to do with your time, check out the government sites with updated information on tax bills in Congress:
Wolters Kluwer Tax & Accounting (https://taxna.wolterskluwer.com/) is geared toward tax and legal professionals who need to keep up with and research the tax laws. Access to most of the site’s resources comes by subscription only.
Hiring Help
Because they lack the time, interest, energy, or skill to do it themselves, some people hire a contractor to handle a home-remodeling project. And most people who hire a contractor do so because they think that they can afford to hire a contractor. (Although sometimes this last part isn’t true, and they wind up with more debt than they can afford!)
For some of the same reasons, some people choose to hire a tax preparer and advisor. By identifying tax-reduction strategies that you may overlook, competent tax practitioners can save you money — sometimes more than enough to pay their fees. They may also reduce the likelihood of an audit, which can be triggered by blunders that you may make. Like some building contractors, however, some tax preparers take longer, charging you more and not delivering the high-quality work you expect. See Chapter 13 for how to proceed in hiring tax help.