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  • Figuring Out the Best Way to File Your Taxes

    It’s that dreaded time of year again – tax season! There’s nothing fun about it. Even getting a refund has its downside, namely that you overpaid the government and didn’t earn interest on the money you’re getting via refund.

    So let me try to make things a little easier by helping you figure out the best way to file your taxes. As with most things in life, this isn’t a one size fits all kind of thing. Instead, you’ll need to take your own particular circumstances into account as you keep reading.

    Figuring Out the Best Way to File Your Taxes | Chief Family Officer

    EZ File from the IRS

    If your income is under $66,000 and your tax return is pretty straightforward, you should definitely consider using one of 12 programs to file your tax return for FREE through the IRS’s Free File Alliance. Here is a list of what you need to get started. It’s basically the obvious documents, like your W2 and 1099 forms. Depending on your income level and where you live, you might even be able to complete and file your state tax return for free as well.

    DIY Tax Software

    Don’t be put off by the DIY part of using tax software. Programs like TurboTax, TaxAct and H&R Block are designed to walk you through each step of filling out your tax returns. Even better, the cost for each program is based on how complicated your taxes are, so you don’t pay for what you don’t need.

    When you use tax software, you answer questions that the program asks you, so you’ll need to be able to provide the answers. Because of this, you do need to be somewhat detail-oriented and patient, and have the necessary documents at your fingertips. It’s helpful (but not necessary) to have a basic understanding of how income taxes work, i.e., a general idea of what’s taxable, what deductions are, etc. Usually there is a way to get specific questions answered, whether it be through online chat or a forum. The different software companies have different guarantees, but often they guarantee you’re getting the maximum refund and include audit support in the event you are audited.

    These programs tend to be very cost-effective, ranging from free for basic returns to approximately $150 for business tax software. Personally, I switched last year from using a CPA (discussed below) to TurboTax (recommended by WireCutter). For a few hours of my time, I saved about $800!

    Tax Prep Companies

    I don’t really know what to call companies like H&R Block and Jackson Hewitt, but they’re places where you can bring your documents and they’ll help prepare your tax returns for a fee.

    I don’t know how trustworthy these services are, but I think they can be useful if your taxes aren’t too complicated but you lack the confidence to use the self-directed software programs discussed above. Perhaps the biggest concern is the competence of the person assigned to help you. Ask about their background and make sure they didn’t just go through a surface-level training program provided by their company. You’re paying for their services, so you have the right to ensure that the person assisting you has at least some background in accounting and tax prep. Also about what guarantees they provide regarding accuracy and refunds.

    These services come with various guarantees and seem to be competitively priced. They also frequently offer advances on your refund so you get the money faster than you would from the IRS, but be careful of these. Make sure you know what fees, if any, they charge for these advances, and what the consequences are if the IRS reduces your refund amount.

    CPA

    A CPA is a Certified Public Accountant, which means he or she has a certain level of training in accounting and had to pass a rather difficult test to get certified. Of course, this doesn’t mean every CPA does a great job. The best way to find a good CPA is to ask for recommendations from friends and family, and be sure to find out the CPA’s qualifications. Find out how long they’ve been preparing taxes, how many of their clients have been audited, how they handle audits, etc. Also, be sure to find out the CPA’s rates, which can vary dramatically. One friend paid her CPA a couple hundred dollars, while I was paying ours almost a thousand. Of course, she didn’t trust her accountant enough to recommend him, while I had complete faith that our return was prepared properly.

    If you don’t have the confidence or time to prepare your own taxes, especially if they are on the complicated side, hiring a CPA can be a worthwhile expense. And if the cost exceeds a minimum threshold, you can even deduct the amount you paid the CPA next year.

    VITA/TCE

    VITA stands for Volunteer Income Tax Assistance and is a program where IRS-certified volunteers provide free assistance to those with lower incomes and/or who need help understanding English. I’m fond of this program because I was a VITA volunteer when I was in law school, and got to help many people who didn’t know how to fill out their 1040.

    TCE stands for Tax Counseling for the Elderly and is a program that provides free assistance to those over the age of 60.

    VITA and TCE centers are frequently located in community and neighborhood centers. I recall volunteering at a church once. Find a center here.

    This post contains affiliate links that help support this site at no additional cost to you. Thank you for clicking through them! You can read CFO’s full disclosure here.

    Why You Should Contribute to A Flexible Spending Account

    Why Should Contribute to a FSA

    It’s Open Enrollment season at many jobs, which means you may have the opportunity to contribute to a medical reimbursement account (MRA) and/or dependent care reimbursement account (DCA), which I will collectively refer to as a Flexible Spending Account (FSA). In a nutshell, your employer deducts your FSA contribution from your pre-tax income, and disburses the money to you as you incur expenses. The beauty of the plan is that you don’t have to pay income tax on the money you divert to an FSA. The downside is that anything left in your account at the end of the year reverts to your employer. So the trick to maximizing the benefit is to contribute as much as you are going to spend in the coming year. You can contribute up to $5,000 each to an MRA and DCA each year.

    You can use an MRA to pay for your dental and medical out of pocket expenses, including co-pays and prescriptions, as well as contact lenses, contact lens solution, and more. One way to estimate expenses is to review expenses from previous years and assume expenses will be similar. However, you’ll need to calculate differently if your family has changed or you have upcoming expenses you know about. In fact, if you have procedures that you can put off until the new year, you may want to ask if you can wait so that you can pay for them with FSA money.

    A DCA can be used to pay for childcare provided by a qualifying provider, if you are paying for the childcare so you can work (you’ll need the provider’s tax ID). When my children were in daycare, I maxed out this benefit every year. A DCA can also be used to pay for summer camp for younger school-aged children.

    Here’s a summary of tips I’ve shared in the past to help determine how much you should contribute to an MRA:

    • Examine your expenses in the last few years and determine whether they are likely to recur.
    • Determine what expenses are a given. This includes co-pays for routine doctor’s visits, contact lenses or glasses, and medication that’s taken regularly.
    • Build in a cushion for unpredictable expenses, like extra co-pays and blood tests. Your past expenses can be a helpful guideline here.
    • Have a contingency plan for the cushion in case you don’t use it. Glasses (wouldn’t a pair of prescription sunglasses be nice?), preventive dental work (has your dentist recommended replacing a crown?), and even laser eye surgery can fall into this category.

    Image via FreeDigitalPhotos.net by David Castillo Dominici.

    Get Started on Next Year’s Taxes Now

    Last week, I shared some tips to make organizing and filing your taxes easier. Today, I’ll share a few tips that will make doing next year’s taxes even easier, because now is a great time to get started on next year’s tax return.

    • Designate a place for tax documents. Tax documents come in all year long, not just in January. You’ll have paystubs, receipts for tax-deductible donations and tax-deductible expenses, random income statements, and other miscellaneous documents. It’s nice to have one central place where you collect all of those documents throughout the year.

      I use an expandable pocket file similar to this one to collect my tax-related documents throughout the year – I separate the documents by category so that part is already done when filing season rolls around. In fact, I have two folders, so that I can start collecting the next year’s papers while I’m still gathering documents for the current return.

    • Keep a “Taxes” folder on your computer and save important documents in it. For example, I itemize non-cash donations in a spreadsheet, and save that spreadsheet in my computer. I also take photos of the items I’m donating, and put them in the same folder on my computer. I don’t always remember, but I try to print out a copy of the spreadsheet and staple it to the receipt from company I donated the items to, which makes things easy when I am giving all of my documents to our accountant.
    • Check your Flexible Account Spending several times during the year. FSAs are a fabulous tax benefit, but you forfeit your contributions if you don’t use them. Checking on the account throughout the year ensures that you spend all of the money instead of losing it.
    • Track amounts throughout the year. If you find yourself gathering information from multiple sources each year, consider tracking that info in a spreadsheet throughout the year so you don’t have to do it all at once. For example, my blog income comes from many different sources, and on a variable basis. I’ve found that tracking my income as it comes in is far easier than aggregating that information once a year.

    It doesn’t take much effort to put these tips into practice, and you’ll be so glad you did when next year’s tax season arrives!


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    Tips for Organizing and Filing Your Taxes

    It’s the start of tax season, and unfortunately the best time for preparing and organizing your tax documents is the year before. But if all you have right now is a big mess of papers, then here are some suggestions for making the seemingly overwhelming task of doing your taxes manageable:

    • Gather all of your documents. Taxes = lots of papers. For several weeks, the mail brings 1099s, W2s, and other tax-related documents. You may also have receipts for deductible donations and expenses. Getting everything together in one place is the first step. Be thorough. Any omission could cost you money – either because you failed to take a deduction to which you were entitled, or worse, because you failed to report income and the IRS has found out!
    • Create a workspace where you can spread out. You’re going to be creating piles, so a wide, flat surface is your best friend right now. Be sure to remove spillable items (like that giant Diet Coke) out of the way.
    • Create categories based on your tax return. Some tax returns are more complicated than others, depending on your types of income and the type of return you file. General categories are income and deductions. Some documents, like your W2, may include information for multiple categories, and I tend to separate those out since there aren’t many of them.

      My husband and I file a 1040, and I create categories based upon the sections on the form itself. Our income is separated into the following categories: his salary, investment income, prizes, my miscellaneous earnings (e.g., from surveys), and blog earnings. Our deductions get separated into the following: mortgage/tax deductions, charitable deductions, and other (e.g., dependent care expenses).

    What you do next will vary based upon whether you file your own return, or whether you pay someone to do it, and just how much paper you have to deal with.

    If you are filing a simple return like a 1040EZ, you can pull out the form and start filling it out at this point. Low to moderate income earners (generally below $50,000) can get free tax return preparation assistance. I worked as a VITA volunteer in law school, and prepared many 1040EZs for low income families – it’s a legitimate program that can help a lot.

    If you are hiring someone to do your taxes for you, this is a good time to find out how much more work they’d like you to do. Our old accountant would send us a worksheet that I would fill out, but our current accountant prefers me to hand over the sorted papers.

    If you are doing your own taxes and are filing a 1040 or 1040A, pull out the form and just go step by step through the instructions and a draft version of the form. You may need to rearrange some of the sorting you did previously, but everything should be quite easy to find now that they’re in general categories.

    You have 82 days from today until the filing deadline of April 17. Good luck!


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    It’s that time of year again: Five ways to make tax time easier

    I am one of those people who has to balance the checkbook to the penny – it’s how my dad taught me, and I go a little batty when the numbers don’t match exactly. It’s mostly a fear thing, fear that somehow the whole checkbook balance will be off, I won’t know exactly how much is in there, and I’ll end up with a ton of service charges. It’s not exactly logical, but it’s how I feel.

    I feel pretty much the same way about taxes. If I don’t get it exactly right, something horrible is going to happen, like the meanest IRS agent is going to show up at my door and tell me I’m under arrest for tax evasion. I know there’s no logic to how I feel, but nevertheless I feel that way, and my feelings make tax time overwhelming. I get stressed out just thinking about what I need to do, all the data I need to gather, and fear that I might have missed something.

    In order to make things more manageable, I do a few things that might help you as well:

    1. Keep a pocket folder dedicated to taxes. This is the single most important thing that I do – I use a multi-pocket file folder like this one and file documents as they come in according to category. I have sections for paystubs, charitable contributions, medical and childcare expenses, business-related income and expenses, tax documents like W-2’s and 1099’s, and a miscellaneous pocket that’s a catchall for anything that doesn’t fit in the other pockets. The wonderful thing about this system is that you can customize it to fit your needs, and do some tax prep throughout the year.

    2. Use online tools. I love online banking, and I use my computer to save copies of important downloadable documents, and to capture screenshots of documents that can’t be saved as a pdf. I have a folder on my computer that’s labeled taxes and all tax-related documents go there. It’s especially useful at the end of the year when companies make year-end statements available online.

    3. Hire a professional. I took a personal income tax law class in law school, and I actually kind of enjoyed doing my own taxes. But a few years ago, our taxes started getting more complicated than I was comfortable with, so we hired an accountant to do our taxes for us. I don’t think that we save any money in the form of credits and deductions I wouldn’t have known about, but it’s worth every penny for the peace of mind. If you’re comfortable doing your own taxes, then consider using a program that walks you through the possible deductions and credits – it might find something you would have overlooked on your own (and do most of the math for you).

    4. Be organized. Our accountant needs me to provide the information necessary to complete our taxes, so it’s still up to me to pull all of that data together. And the more comprehensive and organized I am, the easier it is for him to do his job (and I assume that he consequently charges us less, though I’ve never actually asked). In the past I have tried to get that information together by mid-February, but I am running a couple of weeks behind this year. I will definitely be done by the end of the week, however. If you’re doing your own taxes, then gather all of the information you know you’ll need as early as possible, and don’t procrastinate – it’s not worth the stress.

    5. Do a little at a time. Most tax-related tasks can be broken down into smaller projects. You can gather all of your charity donation receipts at one time, but pull together your childcare expense information at a separate time. You can even break up filling out your 1040 by the section of the form – calculate your income one day, then work on the above-the-line deductions the next. Before you know it, you’ll be done!

    I love electronic filing and direct deposit

    Our accountant electronically filed our taxes probably early last week, and now the IRS web site shows that our refund will be deposited on April 21. I’m old enough to remember when everyone filed paper returns and everyone due a refund received a paper check, so it’s just amazing to me that we can get our refund in less than two weeks. (Funny how that makes me sound so much older than I am. It’s really just a reflection of how quickly technology has progressed in the last 20 years, since I first started filing my own tax returns.)

    I used to pride myself on doing my own taxes, and did quite well in personal income tax law class in law school. But once we had kids who had investment income, along with blog income, I didn’t want to risk making any mistakes. Especially since tax law changes so frequently that what I learned in school isn’t that useful anymore, beyond a basic understanding of how the tax system is set up. I do think that knowing something about tax law makes preparing the documents for the accountant and reviewing our returns easier for me than it would be otherwise.

    I guesstimate what our accountant’s bill is going to be each year and include that amount in my monthly Infrequent Bills total. (Learn more about how I budget for annual and semiannual bills with my Infrequent Bills Account.) From what I’ve gathered from my friends, we pay quite a bit more than they do, but our taxes are probably more complicated and I suspect we’re paying more for quality/professionalism since we just with my in-laws’ accountant. I’m okay with that, since to me it’s added peace of mind.