Tax Preparation Tips

Things are a little off-kilter in our house due to the switch to daylight savings time. Both adults and children are having to adjust to the one hour earlier time difference. It is amazing that “just” one hour has such an impact. Starting off a new week feeling a little disoriented is not my first choice but perhaps it is helping to distract me from the fact that only 30 days remain to file our taxes.

Taxes. Gotta love ’em. No one likes taxes but we accept them as necessary to pay for things like roads, police, national parks, public education, Social Security and the military defense of our nation. I have not met a person yet who feels that they pay just the right amount of taxes. We all feel that we pay too much, regardless of our income level or how many credits or refunds we receive.

I have prepared my own taxes for the last 12 years and I will do my own taxes again this year, even as things start to get a little more complex adding a small business into the mix. Today’s post provides tidbits of tax help.

First, three important lessons I have learned about self-help tax preparation over the years:

1. The “Coupon” Test. If you are ever filling out a tax form and you fill in a credit or deduction and get an immediate happy sense like, “Wow! That is a really great deduction!” chances are you have done something wrong! Every time this has happened to me, I go back and rework the math or study the IRS guide on the deduction and learn that the deduction is capped, I am entitled to only a pro-rated amount, or the deduction does not actually apply to me. I have been served well by what I call “The Coupon Test.” Most tax deductions and credits are supposed to be like a 10% off store coupon. They take the edge off of certain expenses but they don’t necessarily give you a huge financial boost. For us, the amount of most deductions and credits is just barely worth the effort to fill out all the paperwork needed to claim them.
2. Choose Your Tax Sages Wisely. While you would think that as long as you consult the IRS for any questions, you should be OK, unfortunately this is not the case. If you have ever called the IRS tax question help line, you would know that it appears to be staffed primarily by temporary workers who are answering questions based on a computer script. These workers may know nothing about taxes. One time I called with a question about domestic employment taxes and was routed to four or five people around the country. All of them were reading off the same computer script and none could answer my question. According to the IRS itself, its own advice is about 93% accurate. I have received great insight on difficult tax questions from Internet moderated tax discussion groups. On these lists, typically you have a lot of CPAs and other tax professionals. They might not have a solid answer to your question but they can at least point you in the right direction.
3. The One-Week Filing Rule. In our house, we have a rule that all tax forms must sit for one week before they are officially filed with the tax authorities. Inevitably, a few days after we declare our taxes “done,” one of us wakes up and remembers something that we forgot, realizes an error, etc. I try to spend as little time as possible doing taxes and the last thing I want to do is file my taxes twice because I need to amend the return (which, yes, has happened over the years).

Some great links to help you with your tax preparation:

1. IRS Free File. If you earn $57,000 a year or less, you may be eligible to get free software to help you file your taxes. If you earn more than $57,000 a year, you are out of luck and have to purchase tax preparation software if you want this type of service. (Note that our pals, the Medians, would not qualify for Free File.)
2. IRS eFile. If you exceed the Free File income guidelines, you can still file an electronic return with the IRS without having to pay a fee. I used the eFile system for the first time last year and while I am glad to have the opportunity to eFile for free, the system is really bare bones. It does not check your math on most calculations, the interface is a bit clunky and is hardly better than pen and paper forms. I will soon find out if this year’s version is any different. I was cheered to hear Vivek Kundra, our nation’s first government CIO, specifically mention improving IRS tax filing software.
3. IRS Small Business Tax Workshop. I will give the IRS kudos, however, for this great virtual tax preparation workshop for small businesses. Lesson 2 addressing common business income and deductions and Lesson 4 on the home office deduction were particularly helpful.
4. misc.taxes.moderated.  This is a great moderated forum to search to see if your tax question has been asked and answered or post a new tax question. Of course, you take the information at your own risk but many of the people answering questions are professionals and provide high quality answers.

Finally, a few tax organizing tips.

1. Have a Yearly Catch-all Taxes File. Each year, I create a file with the word “Taxes” on it and the year. As the year goes by, I throw in there all charitable donation receipts, personal property tax receipts, W-2’s, etc. When it comes time to file taxes, I just pull the file.
2. Use Certified Mail if you are Paper Filing. When I told a friend this tip once, she wrote it off to my legal training and said that in 30 years of filing taxes a single stamp seemed to do the job just fine. In a way, this is a risk calculation. Is it worth $5 in postage to give you a pretty good defense in case your return gets lost in the mail? For me, the answer is absolutely yes.
3. Print A Copy of All Screens if eFiling. This tip may seem crazy to some people as well but on numerous occasions this has served me well. As you are going through the eFiling process, you may be asked to complete various worksheets or forms. These forms are then consolidated into your final tax return. Usually, when you get to the end of the eFiling process, you are allowed to print/download a copy of your return but often it does not include those intermediate worksheets. It takes a little extra time to print a copy of all the screens as you go through but often you might need to refer back to these worksheets in future tax years.
4. Create one Final Copy of Your Taxes for Your Permanent Records. When my taxes are done, I make sure I have a copy of the signed federal and state returns with supporting documentation clipped together for easy reference. The general order is:

• • Certified Mail Receipt
  • Cover letter (if applicable)
  • Signed Tax Return, including all schedules
  • Copy of Any Spreadsheets/ Calculations I used to Prepare my Taxes
  • W-2s
  • Other income reporting forms
  • Bank interest (1099-INT forms)
  • Brokerage/Investment Statements (1099-DIV and 1099-INT)
  • State Tax Refund Statement (1099-G), if applicable
  • Mortgage Interest Statement
  • State Personal Property and Real Estate Tax Statements
  • Charitable Donation Receipts

Do you have your 2009 taxes done? Have a tax tip?  Please share in the comments.