The 2011 tax-filing season is under way. Whether you prepare your own return or hire a pro, keep these points in mind as you organize your financial information:
Don't Wait For Forms
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This year the IRS will no longer mail paper tax packages, including its hefty instruction booklet, Publication 17. The agency cites cost considerations in the decision, as well as the continued growth of electronic tax filing, which eliminates the need for a paper form. If you want to do your return manually, you can get the forms at local IRS offices, some libraries, and post offices, or go to www.irs.gov.
File Free Online
If your adjusted gross income is $58,000 or less, you can use the IRS's Free File program (www.irs.gov/freefile), which links you to for-profit companies that will let you use their software to prepare and electronically file your federal return at no cost. The software guides you through the process, puts your information on the correct forms, and does the calculations. If you prefer a more hands-on approach, you can use the Free File Fillable Forms, regardless of income. You choose the forms and fill them out online, and the program does some basic calculations.
Shop Carefully For a Tax Preparer
About 60 percent of Americans use a tax professional to prepare their annual returns. Tax preparers have varying levels of training, and their rates differ accordingly. The average 2009 cost for an itemized return (federal and state) was $229, and for a non-itemized return, $129, according to a biennial survey by the National Society of Accountants, which includes certified public accountants and enrolled agents, who are licensed by the IRS. The net average fee for tax returns prepared by H&R Block was $187 in 2009.
Remember that you're responsible for all the information on your return, regardless of who prepares it, so choose a preparer with care. Look for one with clients similar to you who has seven to 10 years of experience to ensure that he or she has dealt with a variety of tax and economic situations. CPAs and enrolled agents can usually represent you before the IRS in all matters, including audits, collections, and appeals. The IRS warns you to avoid tax preparers who base their fee on the amount of your refund and to never sign a blank form.
Make an appointment with your tax preparer in February or early March. Before you go, organize your documents in an accordion file by type: wages, investment income, deductions, business expenses, and any other category that applies to your situation. Expect to pay more for tax prep if you take a shoe box bulging with unopened tax forms and receipts to your meeting. Make sure you take the Social Security numbers of all of your dependents and your tax return for the prior year.
If you owe taxes, you can wait until the April 15 deadline to file. If you're due a refund, you'll want to file as soon as possible. But if you have a lot of investment income, you might want to wait until closer to the deadline. That is because of an increase in the number of revisions to 1099 forms, which report investment interest income, dividends, and sales of stocks or mutual funds. They're supposed to arrive in your mailbox by Jan. 31, but about one in eight 1099s has to be corrected, according to some reports. That's double the number of revisions needed 10 years ago. The corrected 1099s might not arrive until late in the tax-filing season or even after the April 15 deadline.
Joint Return Not Always Best For Married Couples
Couples who recently lost tax breaks when they bid their dependent children goodbye might now benefit from filing separately, says James P. Schnell, a partner at the CPA firm of Mengel, Metzger, Barr and Co. in Rochester, N.Y. So might a married couple whose income is much higher or lower than last year's.
Sometimes the discrepancy in tax has to do with differences in how states handle income taxes. Last year, one of our staffers used tax software to prepare her family's returns both ways: married filing jointly and separately. It turned out that by filing separately, the couple had a net savings of $244; their federal tax bill was higher than it would have been on a joint return, but savings on New York state taxes more than made up for it.
If a tax pro does your return, he or she should be able to tell up front whether such a comparison makes sense. And of course you'll have to weigh whether the potential savings will be greater than what you'll pay the pro to do your returns both ways.
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