As The United States Tax Code gets more complex, one would think that the number of individuals utilizing a paid preparer would be on the increase. However, that is not the case. More and more individuals are filing their own returns. I see at least two reasons for this. The individual tax return market can be viewed as consisting of two segments – very simple returns with no itemized deductions or other complications in the return and more complex returns utilizing multiple tax schedules and tax forms. As the standard deduction increases, more taxpayers are taking the standard deduction, so their tax return is fairly simple to prepare. Adding to the simplicity of the return is the second factor – availability of inexpensive or free preparation software. Since these typically guide the taxpayer in preparation, the task becomes even simpler.
However, taxpayers of all stripes should be aware of certain factors involved in filing their returns. I have provided my “Ten Best Tips for Filing your Return.” These tips can be useful for those preparing their own returns, but they can also guide the taxpayer using a CPA or other professional preparer in assembling their information for the preparer.
• File tax returns on time, even if you cannot pay now. You will be assessed a penalty and interest for failure to pay, but you will avoid the failure to file penalty. This penalty is 5% per month of the amount of taxes owed, up to 25%. If you don’t owe, there shouldn’t be a penalty.
• Take deductions that you are entitled to, assuming you can prove them. Many people avoid taking some deductions as they wish to avoid an audit. If you can justify everything on your return, you should not fear an audit. It may be a bother, but why pay more taxes than you owe?
• Be certain that your social security number and other tax numbers are entered correctly on the return.
• If you can’t file by the April 18, 2016 deadline, file Form 4868 for a six-month extension. But be aware that an extension is an extension of the time to file the return, not an extension to pay. If you owe, you should make a payment with the extension. Otherwise, you will be subject to an underpayment penalty and interest. The penalty is one-half of one percent per month of the amount owed. Interest is at the current IRS rate, announced quarterly.
• Keep acceptable proof of your tax deductions. Depending on the deduction, this can take many forms, but you should be able to prove (under IRS standards) any tax deduction taken on the return.
• Use the correct filing status. If you are married you must file a married filing joint or married filing separately. If you are not married, but have a qualifying dependent on your return, you can probably file as head of household. If none of the above apply, you must file as single.
• You should report all taxable income. Many believe that if you have less than $600 in certain income it is not taxable. This is not true. The $600 amount is the amount that requires issuance of a 1099-MISC. Income below that amount is still taxable.
• Don’t just use the same amounts a last year. Some have a tendency to say “My tax situation was about the same as last year, so I’ll just use the same amounts for mileage, contributions, taxes, etc.” This is not valid and can make you run afoul of the IRS.
• If you have a business filing Schedule C or if you report unreimbursed employee business expenses, be sure that what you deduct is a legitimate business expense.
• If your return gets more complex to the point where completing it is beyond your ability, hire a professional CPA, enrolled agent, or other preparer. Make sure the preparer signs the return as preparer.
Income taxes and income tax returns are a fact of life. There is no question that the United States Tax Code has become quite complex for many taxpayers. Many are capable of preparing their own returns but as life gets more complex, if frequently pays to consult a professional for tax planning advice as well as preparation. This is one of these things in life that may actually save you money. Even if it doesn’t, it can save you a lot of hassle.
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