Do you do your taxes yourself or work with a tax professional?
This year is the first year I've enlisted the help of a tax professional. Previously I did my own taxes for years using TurboTax.com. It's great! I saved myself a lot of money, learned a good amount about taxes, saved time in back and forth with a tax pro, and every year TurboTax pre populates some of the minutiae based on my last return. There's also no cost to try it out if you want to see how it works - you pay when you file. H&R Block has also come into the online world with its H&R Block At Home system. I haven't tried it, but would love to hear from you if you have! And of course, you can always file them directly with the IRS. I didn't find it nearly as intuitive as TurboTax, but it is the cheapest option if expense is your primary concern.
For those of you who use a tax professional, it is wise to reconsider your options each year. Using the same professional on a yearly basis can sometimes end up in cost creep (if they raise their rates each year) and can keep you from seeking out great promotions from other providers. On the other side, the value of having a clear mind and sound, personalized advice that is consistent over time can make the cost of their services very worthwhile.
Do you usually owe taxes, receive a refund, or break even?
- If you usually owe - Review your W-4 with your employer and make sure you aren't claiming too many allowances. This is especially concerning if you don't have cash on hand to pay any larger-than-expected taxes that sneak up on you suddenly.
- If you receive a big refund - While this is always exciting (unexpected bonus time!), this also means the government is making money off your money and not paying you a dime for it. Consider whether you could be making interest or gains on that money by investing the portion of your paycheck that would have been taxed. At the same time, if you struggle with saving money, keeping the government one step ahead of you might not be a bad arrangement. Again, your W-4 is where an adjustment can be made.
- If you break fairly even - This is a good place to be, as long as you are diligent about keeping extra cash on hand in case you end up a little more in the negative than anticipated.
Do you know your way around tax credits and deductions (aka, ways to get money back)?
Whether you do your own taxes or have someone help you, knowing about tax credits and deductions is very important. If you know in advance what qualifies for either, tracking related expenses throughout the year may prove to be a very valuable exercise.
What's the difference between a tax credit and a deduction? Credits decrease your total taxable income dollar for dollar (regardless of your tax bracket), whereas deductions simply decrease the taxable amount of your income. The benefit of credits is often greater, and can even potentially move you to a lower tax bracket if you are on the fence. Here is a short video from Yahoo! Finance on some of the largest credits available, and another from MSN Money on 5 commonly overlooked deductions. And in case you don't have time for the videos, here are some of the credits and deductions I've claimed in the past that I found to be very worthwhile:
- Charitable deductions, including mileage and materials
- Medical expenses, those that exceed 7% of your adjusted gross income (it was a clumsy year)
- Job seeking expenses, those that exceed 2% of your adjusted gross income (also not a good year thanks to the financial crisis)
- Education credits (back in my college years)
What do you do if you owe money or receive a large refund?
If you owe money:
- First things first, if you owe a lot of money take the steps needed to make sure it doesn't happen again next year (see above regarding W-4s, as well as this video on other forms of income to account for in advance). There is no time like when you first see the total taxes due to motivate you to make those adjustments.
- Then, consider ways to pay your dues without compromising your other financial responsibilities. If you need to implement a budget, consider using Mint.com or other online resources. Such tools will help you identify where your unnecessary spending may occur and ways you can change your habits for better financial results.
- This is also an important time to make sure you are keeping on hand an appropriate amount of "emergency money", particularly if you weren't expecting the tax bill. You should have, at minimum, three months worth of living expenses in cash savings.
If you receive a large refund:
- Resist the urge to splurge! While some minor spending might be a treat (there will be some good sales in the name of tax returns), this is also a great opportunity to put away money you didn't know you had and let it grow for the long run.
- Reconsider whether you want the government to hold on to that cash each year without giving you the benefits (again, read the section above about W-4s).
- Look into preparing yourself for the next tax season by making a donation to a worthy cause. This will automatically work to your advantage as next year comes around while giving to those in need when you have the ability.
Do you have suggestions on how to make the most of the tax reporting process? What systems have you used that you liked? And what great ways have you used a tax return in the past?
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