Tax Advice

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AFor highlights of the tax changes for the current tax year, refer to the “What’s New” section of the following:

Instructions for Form 1040 (.pdf),
Instructions for Form 1040A (.pdf), or
Instructions for the Form 1040EZ (.pdf).

For more information refer to www.IRS.gov

AAre you ever wondering if you would be better off paying an accounting professional (CPA, attorney, enrolled agent or tax preparer) or using tax/accounting software to prepare your tax return? Is one better than the other? Unfortunately, there is no single answer for every taxpayer, and you will have to select the tax preparation method based on your individual situation. Here are some of the factors to consider in making your decision.

Factor #1: Complexity of Tax Situation

As a general rule, the more complex your tax situation, the more beneficial and compelling it is for you to hire a tax professional to prepare your tax return. Some of the following situations may present complexity that may require CPA assistance:

• You own a business (or businesses). As you probably know by now, there are many complex rules and various tax elections that you may want to discuss with a tax pro. For example, if your business purchased equipment, you have several ways to write off the cost; the best way to do this depends on your current tax situation as well as your prospects for the future. You can, of course, handle complex situations with appropriate tax software (e.g., TurboTax Home and Business enables you to prepare a Schedule C for your sole proprietorship), but you won’t get personal advice.
• You had a major life event. For example, if you sold a business, went through a divorce, sold a home or had any other major life change, a tax preparer can alert you to the rules that you now have to consider in your tax preparation
• Extensive securities transactions. Software can automatically input the results from Form 1099-B, which reports securities transactions. However, you may need to work with a tax pro to make sure you have all the information required for your return (e.g., your tax basis); it may not all be on the 1099.
• You want to itemize. Again, software enables you to put all your information into the mix. However, a tax preparer can provide advice about legitimate deductible expenses, the substantiation you need and other matters to help you optimize your deductions while avoiding problems with the IRS.

Factor #2: Your Tax Proficiency

For some people, the very idea of numbers, taxes and the process of preparing and filing a return seems daunting. For others, taxes have become a routine chore that needs to be done each year.

If you’ve been doing your taxes year after year and not much has changed in your financial or personal situation, you’ll likely be more than able to handle your annual tax return. Just familiarize yourself with the new entries on the return related to the Affordable Care Act (may be found in the instructions on the return).

If you’ve never done a return before, decide whether you’re up to the task. Recognize that you don’t have to be a math wizard because software or online preparation sites do calculations for you. And you don’t have to be a tax expert because you’ll be prompted to supply needed information to complete your return.

Factor #3: Your Schedule

Time is always an important factor in deciding whether to do your return yourself or hire a preparer. Either way, you’ll spend the same amount of time gathering the documentation needed to prepare the return: information returns you’ve received (Forms W-2, 1098, and Schedule K-1s), your canceled checks for itemized deductions, logs and other substantiation for certain expenses.

So, the difference is in the time spent doing the actual return. Depending on your situation, that could be modest (an hour or so), or lengthy (6 hours or more). If you don’t have this time, then using a preparer is the better choice.

Factor #4: Cost

Cost may influence your decision about who prepares your return. Fees may be higher or lower depending on your area and complexity of your particular situation. Give us a call, so we can schedule your free consultation and provide you with a quote.

The Bottom Line

To summarize, hiring a tax preparer or using a software package or online tax site can both work well, depending on your tax situation and your comfort with the process.

If you want to use tax software, recognize that there have occasionally been issues with certain products – for example, some fraudulent state tax returns were filed using TurboTax, leading to a suspension of state filings for 24 hours and inducing Congress to investigate the matter. (Tax-related identity theft is an issue that everyone needs to be aware of, regardless of the method you use to prepare your return.)

If you opt to use a paid preparer, make sure to find a reliable one. You want to research few things like: How long have they been in business? Do they have a website? How are their online reviews?

Either way, the responsibility to file a tax return is on you, so don’t procrastinate!

ATo claim your child as your dependent, your child must meet the qualifying child test or the qualifying relative test.

• To meet the qualifying child test, your child must be younger than you and as of the end of the calendar year, either be younger than 19 years old or be a student and younger than 24 years old.
• There is no age limit on claiming your child as a dependent if the child meets the qualifying relative test.

As long as you meet all of the following tests, you may claim a dependency exemption for your child:

• Qualifying child or qualifying relative test
• Dependent taxpayer test
• Citizen or resident test, and
• Joint return test

For more information refer to www.IRS.gov

AIt depends on the type of mistake you made:

• Many mathematical errors are caught during the processing of the tax return and corrected by the IRS, so you may not need to correct these mistakes.
• If you did not attach a required schedule or form, the IRS will contact you and ask for the missing information.
• If you did not claim the correct filing status or you need to change your income, deductions or credits, you should file an amended or corrected return using Form 1040X (.pdf), Amended U.S. Individual Income Tax Return.

When filing an amended or corrected return:

• Include copies of any schedules that are changing and/or any Form(s) W-2 (.pdf) you did not include with your original return. To avoid delays, file Form 1040X only after you have filed your original return. Generally, for a credit or refund, you must file Form 1040X within 3 years (including extensions) after the date you timely filed your original return or within 2 years after the date you paid the tax, whichever is later.
• Please allow the IRS up to 16 weeks to process an amended return.

For more information refer to www.IRS.gov

AYou must make estimated tax payments for the current tax year if both of the following apply:

• You expect to owe at least $1,000 in tax for the current tax year after subtracting your withholding and refundable credits.
• You expect your withholding and refundable credits to be less than the smaller of:
  – 90% of the tax to be shown on your current year’s tax return, or
  – 100% of the tax shown on your prior year’s tax return. (Your prior year tax return must cover all 12 months.)

There are special rules for:

• Farmers and fishermen
• Certain household employers
• Certain higher income taxpayers
• Nonresident aliens

For more information refer to www.IRS.gov