The Professional Expert

Taxes - Doing them yourself

Disclaimer: This is entry not intended to offer official tax advice. Please see www.irs.gov or contact a certified tax professional with any questions or for specific instructions. 

If you are going to do your taxes yourself, you will need the forms. There are several different versions of the tax form.  We’ll talk about the 1040EZ, the 1040A, and the 1040.

You can get the forms at the local library or other government building, such as City Hall.  You can also get them on line at www.irs.gov .  They have a booklet that explains which form you should use.

Lets start simple and work our way to the more complex.

The 1040EZ is for the basic situation, as follows:

You are single or married filing jointly
Your taxable income is less than $100,000
You are less than 65 years old and not blind at the end of 2007
You have no dependants
You had only wages, salaries, tips, taxable scholarship or fellowships, unemployment compensation or Alaska Permanent Fund income and taxable interest less than $1,500.

If all of these apply to you, then you can probably use 1040EZ.  This is the simplest of the tax forms.  Be sure to read the instructions to make sure this is the right form for you, there may be special circumstances that apply to your situation.

The next level of complexity is the 1040A.

This form applies to most people who do not itemize deductions and have a taxable income less than $100,000.
The criteria are pretty detailed and more than we can spell out here.

The 1040 form is for the most complex taxes.

This is for people that itemize deductions, received income from non-taxable bonds, earned income overseas, or any number of special situations. 

As you can imagine, there are pages and pages of stuff in this one.

Be sure to read through the instructions to be sure you are using the right form.

There are also state forms and (in some cases) local forms.  You can get these at your library as well.  After you have paid taxes once, they will send the forms to you. 

If you live in Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming there is no state income tax.  Two others, New Hampshire and Tennessee, tax only dividend and interest income.

You can also find out about state and local taxes by searching for  “state tax forms.”  Several sites come up. I liked the LSU tax site, http://www.lib.lsu.edu/govdocs/taxes.html. They have links to each state’s tax information. 

Remember, they need to be postmarked or submitted by midnight on April 15.

Taxes - Who should do them?

Disclaimer: This is entry not intended to offer official tax advice. Please see www.irs.gov or contact a certified tax professional with any questions or for specific instructions. 

There are several ways to get your taxes done.

1. Do them yourself. You can find the forms at your local library. This is a good option if you have a minimal amount of paperwork. If you have only one W2 and/or one 1099 form, with no deductions you will probably want to do your taxes yourself. 

An option available to you only if your income was less than $54,000/year is free electronic filing.  You can go to www.irs.gov and do your taxes online.

2. Tax software package such as TurboTax.  This software can be downloaded from www.turbotax.com or purchased from your local big box store.  The software will ask you questions, and then fill out the forms for you.  It will also determine if you need special forms based on your answers.  It has videos to help you if you have questions along the way.  The software can also handle electronic filing of your tax return, for a fee, of course.

3. If you don’t feel like doing it yourself, you can take your paperwork down to the local storefront tax service, such as Jackson Hewitt or H&R Block and have them do it.  They will be able to look at your paperwork and determine the best way to handle your situation.  This way, you have someone familiar with the process going through it with you and filling out the forms.  The will also sign your return as a “paid preparer,” which means that they will stand behind your return if the IRS decides to audit you.

They also can offer an “instant refund” if you have money coming back. But beware, these are actually loans and can have outrageous fees or interest associated with them.  Better to wait a few weeks and get the whole thing yourself.

4. The “big guns” in the tax filing business are the CPAs (Certified Public Accountants).  Look for CPA after the name of the firm or individual. They are licensed by the state, and have their license on the line when they prepare your return.  They know all of the details of the tax code.  I recommend an accountant if you have your own business, lots of diversified investments, or anything you don’t feel comfortable with.

Taxes - Some definitions

Disclaimer: This is entry not intended to offer official tax advice. Please see www.irs.gov or contact a certified tax professional with any questions or for specific instructions. 

Before we go any farther, let’s define some commonly used terms related to income taxes:

Filing status – The category the individual will use to file the income tax. Your filing status determines your tax bracket, standard deduction, and other factors for determining your taxes. There are 5 different categories.

Single – not married and without dependents

Head of household – not married but with dependents (children or disabled parents) living in the house.  Head of household pays for more than half of living expenses for household.

Married filing jointly – a married couple which files a single combined tax return, combining their income and deductions onto one form.  This is designed to provide a better situation than filing separately.

Married filing separately – this is when a married couple decides to each file their taxes separately – this is usually worse than filing jointly, but is available for situations where filing jointly is not possible. 

For the purposes of the IRS you can file as married if you were married at the end of 2007 or if you were married during the year and your spouse died before the end of the year.

Qualifying Widow(er) – Can be used for two years after the year of the spouse’s death as long as the widow(er) has not remarried before the end of the tax year, had the right to file a joint return in the year of your spouse’s death, and has a dependent child in the home and has paid more than half the cost of maintaining the home for the dependent. This allows the widow(er) to use the same rates as if filing jointly.

Dependants- a relative (child, parent, niece, nephew, uncle, aunt, grandparent) that you pay more than half of the living expenses for, includes foster and adopted children that lived with you for more than half of the year.

Earned income refers to wages, salary, tips, bonuses, and commissions – essentially money you worked for

Unearned income refers to dividends, interest, capital gains – essentially, investment income – income you didn’t “work” for.

The alternative minimum tax is a provision of the tax code that applies to individuals that benefit from certain deductions and credits and may have enough deductions and tax credits that they qualify to pay no tax. This sets in place a minimum tax that they pay, regardless of their deductions.  This is designed to assure that the “very rich” don’t end up paying no tax; instead they pay this “minimum” tax.

Deductions are used to offset the amount of income you have, reducing “taxable income” and thereby reducing the amount of tax you owe.

Tax credits offset the tax you owe.  After you figure out how much tax you owe based on your taxable income, you subtract “tax credits” to calculate your tax owed.

Retirement funds such as IRA, 401K and 403B are usually deductible.  In many cases you can deduct the amount you invest in these accounts from your income.  Roth IRAs are not deductible.  Go to www.irs.gov for specific details on these accounts.

FICA stands for Federal Insurance Contributions Act.  This is the social security tax. 

“Itemizing” is when you list out your tax deductions.  There is a standard deduction you are entitled to depending on your filing status (single, married filing separately, married filing jointly, head of household, or qualified widow(er))  You would want to itemize if you have tax deductions that would add up to more than the standard deduction. This applies if you are paying mortgage interest, large medical bills not covered by insurance, or gave a lot to charity.

Taxes - Getting the paperwork together

Disclaimer: This is entry not intended to offer official tax advice. Please see www.irs.gov or contact a certified tax professional with any questions or for specific instructions.  

The first thing to do is get all of your paperwork in order.  The main things are your W2 and 1099 forms.  These will start arriving in the mail in January.  These show income you had during the year.  They also show how much tax was withheld (tax you have already paid).

The W2 form comes from your employer. This form shows how much income you earned for the past year as well as how much you paid in federal, state, and local taxes. It also shows the Social Security and Medicare taxes you paid last year.

1099 forms are sent out by banks and investment accounts.  These will reflect your income or losses due to your savings and investments.

1099 forms also cover a variety of other income, such as contract work you got paid for, but were not considered an employee. 

You may also want to gather paperwork for deductions. If the total of your mortgage interest, medical expenses you paid, and donations to charity are more than $5,300 if you are single or $10,700 if you are married filing jointly, you can itemize these deductions to get more than the standard deduction. If the total is not higher, you can still take the standard deduction.

Paperwork to get together for deductions:

Mortgage interest statements – these tell you how much interest you paid on your mortgage last year. The interest is deductible.

Medical expenses that you have paid – if you paid out-of-pocket large medical bills last year, these may be deductible. This deduction only covers the amount you paid, not the insurance company. For more info visit www.irs.gov/taxtopics/tc502.html

Donation receipts for charitable organizations – visit www.irs.gov/pub/irs-pdf/p526.pdf to find out the guidelines on charitable donations.

Now that you have your paperwork in order, tomorrow we’ll discuss how to “do your taxes?”

Taxes - Do I need to file?

Disclaimer: This is entry not intended to offer official tax advice. Please see www.irs.gov or contact a certified tax professional with any questions or for specific instructions. 

It is that time of year again, tax time.  If you have money coming back, I assume you did them in January and already have the refund in the bank.

If you expect to owe, you will probably be one of the masses working on your taxes in the next few weeks.  Either way, you will need to have your tax forms completed and sent to the IRS either electronically or through the mail, postmarked by midnight April 15.

Not sure if you need to file?

If you are not claimed as a dependant by someone else (parents, etc.) the following applies to you.

If you are claimed as a dependant, and made more than $5,300 you also need to file.

More information can be found at www.wwwebtax.com
 
Be aware, for this year only (tax year 2007), if your income is over $3,000, you may want to file an income tax even if you do not meet the above income requirements in order to receive a rebate or Economic Stimulus Payment. For more information, see

Economic Stimulus Payment.