“It’s the least wonderful time of the year….” Yes, it’s time to prepare to file your tax return. While this time of the year is met with dread by many individuals, it doesn’t have to be quite as bad as it’s purported to be or as you may think. By following these steps, you can make it as stress-free as possible.
First, gather your information. By now, you should have received all the reporting documentation you’ll need. Here’s a checklist:
- Social security numbers: yours, your spouse’s (if filing jointly), and those of all your dependents
- W-2 forms from your employer(s) and those of your spouse (if filing jointly)
- 1099 forms (if applicable):
- 1099-MISC: for miscellaneous income earned as an independent contractor or self-employed person who earned more than $600 from an individual client. Provided by your client(s).
- 1099-INT: for interest income. Provided by your bank or investment firm.
- 1099-DIV: for dividend income. Provided by your bank or investment firm.
- 1099-R: for retirement income from withdrawals from your traditional IRA or 401(k) account. Provided by your bank or investment firm where the account is held.
- 1099-G: for unemployment compensation or a state tax refund. Provided by the appropriate government agency.
- 1099-C: for debt cancellation that the IRS treats as income. Provided by the company forgiving your debt (e.g. credit card company).
- Income from state and local tax refunds from the previous year (that may not be reported on a 1099-G)
- Accounting records for business income
- Social Security benefits
- Rental or royalty income
- Miscellaneous income (e.g. jury duty stipend, gambling/lottery winnings, prizes or awards, and distributions from a medical savings account [reported on Form 1099-MSA])
You can reduce your tax liability with deductions and credits. You should have the documents and amounts you paid for mortgage interest, student loan interest, IRA contributions, medical savings account contributions, moving expenses, childcare costs, charitable contributions and donations, qualified job and business expenses, casualty and theft losses, and any homebuyer or green energy tax credits for which you may be eligible.
Also, please share with us any life changes (marriage, divorce, new child, job change or relocation, death, etc.) that you experienced in the last year, so that we can fully and effectively address your tax situation and take advantage of certain credits, exemptions, deductions, etc. to which you may now be entitled.
Please provide your updated mailing address and bank account information to avoid a potential delay in your refund.
Finally, ask questions! We are here to serve you, so please don’t hesitate to ask any questions you may have.
Using Waddy’s Organizer
We understand that taxes can be complex, so we’ve created a tax Organizer to help you expedite the process. The Organizer walks you through your personal tax situation with a series of yes/no questions and easy-to-follow worksheets on which we’ll collect needed information about your dependents, income, healthcare coverage, as well as other income and adjustments. For those who need it, we’ll help you cover every detail for Schedules C (business), E (rental & royalties), and F (farming) as well as itemized deductions for which you may qualify to potentially reduce your tax liability.
With the Organizer complete, you can easily upload it to use via our secure online portal.
The average timeframe for Waddy to complete your tax return is two hours to two weeks depending on how your information is organized.
Once your return is filed, if you are getting a refund, the IRS issues most refunds in fewer than 21 calendar days. However, it may take longer, especially if you are claiming the Earned Income Tax Credit or an Additional Child Tax Credit. By law, the IRS cannot issue a refund in that case until at least Feb. 15, 2017.
You must also take into consideration the time it takes for your bank or financial institutions to post the refund to your account when getting the refund via direct deposit.
You can use the IRS “Where’s My Refund” site to track the status of your tax return.
With a lot of discussion in Congress regarding tax reform, there is also chatter about implementing a consumption tax rather than income tax. Very simply, a consumption tax is tax paid on the purchase of goods and services and occurs as sales or excise taxes or tariffs. The money paid on this type of tax is based on how much money you spend rather than how much money you earn, as is the case with income tax.
The idea of consumption tax is not at all a new one. In fact, prior to 1913 when Congress passed the 16th Amendment, the federal government primarily raised revenue by means of consumption tax rather than our current system of income taxation. Of course, income tax is levied on how much you earn, and that goes beyond your paycheck and includes interest, dividends, capital gains, etc.
There are pros and cons to each taxation system.
At first glance, a consumption tax gives you the opportunity to control how much you pay in taxes. The less you spend – consume – the less of your money goes to the government. This tax becomes naturally limited since it will tend to automatically discourage spending activity when the tax becomes too high. Also, savings and investment accounts are unaffected and even encouraged by consumption tax since any gains they earn (e.g. interest, dividends, capital gains) are not taxed until that money is actually spent. This ultimately leaves more money in the hands of the taxpayer.
Those in favor of consumption tax argue that it comes as close to achieving taxation neutrality as possible – in essence, a flat tax in which every taxpayer pays the same percentage. This neutrality can also lessen, or perhaps eliminate, the paperwork involved with filing tax returns and reporting, which in turn, saves the government billions on compliance. Think: reduce or eliminate the IRS. April 15th will no longer be a day that most taxpayers dread.
The income tax model, on the other hand, makes it easier for the government to estimate revenues and is far less regressive than a consumption tax. While it’s nice to think we can pay less tax simply by spending less, there will also be consumption tax paid for certain necessities. With everyone paying the same tax percentage on the necessities, those with lower incomes end up spending a larger portion of their overall income and are hit harder by consumption tax than by a progressive income tax in which the tax percentage increases as income levels increase. Many argue that for this reason, the income tax model is fairer, with higher-income taxpayers contributing a larger percentage to the government’s revenues.
The flip side of paying less tax by spending less in the consumption model is that it could discourage consumer spending, which would then create a domino effect of negatively impacting the economy, business revenues, and potentially jobs. However, there are many states that have eliminated income tax in favor of other forms of taxation, including Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. (Residents in New Hampshire and Tennessee only pay tax on interest and dividends, not on earned income.) Another argument against consumption tax is that it would raise less revenue than income tax if both tax rates were the same.
Reporting complexity and lack of transparency lead the list of negatives of the income tax model. Additionally, there is ultimately less money saved since earnings on savings are subject to taxation. There is also an economic cost to businesses to collect and report corporate income taxes. Those who argue against income tax and in favor of consumption tax also believe that income tax reduces productivity since every hour worked is taxed – the only way to pay less tax in this system is to earn less money.
There will always be a need for taxes to offset the costs associated with public safety, infrastructure, and defense, to name a few. There are several European nations using a value-added tax (VAT), similar to consumption tax, which appears to raise adequate revenue without negatively impacting their economies. However, combining income and VAT certainly raises the overall tax burden.
With pros and cons to each system of taxation, Congress has a lot of homework to do in creating a reform to the current system.
Its advertising makes filing your tax return with TurboTax by Intuit® seem easy. As with any software or computer program, the age-old adage applies: garbage in, garbage out. Yes, it is a very robust piece of software, and yes, it walks you through the process with a series of questions. If your tax situation is very simple, this software might be a viable option for you. Then again, if your tax situation is very simple (i.e. one source of income, no dependents, no need to itemize deductions, etc.), using TurboTax simply saves you from adding and subtracting the numbers you would be entering on your 1040EZ form with a pencil, for example.
If you’ve completed your own tax return in the past and have a basic sense of how the calculations on Form 1040 flow (e.g. income and adjustments on the front, credits and payments on the reverse side), you may become frustrated or at least a bit confused when following the TurboTax process. “Why is it asking for that information now? I’m not to that part of 1040 yet.”
Choosing the TurboTax Version
There are several different versions of TurboTax from which to choose, depending on your personal tax situation. While the website can help you select an appropriate version (e.g. asking if you own a home or rent, have children, made charitable contributions, sold stock or own rental property, paid out-of-pocket medical expenses, etc.), if you don’t consider all of the implications of your situation or if you happen to answer incorrectly, you could either buy a version that can’t address your more complicated tax scenario or buy a version that is more robust than you actually need. In either case, you’re wasting money.
With the former mistake (buying a cheaper version than you need), you will end up either buying a more expensive version (and paying twice: Intuit won’t refund your money because you bought the wrong version) or you will have to manually calculate some of the more complex areas of your tax return as well as the end result (because TurboTax cannot consider what you are doing outside the program when the software is making its own final calculations). There have been many tax payers who bought the software only to give up and use a professional tax preparer instead.
It’s Still Your Time and Your Responsibility
Although TurboTax has built its reputation on simplifying your tax return by asking you questions, the tax code is still very, very complicated. There are no shortages of pop up “learn more” windows inside the software; however, keep in mind that these explanations are simplified, and even in their simplified state may not make more sense to you than reading the instructions from the IRS. Only you can determine how much time you want to spend researching and learning about the tax code when TurboTax poses a question to which you are not sure of the answer. Additionally, if you answer something incorrectly that alters your tax liability, the IRS still holds you solely responsible.
TurboTax also offers an online version. Use extreme caution with this version. In fact, the best advice is to avoid using it at all. Why? You will be entering the most sensitive personal and financial data that exists about you – social security number, address, income, etc. Despite any and all precautions the company takes regarding security, hacking is a real possibility when data exists “in the cloud.”
One of the biggest complaints about TurboTax is “the program won’t let me….” You may not be able to change a number or make a correction after you’ve entered data. Additionally, if you fail to update whenever prompted – and certainly before you e-file, your return could be inaccurate. It is not unusual for Congress to make last-minute changes to the tax code, even as late as December, when the software may already be available for purchase.
The common TurboTax errors that we’ve seen at Waddy Financial Services involve the complexity of childcare issues and credits when there are multiple children in the household. Also, there are certain deductible job expenses that are missed as well as improperly claiming net operating losses for business filers.
Finally, depending on the version of TurboTax you purchase, you will not have access to a live person to whom you can pose questions and ask for clarification. If you do have that access and misunderstand the answer you’re given, it could lead to an error on your return. Once again, you and only you are responsible.
When you use Waddy for your tax preparation, you’ll be working with an individual who can answer your questions and who will ask questions of you to ensure that you are capturing all of the deductions and credits to which you are entitled. Most importantly, Eric Waddy is an enrolled agent and can represent you before the IRS should you be audited. That’s a peace of mind that no software can offer.