TAX RETURNS: Do it yourself or not?

Software programs, such as Turbo Tax, have unequivocally made tax returns easier to execute. While tax professionals have been using them for decades, consumers weren’t heavily marketed to buy until recently. Is it wise to do your own taxes? The answer to that question depends on what you are and aren’t willing to do.

If you shake in your boots at the mention of the IRS, then filing your own return is obviously not an option. If you’re the type of person who is willing to do some research, computer confident and isn’t facing a plethora of intricate tax situations, then you may want to take a crack at it.

Coming from a tax background, I am comfortable with doing returns and ecstatic with today’s technology. However, though the software leads me through a line by line order, it does not interrogate me about potential credits and deductions my clients may be able to take. I need to know what to look for on their behalf first. Capturing personalized and legitimate calculations is still something that can’t be categorically computerized.

Most recently, one of my clients did their own return using Turbo Tax and asked me to review it before they filed. They came up with a refund under $100; I came up with a refund of several thousand from legitimate tax credits they could take but were unaware of. This is definitely one of those moments where it absolutely does pay to do your homework. But where do you start?

My first suggestion would be to Google the current year tax and see what comes up. You need to know if there are new rules and law changes which will affect the return year, as well as any which may be expiring or have been extended for credits, allowances, deductions and so forth.

You don’t have to read the tax code, but you do need to be aware of what to look for. A great place to start is the IRS Newsroom. These websites pages are surprisingly easy to navigate via short categorical listings by tax year. Generally speaking, here are a few things to keep in mind when doing your return:

Consider Credit Basics

Make sure that you examine your situation for qualification/eligibility of Earned Income Credits and Child Tax Credits.

Pay Attention to Non Recurring Items

If you are going to be the recipient of non recurring income items such as inherited annuities, make sure that you account for the possibility of having your Social Security payments taxed at a higher rate. Changes to financial accounts, stock transactions, home sales, business ownerships and other such items should also be scrutinized.

Review Retirement Plans

Utilize deductible IRA’s if qualified. This could result in what amounts to up to a 30% subsidy from the Fed’s that can be saved tax deferred toward your retirement.

Know Your State Regs

In Illinois, contributions to eligible 529 Plans for education qualify to be deducted from taxable Illinois income. In 2009, Illinois started requiring the property tax ID number to be included on returns in order to qualify for the 5% credit for property taxes paid.

Backup, Backup, Backup

Though you may be a wiz at Quicken, you still need to substantiate those account entries with back up. Keep detailed records of itemized deductions such as charitable contributions, medical expenses, business expenses, etc. With regard to record retention, the rule of thumb is 3 years; some schools of thought say 7 years is better. The statue of limitations runs out in 10.

Check Filing Status

Make sure that you use the proper filing status. The difference in tax liability between filing Single vs. Head of Household can be substantial.

These are the basics of what you need to know and consider if you choose to do your own return. I will be posting more tax articles in the coming weeks as well. Please feel free to contact me if you have a question you’d like some help with.

As of today, there are 49 days left before the 2011 filing deadline falls on April 18th. Are you prepared?

Kurt Rusch CLU, ChFC

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One Response to “TAX RETURNS: Do it yourself or not?”

  1. Top-notch idea! Your insights are very adjuvant. Thank you!

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