Filing Income Taxes

Income taxes are one of our largest expenses, second only to housing for most American families. Depending on where you live and your income level, your income taxes could be 15 percent to 45 percent of your annual income. Most of it is money you never get to see: It's usually deducted from your paycheck before you ever get to touch it.

Despite this significant expense, for many people "tax planning" happens too late. The only time most people consider their taxes is at the time they fill out the annual return. Consequently, because tax laws are complicated, many people pay more taxes than they are required to. People who don't hire a tax preparer or bone up on basic tax rules may end up overpaying their taxes.


In this article, we'll provide tax tips and suggestions that will take you from filing your taxes to deciding what to do with that rebate check.

Organizing Your Tax Information

Taxes are one of life's certainties, but you can make tax time less stressful and costly by staying organized and informed.
Copyright 2008 HowStuffWorks

Here are some basic tax strategies that you can use to save money:

Keep organized records. Whether you complete your tax return yourself or hire someone, you will be ahead of the game if you keep neat, organized records all year long. If you do prepare your own taxes, you will save yourself time and headaches. But you may overlook a large deduction if your receipts are unorganized.


If you hire a tax preparer, be sure to schedule an appointment early in the year. Your preparer can help you set up a bookkeeping system. Expect to pay more to have your tax return completed if you dump off a grocery bag full of receipts that are not organized at all.

Educate yourself. One way to learn more about taxes is to take a continuing education course on tax preparation at your local university or community college. The tuition will be modest, (maybe even free if you are over the age of 55). The information will be up to date, and you can ask the instructor any questions you have. Even if you do not think you can complete your entire tax return yourself, you will learn some money-saving ideas relating to your particular circumstances that you can pass along to your tax preparer.

Try tax preparation software. If you have a computer, one of the tax software programs might make the job easier and would be cheaper than going to a CPA. Most tax programs cost less than $50 and cover basic tax return situations. You may also qualify to file your taxes for free using the IRS' freefile program.

Don't rely on the IRS toll-free number for information. Many times the information they give you will not be accurate. If you do follow their advice, be sure to write down when you called, who you talked to, and exactly what the person said. If you can prove you got wrong information from the IRS, you won't pay a penalty, but you will still be liable for any additional taxes owed.

You're almost ready to file your taxes. Read on for more helpful tips.


Tax Returns and Deductions

Consider filing separate returns. If you are married, don't automatically assume that you will pay the least tax with a joint return. If you are a two-income family and one of you has high medical ex­penses, you may be able to save a substantial amount of money by filing separately. Always calculate it both ways and see which results in the least amount of taxes.

Shift income. If you receive investment income or you have a capital gain to declare, you may want to check out the rules on shifting or transferring some of the income or gain to your children. You may be able to save some taxes by having it taxed at their rate--probably 15 percent -- instead of your higher rate. Remember, honesty is the best policy.


Always take all the deductions you are legally allowed. Taking deductions that you are not entitled to can be very dangerous to your pocketbook. If you get audited down the road, you will owe the additional tax, penalties, and tons of interest. The audit could occur when you can least afford it.

Taxes can be complicated for everyone, so how do you know if you really need a professional tax preparer? Even if you use a professional, you're still responsible for making sure he or she has all the relevant information about your financial situation. On the next page, find out when you might need an accountant.


Tax Preparation

It's a good idea to familiarize yourself with your income tax paperwork, because you'll be held responsible for any mistakes, including those made by a tax preparer.
Copyright 2008 HowStuffWorks

Seek professional help. If you itemize deductions, are self-employed, sold a house, or have any other special schedules to fill out, you may benefit by hiring a certified public accountant (CPA) or tax preparer to complete your tax return. The preparer could save you more money in taxes than the fee charged. A good professional tax preparer spends hundreds of hours working on tax returns and attending seminars and continuing education courses. If you do hire someone to fill out your return, be sure that the preparer has other clients in situations similar to yours. That will tell you that he or she has the background to know how to find all the deductions you are allowed.

Seek knowledge. No one knows your special tax circumstances better than you do. Don't rely on your tax preparer to be a mind reader. You must become aware of the kind of information you need to pass on. Ask questions and be sure to mention any financial changes that have occurred over the year. Things that seem insignificant might have a big impact on the taxes you may owe.


Negotiate the fee. Be sure to ask the tax preparer about ways to keep the fee as low as possible, and negotiate the fee up front. You probably will not be able to negotiate the fee with a large firm or a tax preparation chain, but a local CPA firm or bookkeeping service might be willing to negotiate a lower rate.

If you have your taxes done by a tax preparation service, think twice before you opt for the "instant refund" loan the service provides. When you put the numbers to these loans, the annual interest can translate into a whopping 50 to 100 percent.

Review your return. Always check the return for accuracy before you mail it or submit it electronically to the IRS.

Recheck the math. Make sure all your dependents' social security numbers are listed. If you file a joint return, be sure that both of you sign the return. Send your return via certified mail. Certified mail costs money, but anything can happen. Keep the receipt with your copy of your return. If the government claims that you were late with your return and wants to charge you interest, you have proof you sent it in on time.

Read on to find out what you should do after you file, whether you receive a refund or owe a balance to the IRS.


Tax Refunds and Audits

Respond immediately if you receive a notice from the IRS. Interest and penalties will be added to your account from day one. If you wait long enough, your wages will be garnished or your bank accounts will be frozen. Call the number listed on the notice and find out what the problem is. If you did make an error on your tax return and you do not have enough money to pay the entire amount due, work out a payment plan. Remember, the longer you draw out the payments the more interest you will have to pay, so it is to your advantage to pay off the taxes as soon as possible.

Try to break even. Getting a large tax refund each year might seem like a good way to force yourself to save money. But who wants a savings account that earns zero interest and that you can't get to in an emergency? If you get a large refund every year, go to your personnel office and change your withholding. Then set up a savings account and have the extra money deposited directly into the savings account. By the end of the year, you will have the amount of your tax refund -- plus interest.


By the end of the year, you'll have the amount of your tax refund -- plus interest. For more tax information and additional links, check out the next page.

*This article was adapted from "Inside Info: The Secrets You Should Know" and "The Frugal Almanac," both published by Publications International, Ltd.


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*This article was adapted from "Inside Info: The Secrets You Should Know" and "The Frugal Almanac," both published by Publications International, Ltd.