Thursday, February 26, 2009

Prepare Your Own Taxes

Saving Money Tip #77 - Prepare Your Own Taxes. At least try to do them. It is a great lesson in how taxes are computed. And you might just find out that yours aren’t that difficult to do. By doing them yourself you may be able to save yourself hundreds of dollars. And if you are not confident in your ability to calculate your taxes properly, why not give it a try before handing them over to your tax preparer? You may come up with the same calculations as your tax preparer does. And then you know that you have the ability to do your own taxes and can do them yourself next year.

If you want to take a stab at your taxes, you can do it primarily one of two ways:
1. By hand on paper, using a calculator and your head to do the arithmetic.
2. You can use one of the popular tax preparation software programs.

Personally, I think doing them by hand the first time is a great lesson on how to do your taxes. But I’m weird that way. I like math. Most people would probably bypass the “by hand” method and go right to the electronic or computer method. If you don’t want to try them by hand, then go online and look at the different types of software available to do your taxes. The three most popular types of tax software are TurboTax, TaxCut, and TaxAct. TurboTax is the biggest tax software program. TaxCut is produced by H&R Block, and TaxAct appears to be a free tax software program for those with simple taxes. I have always used TurboTax so I will mostly talk about that program. But if you want, you should look into the others to see if they are more appropriate for you.

If your finances are relatively straightforward and simple – income from your employer and some money in a savings account and no itemized deductions – then you may be able to get away with doing the 1040EZ form. You can go to the store and buy the TurboTax (or Tax Cut) 1040EZ package or you can do any of the three online tax programs for free! If your taxes are more complicated, go into your bank's or financial institution's website to buy the TurboTax program. By going through your bank, credit union, or mutual fund company's website, you will often get a discount of at least 20% on TurboTax. Make sure you check each one you have an account with because some financial institution's discounts are better than others.

The first time you do your taxes will generally be the hardest. You have to figure out where everything goes and sometimes the IRS jargon that is used may not be very clear. If this year is the first time doing it, make sure you pull out last year’s taxes to compare it to. That will make the job much easier. After completing your taxes the first time, it becomes much even easier in the future. For the most part, you can look at which lines you completed in previous years and fill them in with updated numbers. And when doing them online most of the information is already pre-filled for you. And you will see a line-by-line comparison of this year to last year. So if something looks out of whack, then you can spot it pretty easily.

If your taxes are complicated because you own a business and have employees or have inheritances and other complicated matters, then it may be wise to use a tax preparer who is knowledgeable on which deductions to take or how to keep your taxes the lowest within the guidelines of the law. However, I still think it is a good idea to at least try doing your taxes yourself. You can start your taxes for free with Turbo Tax even if you don't follow through and file them yourself. If you have a business then you know best what is going on there so why not attempt it? But I especially think you should try doing your taxes if your income and investments are straightforward. Try taking a stab at them this year. You might find that your taxes are not complicated to do at all.

In Real Life (IRL) –
I have been doing my own taxes since one year after I graduated from college. While I was in college, my dad still claimed me as a dependent. And my first year out of college, my dad’s accountant did my taxes for me. That was the one and only year the IRS sent me a note that there was a mistake!

Since then I have done my taxes myself. I’ve had it somewhat easy because each year my taxes have become progressively more complicated. It started out with straight income and a few investments. And then progressed to calculating capital gains and losses from stock purchases and sales to itemizing deductions from mortgage interest, adoption credits, and having a small eBay business. Fortunately I was able build on the knowledge that I already had from previous years. If I started doing my taxes when they were already somewhat complicated then I may not have finished. But as mine got progressively harder, I’ve been able to learn each year as I go along.

The first year I did my taxes, I did them by hand. And because of that experience I felt like I got a full understanding of where the numbers are pulled from on the various forms. After that I started buying TurboTax in the store. I started with the EZ edition and as the years went by, I moved up to the deluxe edition. A few years ago, I started doing the TurboTax online by going through Vanguard or similar websites. This year Vanguard offered me the best package for the deluxe edition for only $19.45. By doing them online, it's not only convenient, but the refund (if you're getting one!) is often directly deposited faster than if you mail in the return. In general, my taxes are more difficult to complete than those who don’t itemize their deductions or have investments with capital gains (or losses as is mostly the case this year). But they are not as complicated as others who have their own businesses with employees.

I think there are people out there who have very simple taxes to do but are too scared to do it themselves. And they are willing to pay several hundreds of dollars for someone else to do them for them. I say this because recently someone in my Mom’s Club asked for recommendations for a tax preparer. She was looking for someone cheaper than she used in the past. She said her taxes are pretty simple and that she paid $600 last year! That sounds like an awful lot to me for simple taxes. That’s why I think everyone should at least try to do them themselves. If you have nothing complicated, TurboTax or a similar program walks you through the steps. And you can save a lot of money while you are at it. And if your tax situation is more complicated, then doing them is still a good exercise even if you don't file them yourself. Try it!

1 comment:

Donnetta said...

I just found your blog and I'm enjoying it.
Last year, the CPA made a mistake on our taxes in relation to our HSA savings. I had always wanted to try doing our own taxes, but was afraid to (part ownership in a couple businesses, etc).
Well when she did it wrong, I decided to correct it myself and use to do the taxes. I did it and then matched it to what she did and found that I *can* do our taxes! We paid her last year and hopefully it'll be the last time unless something major changes.