It’s that time of year again
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Even if we are due money, few folks like to go to the trouble – the hassle – of preparing their taxes. There’s always the worry, justified or not, we’re going to get audited or caught by the IRS.
Since a good number of us would have as much luck completing a calculus formula as completing a 1040 form, we take our taxes to certified tax preparers. And they are sure busy this time of year.
“It’s not standing room only in here like it was around the middle of January, but I’m still busy,” said Beersheba Street Income Tax Service owner Tina Redmon. “A lot of times I’ve been working till 9 o’clock at night. I’ve even come in on Saturdays and Sundays.”
This is the third tax season for Redmon, who receives some help from a part-time employee but does the bulk of tax filing herself. She estimates she has filed around 200 tax returns already and says the recurring theme she hears from her customers is they want their money back in a hurry.
“A number of people want their money back the next day,” said Redmon. “I’ve been doing a lot of e-filing and rapid refunds. I’ve had very few who mail it in and wait six to eight weeks.”
James Denning of Denning & Cantrell CPAs echoed those same sentiments. He says the recent trend has been to file taxes over the Internet, which is a trend he likes.
“I’d say 95 percent of our clients now file electronically,” said Denning. “It’s a lot better, there’s less paper work and the government acknowledges that they have received your return.”
Denning estimates that his firm has prepared around 700 tax returns already this season. He says almost all his customers have been getting money back this season.
Denning said even if a customer isn’t getting money back, it’s still important to get your taxes done early in order to do a thorough job. Then you still don’t have to mail them until the April 15 deadline.
“The more rushed you are, the less time you have to sit down and go over information with a client,” said Denning. “A lot of times I feel like customers haven’t brought in all the deductions they could have come up with if they had extra time to sit around and think about it.”
For the folks ambitious enough to fetch a calculator and do their own taxes, it’s been a fairly calm year as far as tax law changes. There are a few minor changes, however, which tax filers should realize.
• More money for your kids – If you have kids you may recall getting a $400 check from Uncle Sam last summer. That was your advance refund on the expanded child tax credit, which for the 2003 tax year is worth $1,000. That’s up from $600 the previous year. If you didn’t get your advance refund yet you can claim up to $1,000 per child, provided your income falls within certain limits.
• Tax breaks for married couples – This year there are two changes that grant tax relief for married couples who file a joint return. The first was the expansion of the 10 and 15 percent tax brackets so that a husband and wife can now earn twice as much as single filers and still fall within the limits for these rates.
The second provision boosts the standard deduction for joint filers to $9,500, twice the amount for single filers. Married couples who itemize their deductions, and therefore won’t use the standard deduction, aren’t affected by this change. Remember, tax experts say it’s generally better for married couples to file jointly.
• Lower taxes on investments – Capital gains on short-term investments (those held for less than a year) are levied at your normal income tax rate. Long-term investments held a year or more also will be taxed at lower rates.
Specifically, the 20 percent long-term capital gains rate has been cut to 15 percent. However, this rate only applies if you sold your investment after May 5, 2003. Sales prior to that date are taxed at 20 percent.
• More money for retirement – When the New Year rang in, it ushered in increased opportunities to save for retirement. Specifically, employees can now stash up to $13,000 in their 401(k) plans for 2004, or up to $16,000 if you’re over age 50.
Don’t forget you have until April 15 to put up to $3,000 into a Roth IRA or traditional IRA for your 2003 contributions. Individuals over 50 can save up to $3,500.
Tips for a quicker refund
According to the IRS, almost 77 percent, or 100 million of all tax filers, will receive refunds this tax season. The IRS says tax filers in a hurry to get their refund should file their tax returns electronically over the Internet.
The IRS has expanded its Free File program. Now in its second year, Free File is a public-private industry initiative to provide electronic tax preparation and filing for average-to-lower-income taxpayers. Expanded eligibility requirements should allow over 60 percent of tax filers to qualify for the Free File program.
According to Treasury Secretary John Snow, Free File is an easy, fast and secure way for citizens to file taxes and allows Americans to get refunds in half the time. However, last year only about 3.6 percent of the taxpayers who qualified for the Free File program used it.
But e-filing, which is filing tax returns over the Internet using tax-preparation computer software, is catching on. In 2003, almost 53 million tax returns, or 41 percent of all returns, were filed electronically.
Most of these tax returns (about 70 percent) were prepared and filed electronically by a tax professional. About 22 percent, or 12 million, were e-filed from a home computer.
The benefits of e-filing versus filing a paper tax return are faster refunds and lower error rates (less than 1 percent). The IRS even claims that taxpayers like e-filing over paper returns.
All taxpayers who e-file will receive an electronic confirmation of receipt of the tax return from the IRS. About 37 states also participate in the e-file program.
Direct deposit your refund
The IRS is also promoting direct deposit for tax refunds as a way to even further speed up the process. That message is catching on as over 44 million filers, or 44 percent, who get a refund had their refunds deposited into their bank accounts in 2003, which was a 12 percent increase over the prior year.
If you file using paper and expect a paper refund, it can take anywhere from four to six weeks to get your money. With paper filing and direct deposit, the time frame is reduced to three to four weeks. For e-filers who choose direct deposit, the cash could be available in as little as 10 days.
People who think the IRS direct deposit program is some IRS scheme to access your bank account need to think again. When you deposit a paper refund check, the IRS will receive a copy of the cancelled check with your bank’s clearing information on it, so neither way allows you to “hide” from the IRS.
Tracking your refund
Tax filers expecting refunds can also track the status on the IRS Web site. If you expect a refund and want to know when it should arrive, log on to the IRS Web site after you file, provide your Social Security number, your filing status and the exact amount of your expected tax refund.
The raw deal on Refund Anticipation Loans
Some tax preparers will offer a check on the spot in the amount of your refund, less a fee. This is never a smart idea unless you are really in a pinch for money – and need it right now!
Some companies offer an instant loan refund with the fee commensurate to the amount of your refund. At one national chain, the fee is $115 for a $2,500 refund. This translates into an interest rate of around 120 percent if you would have received your refund in two weeks.
Why pay such high interest rates? You’ll get your tax refund money anyway in a few weeks, only you’ll get more of it.
10 common tax filing mistakes
1. Making math errors
Every year, the most common mistake on tax returns is bad math. Mistakes in arithmetic or in transferring figures from one schedule to another will get you an immediate correction notice.
2. Not including Social Security numbers
Since the IRS stopped putting taxpayer Social Security numbers on tax package labels in response to privacy concerns, many taxpayers forget to write in their identification numbers. Your tax ID number is crucial because there are so many transactions – income statements, savings account interest, retirement plan contributions – keyed to this number.
3. Not signing and dating your return
For legal purposes, the IRS won’t process a return if it doesn’t have a “John Hancock.” If you prefer, file electronically using your own privately selected personal identification number. That way, you don’t have to worry about any paper signature at all.
4. Not using the preprinted label and envelope from the tax package
Use the preprinted label and envelope for your tax return, so the folks at the IRS will be able to easily and accurately read your personal information. If you’re expecting a refund, you’ll probably get it sooner if you use the label.
5. Forgetting about interest and dividends
Thanks to your Social Security number on bank and investment accounts, the IRS pretty much knows how much unearned income you made as soon as you do. If you forget to include this information on your return, the IRS examiners will let you know that you owe taxes on it, too. So don’t give the IRS the chance to send you a notice about absent income, or it could cost you penalty and interest charges.
6. Forgetting to claim charitable donations
Did you give to charitable groups last year? All types of donations – cash, clothing, household items and even cars – could be valuable tax deductions, so make sure you count them all when you file. And if you didn’t get around to dropping off your excess goods at your favorite charity in time to claim them on your current return, don’t despair. Do it now and file away your contribution records so you can use them when you file next year.
7. Not including all your forms
Don’t forget to attach your W-2 form, so the IRS can confirm the wage amount you report on your return. If it was a complicated tax year requiring a lot of additional forms to support your 1040, make sure that extra work isn’t wasted and get those forms in with your return, too.
8. Using the EZ form when a longer form could cut your taxes
If you opt for the 1040EZ way when filing your return, you could pay more taxes than you should. If your tax life is not that complicated, filling out a longer form might not take much time at all. You don’t have to fill out every line, just the ones that apply to you. And the longer 1040A and 1040 forms give you several opportunities to cut your taxable income – such as subtracting student loan interest, contributions to a deductible IRA, alimony payments made – meaning less taxes to pay.
9. Making the check out incorrectly and forgetting to sign it!
If you owe money to Uncle Sam and you choose to pay by check, make it payable to the United States Treasury, not the IRS. This change safeguards your check a bit more. Otherwise, a few pen strokes could turn “IRS” into “I.R. Smith” and your check could end up being cashed by a thief. And don’t forget to sign it. That payment-delaying technique won’t wash with the taxman and it could cost you more.
10. Using the wrong tax table
Are you positive the amount of tax you believe you owe is right? It’s easy to make a mistake reading the tax tables listed in the back of the tax return instruction booklets. The print is small, and there’s a lot of data crammed on the pages. Make sure you use the correct column for your filing status.