Three Programs, Two Ways: Test-Driving the Tax Software

Tim Gray for the New York Times writes: The makers of the better-known tax prep programs — TurboTax, H&R Block at Home and TaxAct — say that many customers, particularly younger ones, prefer Web-based programs to old-fashioned, desktop versions. Web-based programs — techies call this cloud computing — reside on remote servers that customers access via their browsers. They offer the convenience of working on a return from any Internet-connected computer and having that return stored on the software makers’ secure servers.

After spending several days running my family’s tax information through Web and desktop offerings, I learned that I’m old-school. For a decade, I’ve completed our return on my Mac desktop, and I prefer that. Desktop programs may be costlier and, in some ways, clunkier — you must buy them on CD or download them — but they also offer more flexibility.

A single purchase, for example, lets you prepare and file multiple returns, as you might want to do if you’re part of a same-sex couple or if you help family members or friends with their taxes. And you can more easily jump back and forth between the tax return and the interviews the programs use to gather information. That lets you check entries as you make them, as my wife, a C.P.A., insists upon. What you lose in convenience, you gain in control.

Each of the tax preparation programs, whether desktop or online, has strengths and shortcomings. TurboTax is the easiest to use, importing lots of financial information with just a few clicks. H&R Block promises the most reassuring help — its staff will represent you at no extra charge if you’re audited. TaxAct offers the best price. A look at each provider’s offerings shows where it excelled and stumbled in preparing my family’s 2012 return.

TurboTax

TurboTax’s maker, Intuit, has its roots in technology, not taxes, and its facility with bits and bytes shows in its wares. Its desktop and online programs make doing taxes as simple as such a time-eating task can be. If you end up cursing come tax time, the target will be the I.R.S., not your software.

I downloaded the desktop version of TurboTax Premier for $89.99 — though I learned later that I could have paid $10 less if I’d bought it on CD at my local Staples. The download took only a few seconds, as did the import of information from our 2011 return. All of the unchanged data from 2011 — names, addresses, federal ID numbers, even descriptions of business expenses — popped into the right places on the 2012 forms. Even the names of the charities we support carried over. The software also imported my wife’s W-2 and all of the information on our investments from Vanguard, T. Rowe Price and Fidelity. All I had to do was key in details for a few local banks and update the amounts we’d given to charity.

The online version of TurboTax, by contrast, didn’t import as much. My attempt to transfer our 2011 return failed, and an import from one of the fund companies went awry. I inherited an I.R.A., and the money is invested in about a half-dozen funds. Instead of creating an entry for a single 1099-R, the program created a half-dozen, which I had to combine.

Otherwise, the online program looked and worked much the same way as the desktop software. I didn’t have to pay to try it because TurboTax, like H&R Block and TaxAct, doesn’t require online users to pay until they file their returns. Had I filed with the online version of TurboTax Premier, I would have paid $49.99 for a single federal return — the price as it was discounted at the time. But TurboTax says it could rise to as much as $74.99, its list price, before April 15.

TurboTax upgraded its assistance features for this year’s tax filing season — a welcome improvement. In the past, I’d found some help links hard to locate and navigate. When I wanted to pose a question to a tax expert, I had to dig around. But not anymore. When I had a question about recording tax-exempt interest, I clicked on the help link, and TurboTax offered a choice between a call and an online chat. Within seconds, I was e-chatting with Marilyn G., and she pointed me to the right spot on the return. We were done in less than five minutes, and I paid nothing extra. I’ve had a tougher time buying jeans online. (All three companies also provide extensive tax-law explanations embedded in their programs.)

Where TurboTax irks is with its pitching of additional products and services. The online program asked if I wanted to set up an I.R.A. via Mint.com, an Intuit personal finance Web site. It encouraged me to contribute to a charity, Operation Homefront, that TurboTax supports. Both the online and desktop programs tried to sell me, for $39.95, the audit defense services of a company called TaxResources. And they both urged me to pay $10 to upgrade to TurboTax Home & Business.

Yes, businesses have to market themselves and grow, but this kind of promotion grates when you’re pondering the big bill you owe the I.R.S.

H&R Block at Home

In past years, I’ve liked H&R Block’s desktop software. It didn’t import quite as much information as TurboTax did, and occasionally didn’t provide some obscure piece of tax guidance that I could find in TurboTax. But I enjoyed its eye-pleasing, easy-to-use interface and concluded that, for most people, it could do a fine job. This year, I had problems installing it.

I tried to download the desktop version from Block’s Web site and failed — four times. I kept trying to remove any obstacles at my end. I quit my browser, Safari, and restarted. I turned off my pop-up blocker and my antivirus software. I rebooted my Mac. Nothing helped. Stymied, I trundled over to Staples, where I bought Block’s Premium software on CD for $59.99. After that 30-minute detour, I popped in the CD and set about installing the software and the latest updates. During the update installation, the program quit. I restarted. Finally, it worked.

Were the glitches my fault? Maybe. I’m no techie; my nephew who is about to turn 11 can do more with my iPhone than I can. But I was working with the same Mac and antivirus program as last year, and if any software should be idiot-proof, it’s a tax preparation program. Lots of nontechies use software to do their taxes.

After installation, Block’s desktop program was fine. As in years past, it didn’t import as much information as TurboTax, but it otherwise handled our return without problems. And I love the lime green of its interface, which calls to mind Kermit the Frog.

Block’s online offering operated just as smoothly. And because it didn’t have to be installed, it spared me a spike in blood pressure. Had I used it to file, I would have paid $49.95 for a federal return.

Block’s assistance also impresses. If you use its software to file your return, the company promises that one of its tax experts will represent you, free, if you’re audited. The chances of needing this help are slim — the I.R.S. audits less than 1 percent of individual returns, according to statistics it publishes. But even the idea of an audit brings angst, and that guarantee reassures.

TaxAct

TaxAct’s selling point is price. The desktop version of its Ultimate Bundle, which includes electronic filing of a federal and a state return, costs $21.95. TaxAct doesn’t sell a desktop version for the Mac, so in years past I had to load the software onto my wife’s PC and work on our return there. This year, I opted to try the online offering instead. I plowed through our return without difficulty, though I did have to type in more of our information because TaxAct imported less than TurboTax and Block did.

In addition to being inexpensive, TaxAct is quirky. Its maker, 2nd Story Software in Cedar Rapids, Iowa, does some things differently than its competitors. Its interview questions come in a different order, and some of them address surprising topics.

Only TaxAct, for example, asked me whether I had a conscientious objection to Social Security and had filed Form 4029 documenting it. Members of some religious denominations can be exempt from Social Security taxes, as long as they promise not to take benefits.

I didn’t need to know this, but it was a fascinating tidbit to learn — and I’m a fan of anything that relieves tedium at tax time.

Here are five ways to cut your income tax bill this season & 5 more smart ideas to get the most on your tax return

Richard Wagner for Deseret News writes: Think quickly … what is your single largest expense? For many of my clients, their largest expense is taxes. Some people try to rein in their budget and save money by clipping coupons, cutting down on the number of times eating out, buying a cheaper off-brand at the grocery store, or buying a fuel efficient vehicle.

When I was chief financial officer and we needed to save money in our corporate budget, we would look first at the largest expense items, see what we could cut there, and then work our way down through smaller expenses. A 10 percent reduction in our largest expense was much more beneficial than even a 50 percent reduction in our smallest expense.

So if taxes are one of your largest expense items, may I suggest putting real quality time and resources into reducing that expense first. I don’t suggest letting the tax tail wag the dog, but if you can reduce your largest expense item by 10 percent, it is probably worth more to you than skipping a night at the restaurant here and there.

Tax idea 1 — retirement planning

Our country needs self-sufficient retirees who can provide for themselves, and the government provides generous incentives to do so. If you don’t take advantage of these incentives — this free government money — you cannot go back later and claim these funds. We have shown many people how to save hundreds of thousands of dollars through pension planning, and several of these clients had previously been told that their pension plan contributions were already maximized.

Get a second opinion on your pension planning from a proactive planner or if you don’t have a pension plan, consider starting one. This one area could possibly be the biggest contributor to your tax savings and financial security.

One of my clients asked, “I could have been saving around $100,000 per year for the past decade?” Sadly, this was the case, and once the years have passed it is difficult or impossible to go back and get those tax dollars.

Although some pension planning ideas are available after the end of the year, the majority require action before the last day of the year. If you missed the boat on this one in 2012, there is always 2013.

Tax idea 2 — standard deduction for itemizers

Ever wonder what the standard deduction is for? Even those who pay no property tax, mortgage interest or charitable contributions still get the benefit of the standard deduction. You may be paying $12,200 in itemized deductions and the guy next door may be paying $0 in itemized deductions, yet you both get the same write-off.

Well, here is your chance to get more of your fair share of this benefit. We have had success with clients grouping all of their itemized deductions for two years into one year, and then taking the standard deduction in the other year.

Some itemized deductions are difficult to move, and in some cases you may not pick up the entire $12,200 increase in deductions, but even if you pick up two-thirds that amount and you are in the 25 percent federal and 5 percent state bracket, that could mean an additional $2,400 in your pocket every other year! Say this process takes a couple of hours of your time to implement — that is a cool $1,200/hour in tax savings … not bad!

Tax idea 3 — liberate passive losses

I had a client with several years of suspended passive losses that looked like they might never get to be deducted. This is because you can only deduct a passive loss against passive income. Here are a couple of ideas to liberate those suspended losses, either reduce the passive loss by shifting expenses to a category that can be deducted, or generate passive income.

For example, if you have a rental property that is generating losses, you could consider taking out a mortgage on your primary residence and shifting the deduction there, or purchasing one of the many investments that generate passive income and allow your suspended losses to shield that income from taxation.

Remember that you are limited in the amount of home equity interest you can deduct. Just don’t pass away with suspended passive losses, or the benefit may be lost forever.

Tax idea 4 — tax credits

A few years ago, one of my friends told me about a free electric car that you could get through tax credits. I quickly told him this follows the old axiom, “if it sounds too good to be true, it most likely is.” However, in this case my friend was right!

Many tax credits are frequently missed, including the small-business health insurance credit, education credits, and other general business credits. Some education credits are roughly equivalent to a full-ride scholarship, and some entire industries or businesses are built on tax credits. Make sure you investigate options in this area.

Tax idea 5 — tax deferred exchange

If you have rental properties or other highly appreciated assets, you may know that when you sell one of these assets you do not have to pay the tax now if you exchange the property into a “like-kind asset.” We have helped clients exchange millions of dollars of highly appreciated real estate into income-producing replacement property with no tax bill.

In addition, many replacement properties give the owner the benefit of additional depreciation deductions that reduce the amount of tax paid on that replacement property income.

So, you may ask, what happens to the gain? The gain is deferred into the replacement asset, which can be donated to charity, gifted to children or grandchildren, or simply held on to for the rest of the owner’s life. Each of these strategies may result in little or no tax. I like to think of this as harvesting fruit from the orchard rather than chopping down the tree for the temporary benefit of firewood.

Caveat — As you are improving your situation, don’t forget about Congress’ sneaky trick — the alternative minimum tax! When you see a nice “tax reduction” gift from Congress, if it is not married to a similar change in the alternative minimum tax, the new deduction may be worthless.

As you look at different scenarios, make sure you take the AMT into consideration, otherwise all your planning may be for naught. Make sure that you run your tax computation for both regular and alternative minimum tax to give greater assurance that your planning efforts will pay off.

5 more smart ideas to get the most on your tax return

Richard Wagner for Deseret News writes:A young new adviser once approached me and asked, “what book can I read this weekend to gain your tax knowledge.” I smiled as I thought of the decade of effort studying tax law in graduate school, working with tax clients at Deloitte and serving as CFO of multiple companies that forged the ability to see tax savings opportunities. I've also had people come to me with deductions that were not only in error but in my opinion bordering on tax evasion or illegal. Don't even go there, it's not worth it.  There are a plethora of people who will happily take your money and show you strategies that may equate to tax evasion that can destroy your life. I recommend taking all the available deductions to the full extent possible, without running the risk of destroying your financial future by seeking out overly aggressive or illegal strategies to save taxes now and pay dearly later.  We frequently find plenty of relatively simple tax strategies that are overlooked or underused but can be of great advantage to you. Last week, I provided five ideas to potentially save a lot of money in taxes. 
As promised, here are five more.

Tax idea 6 — get a second opinion

Sometimes we feel that with all the technology we have available to us we can just do our own tax planning. Very simple tax preparation, possibly, but tax planning? I don’t think the technology is quite there yet. We have seen new clients try to save money by doing taxes on their own, and have then shown them where they have left thousands of dollars on the table.

Sometimes we have amended previous returns and gotten thousands of dollars back, but the IRS generally allows you to go back only three years, so in some cases, thousands of dollars were left on the table in previous years, never to be recovered.

If you are dead set on preparing your own return, I recommend at least getting a second opinion from a proactive tax planning expert to see what you may have left on the table. We have clients who received more than 10 times the fee charged in tax savings, and sometimes practitioners will perform this second opinion service for free, in hopes of creating goodwill and possible future business.

Tax idea 7 — excess RMD distributions

The federal government always gets its tax! Not only does it tax earnings, but it wants to make sure that we recognize enough earnings to keep the government wheels rolling. Required minimum distributions (RMDs) must be taken each year from your IRA after age 70½, so the government can tax you on these funds.

If you don’t take enough out, the results are rather draconian. Up to 50 percent of the amount you should have taken as distribution, but didn’t, can be taken away in taxes — ouch! Many people take only what they have to, which is a good idea in many cases, but in some cases, you may want to take out more than you need.

We have instructed some clients to increase their IRA withdrawals above and beyond the amount required to be distributed via RMD because they are in a low enough tax bracket that little or none of this additional withdrawal will be taxed. They don’t have to spend this money, but it is a nice way to get it run through the tax systems at little or no tax cost so that it can be spent outside the IRA or pension plan in a later year when they may be in a higher tax bracket. This is one of those benefits you have to use or you lose it. You can’t go back and take those distributions after year end.

Tax idea 8 — harvest capital losses and defer capital gains

When it comes to taxes, gains do not necessarily equate to more income tax. Even with the new 2013 higher tax rates on capital gains for those with income in higher brackets, there are many strategies that can reduce or eliminate altogether the tax on capital gains. For example, when the market declined in 2007 and 2008 we helped clients recognize the tax losses, and now the investments have appreciated, but are in tax efficient funds so those gains have not been taxed.

One of our clients recognized more than $500,000 in losses on the client's tax return, but has actually gainedhundreds of thousands of dollars that have not been taxed.

Tax idea 9 — donate gains or step up basis

Proper tax planning and investing may generate large untaxed capital gains. How do you reduce that tax hit? Rather than donating cash to your favorite charity, donate the property that has large capital gains instead, and you may be able to avoid tax on the entire gain, permanently.

Furthermore, if you want to give money to a child or grandchild, why not transfer these highly appreciated shares to your child instead, and let the child sell the shares. In many cases, the child may pay little or no taxes on capital gains, but still receive the same economic benefit.

Consider taking advantage of the step up in basis at death by deferring these gains throughout life and then after you pass away, if properly structured, your heirs can sell the assets the next day and pay no tax!

On a side note, beware of annuities that may convert capital gains into ordinary income, thereby removing the opportunity to use these capital gains strategies. Furthermore, non-annuitized withdrawals require all gains to be distributed and taxed as ordinary income, before you get any of your original purchase amounts back. There are some instances where an annuity might make sense, just make sure you understand the tax impacts before you invest.

Tax idea 10 — tax managed investments

Be smart about your investments, pick funds that are tax managed or attempt to match gains with losses or have very low turnover so that you're not constantly generating gains that you have to pay tax on. Taxes have a tremendous negative impact on your overall return.

When you compare investments, make sure you include the tax effect of gains on dividends, interest and capital gains from schedule B and D of your return. Focus on the after tax return, because it matters more what you keep than what you earn.

People complain about the market, but over the last decade our clients have almost doubled their money in a boring, well-diversified, inexpensive portfolio with little turnover, and without ever leaving the market.

Don’t worry about the market, you cannot control the market, but you can control taxes and fees paid, so focus on the things you can control and forget about the things you can’t.

Caveat — As you are improving your situation, don’t forget about Congress’ sneaky trick — the alternative minimum tax. When you see a nice “tax reduction” gift from Congress, if it is not married to a similar change in the alternative minimum tax, the new deduction may be worthless.

As you look at different scenarios, make sure you take the AMT into consideration, otherwise all your planning may be for naught. Make sure that you run your tax computation for both regular and alternative minimum tax to give greater assurance that your planning efforts will pay off.

Outright.com Unveils New Version of iPhone App Adding Gas Mileage Tracking and Receipt Picture Storing Capabilities

Small business owners and entrepreneurs are notoriously time-crunched, and would probably spend more time dealing with one of their toughest challenges, increasing sales and revenue, if they could only save time on day-to-day administrative responsibilities.

Outright.com, the leader in bookkeeping and tax software for online sellers,
today introduced a new version of its mobile iPhone app with more features to
make it even easier for users to easily stay up-to-date on administrative and
tax-related issues. Along with automated income and expense tracking, the latest
version of the iPhone app features gas mileage tracking and receipt picture
saving and storing capabilities.

Outright.com, the web-hosted bookkeeping software specifically created for the
24 million Americans who work for themselves, delivers a streamlined, online
solution to help entrepreneurs and sole proprietors track all of their income
and expenses so they can operate more efficiently and get their taxes done
accurately.

"The world is going mobile, and America's entrepreneurs are fast-becoming major
users of mobile apps to run their businesses," said  Steven Aldrich, CEO of
Outright.com. "Outright's updated mobile app allows users to take advantage of
even more features that are available to help small businesses thrive in the
connected world. These new capabilities can help small business owners continue
to save time, reduce expenses, increase productivity, and ultimately, focus on
growing their business."

With the  new gas mileage feature, users can now track the number of miles they
travel by car with just a few simple taps. Outright will keep track of both the
total mileage and the current business reimbursement rate set by the IRS. Users
also can save a trip if they tend to frequent a particular route.  

"Gas mileage is an underutilized, but ever-relevant element of tax filings,"
Aldrich said. "We hope this new feature will make it easier for small business
owners to be prepared at the end of the year when they need to provide
documentation, enabling them to request their deserved deductions."

The app's  new receipt picture storing feature  allows users to add images ---
either new or from a photo library --- to any kind of transaction in Outright's
mobile app. The feature allows users to attach receipts to expenses to help
better prepare for tax time.

"By utilizing this feature, users will not only have a copy of the image on
their phone, but also a backed up version saved in the cloud in their Outright
account," Aldrich explained.

11 Changes You Must Know Before Filing Your Tax Return for 2012

Kelly Philips Erb, "the TaxGirl" for Forbes writes: With so many changes looming for 2013, it’s easy to forget that there were some significant tweaks to the Tax Code for 2012. Here’s a list of eleven changes to keep in mind before you file your 2012 tax return, due April 15, 2013:

1. Payroll tax credit will still affect self-employed taxpayers. The expiration of the payroll tax credit for 2013was big news – but don’t forget that the credit was still in place for 2012. While that means nothing for employees subject to withholding (no additional breaks on your federal income tax return since you’ve already received the benefit of the payroll tax credit in your withholding), those who are self-employed will receive an adjustment on your self-employment (SE) taxes when you file your federal income tax return. Your SE tax will be reduced by 2%; the SE tax rate of 12.4% is reduced to 10.4%.
2. Forms W-2 have more information this year. Under the Affordable HealthCare Act, most employers are required to report the value of health care benefits received by an employee on a 2012 federal form W-2 (a few small businesses are still exempt from reporting under the transitional relief offered by IRS). The amount will be reported in box 12 with Code DD and should include both the portion paid by the employer as well as any amount paid in by an employee. Even though it appears on a W-2, this amount remains federal income tax free for 2012.
3. Roth Conversions May Be Taxable.Taxpayers who converted or rolled over amounts to a Roth IRA in 2010 and did not elect to include the entire amount in income in 2010 may need to report half of that taxable income on their 2012 returns. Favorable tax treatment made conversions in 2010 more appealing than normal: specifically, taxpayers had a three year window to pay the taxes due. That window expires with tax year 2012.
4. Relief For Underwater Taxpayers.With record numbers of taxpayers in foreclosure, Congress enacted the Mortgage Forgiveness and Debt Relief Act of 2007 to provide limited tax relief for taxpayers facing financial difficulties. Under the Act, qualified homeowners who were forced into foreclosure or mortgage restructuring on a principal residence could exclude income of up to $2 million ($1 million for married taxpayers filing separately) on the mortgage forgiveness (the difference between the lower amount received and the higher amount owed to the mortgage company). The tax deal extended that tax relief through 2013 making it possible for taxpayers to avoid a huge tax bill on 2012 short sales.
5. Increased Standard Deduction.The amount of the standard deduction increased for all taxpayers in 2012. The rates for 2012 were:
   • Single: $5,950, up $150 from 2011
   • Married Filing Separately: $5,950, up $150 from 2011
   • Head of Household: $8,700, up $200 from 2011
   • Married Taxpayers Filing Jointly and Qualifying Widow(er): $11,900, up $300 from 2011
   This is good news for most taxpayers since two out of every three taxpayers will claim the standard deduction in 2012.
6. Increased Personal Exemption.Similarly, the value of the personal exemptions for 2012 also increased. While exemptions were worth $3,700 in 2011, they rose to $3,800 for 2012.
7. Sales Tax Deduction Still An Option.Taxpayers who itemize may deduct state income taxes paid on their federal return putting those taxpayers who live in a state without an income tax arguably at a disadvantage. A federal law which allowed taxpayers the option of choosing to deduct state income taxes paid or sales taxes paid offered temporary relief for those folks – and those who made high dollar purchases but lived in low tax states. That tax break – which debuted in 2005 – expired at the end of 2011. However, the tax deal extended that option through 2013, making it still a viable option for taxpayers in 2012.
8. Tax Breaks for Charitable Donations from IRAs Extended. The new tax deal extended the qualified charitable distribution provisions which were set to expire through 2012 and 2013. Generally, distributions from an IRA are taxable when withdrawn whether payable to an individual or a charity. However, under the special rules, a withdrawal from an IRA (other than an ongoing SIMPLE or SEP) owned by an individual who is age 70½ or over that is paid directly to a qualified charity can be excluded from gross income. Up to $100,000 of distributions be distributed – and that amount can be used to satisfy a taxpayer’s required minimum distributions (RMDs) for the year. Even better? Special rules allow taxpayers to treat donations made before February 1, 2013, as qualifying distributions for 2012.
9. Education Tax Breaks Strengthened.The American Opportunity Credit (the super-charged version of the Hope Credit) was extended through 2012 for expenses paid for tuition, certain fees and course materials for higher education. The maximum credit available is $2,500 in 2012 which includes 100% of qualifying tuition and related expenses not in excess of $2,000, plus 25% of those expenses that do not exceed $4,000. Additionally, the Lifetime Learning Credit sticks around for 2012, capped at $2,000, which applies to 20% of the first $10,000 of qualifying out-of-pocket expenses (but no double-dipping: you can’t claim both credits in the same tax year for the same student). Also getting a boost? The above-the-lineTuition and Fees Deduction was extended so that taxpayers who don’t itemize can continue to benefit.
10. Alternative Minimum Tax (AMT) Relief. The tax deal passed in January 2013 provided significant AMT relief for middle class taxpayers in 2012 – and beyond. The AMT exemption for 2012 was increased to $50,600 for single taxpayers (an increase of nearly $20,000) and $78,750 for married taxpayers filing jointly (an increase of more than $30,000). Even better? Beginning with 2012, AMT relief will be adjusted for inflation each year – no more patches!
11. Adoption Credit Survives – But Is Limited. Under the new tax deal, the adoption credit was saved. Originally, the adoption credit was scheduled to sunset at the end of 2010 but was temporarily extended as part of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010; it was also made refundable (a nonrefundable credit can reduce the amount of tax you owe to zero while a refundable credit can reduce your tax liability to zero and any remaining credit will be refunded to you). The new tax deal did extend the adoption credit permanently with one significant hit: the credit is no longer refundable. The credit was only refundable in 2010 and 2011. Taxpayers in 2012 can claim the adoption credit but it is not refundable.

Keep More of your Money this Tax Season: The Difference Between Tax Preparation and Tax Planning

From BiggerPockets.com, they write: The Difference Between Tax Preparation and Tax Planning.  Tax preparation for the March 15th or April 15th return is not considered advance tax planning. It is merely tax compliance as opposed to voluntary tax reduction planning. Though returns aren't due until April, they cover a tax year that ends Dec. 31. Some of the best tax-reduction moves really need to be done early. They often take some advance planning. Getting a head start could make you a lot happier in April, giving you a bigger refund or a smaller check to write to Uncle Sam.

A. Reduce Your Tax Liability

By taking certain steps now,  you can reduce the size of your tax bill otherwise due when you file your return. Especially this year, when Congress has inserted a handful of powerful but temporary tax breaks to get the economy moving again, you do not want to overlook any deduction or credit that you can take in 2012 to lower this year's tax bill. Managing what income you recognize or defer also can pay dividends as you focus on balancing your tax rates between 2012 and 2013, and beyond, with tax reform on the horizon.

B. Your Circumstances May Have Changed

Year-end tax planning is not only about what is happening in Congress and at the IRS. Addressing the changed circumstances in your life has always been a large part of year-end tax planning. What you planned for at the beginning of 2012 may not be what you are faced with now. Changes in your employment status, family, investments, or retirement plans raise new tax issues

• Self-employment, severance pay, sign-on bonuses, stock options, moving expenses, and COBRA health benefits, to name a few employment-related events, all present unique challenges.

• In your personal life, marriage, divorce, a larger family, and child care or eldercare expenses arising in 2012 can impact your tax situation.

• Investments, too, generally benefit from year-end tax strategies. You can take steps to balance out gains and losses. You also should take a year-end tally of dividends and interest to make certain that are paying the correct estimated tax.

C. Plan For Losses

A special word about losses, especially as this difficult year draws to a close. Matching losses with gains is not necessarily a simple task in the tax law. Different rules apply to different losses. Losses can be ordinary losses, passive losses, at-risk losses, capital losses, hobby losses, casualty losses, gambling losses, or Code Sec. 1231 losses. Knowing the differences and acting before year-end to match them correctly can mean significant tax savings.

D. Plan For Deductions

• Planning for deductions and credits at year-end can also get complex but can be equally as rewarding. Timing and qualification rules create traps and opportunities:

• Pre-paying certain expenses, such as real estate taxes or mortgage interest, do not necessarily translate into a larger deduction this year.

• Paying a spring college tuition bill in late December instead of early January, however, can impact whether you maximize the benefit of the new American Opportunity Tax Credit for both 2012 and 2013.

• Year-end charitable giving generally has always been a smart way to reduce current year taxes but strict timing rules and revised substantiation requirements for property donations cannot be overlooked.

• Homeowners should also not ignore taking advantage of the new residential energy property credit, which has a unique set of rules on qualifying expenses and deadlines for installations

TOP TEN YEAR END TAX PLANNING CHECKLIST

1. If you own a business, do you have an EIN number, operating agreement, and a separate bank account?

2. Have you recorded all the income and expenses related to the business on the business bank account? This is a huge audit item for 2012.

3. If you own investment property that was foreclosed or sold as a short sale, have you considered the impact of the cancellation of debt income on your individual income taxes? Have you calculated the loss of sale of investment property?

4. If you generated any kind of active real estate income, have you considered restructuring your business to minimize the impact of self employment taxes?

5. If you have significant real estate education expenses, have you registered a business in order to minimize your audit exposure on deducting these expenses?

6. If you have significant business expenses and already have a registered business, have you considered converting to a partnership to avoid an audit flag?

7. For homes that have been repossessed, do you know the rules on recourse vs. non-recourse debt?

8. Do you understand what your tax filing requirements are for the states where your business is registered such as annual filing, personal property tax returns, etc.?

9. If you own investment property, have you considered doing a cost-segregation study in order to increase your depreciation expense?

10. If you bought or sold property in 2012, have you considered the impact of capital gains, adding rehab expenses to the basis of the property, and whether the holding costs (mortgage interest, taxes, and insurance) are deductible in 2012?

5 Top Picks for Small Business Cloud-Based Accounting

Vangie Beal for CIO writes:  A small business doesn't need expensive software to manage a general ledger and basic business accounting tasks. Here's a look at five reasonably priced cloud services.   Small business owners don't need to purchase expensive business accounting software programs or spend hours lost in complicated reports. Any accounting software will provide the basic applications for accounting tasks, but packages designed for small office owners and manager tend to simplify the process and provide essentials that include a general ledger, the capability to create detailed invoices or view business inventory and purchase history.

Cloud accounting services—software stored and accessed online—is an attractive option for small business owners. When using cloud accounting software, IT tasks such as version upgrades and data backup are managed by the application vendor. In looking at small business accounting options, CIO.com specifically looked for applications designed to meet both the budget and the needs of a typical small office or small business. We chose five cloud accounting service options available cost $20 or less per month and are easy to use—even for small business owners with little or no experience with accounting tasks.

FreshBooks: Guided Help Boxes Make Small Business Accounting Easy

FreshBooks is a simple cloud accounting application designed to help small business owners to get organized and get paid. Since it's a hosted accounting service, you can access your business data everywhere—on a mobile device or desktop computer—and your data is secure and backed up for you.  FreshBooks features options for online payments, expense tracking, time-tracking and accounting reports and taxes. Highlights include customizing invoices, sending late payment reminders, automatic and recurring-expense tracking, managing different rates for multiple projects and profit/loss reports.  Small business owners will appreciate FreshBooks' guided step-by-step wizard and help boxes that appear each time you perform a new task, such as create a new invoice or add a new client to your records. As you familiarize yourself with FreshBooks, you can turn these helpful tips off.  FreshBooks is free for 30 days, with the basic business plan starting at $19.95 per month. There's also an add-on store where you'll find third-party applications to add new features and functionality to FreshBooks. Some apps are free—such as the Constant Contact Export and the FreshBooks Connector for Sage Peachtree (now known as Sage 50)—while others are available on a monthly subscription basis. 

QuickBooks Online Simple Start: A Good Value for Small Businesses

Today, QuickBooks is synonymous with small business accounting. While a number of standalone and hosted versions are available, QuickBooks Online Simple Start is a good value for small office accounting needs.  The online version is $12.95 per month and includes a 30-day free trial. This software makes it easy to create invoices, track sales and expenses, download banking transactions and access business data on any mobile device. Other handy features in Online Simple Start include check printing and exporting data to Microsoft Excel.

If you need a little more functionality than QuickBooks Online provides, there are a few add-ons. These include the "Payroll Bundle" to pay your employees and a merchant service app to accept debit, credit cards and checks in QuickBooks Online.

Kashoo: Professional Invoices, Simple Dashboards

Kashoo is another cloud accounting service worth a look. It's a simple accounting app for small businesses offering anytime access from an iPad or Web browser.

Features for the small business include connecting to online bank accounts and credit cards, professional invoices, simple dashboards and options to categorize income and expenses specifically for tax reporting. In addition, you can easily share your business data with your accountant online. Finally, Kashoo boasts secure, double-entry accounting for bank reconciliation and financial statements.  Kashoo is priced at $16 per month. A free version is available; however, users are limited to 20 transactions each month.

Outright: Online Accounting for Ecommerce Businesses

Outright is an easy-to-use cloud accounting system that lets small business ecommerce owners organize and keep track of sales and finances in one place. At a glance, you can see where money is going, view profit/loss statements and see who your customers are.

You can link existing accounts such as banks, credit cards, Paypal, eBay, your own Web store or FreshBooks to Outright, and you can import your existing transaction history. From then on, Outright downloads your new data each day. Another useful feature: Outright organizes all of your data into IRS-approved tax categories, potentially lowering the workload and headache level at tax time.

Small business owners on the go will appreciate the Outright iPhone app; with the mobile app, you can stay on top of your business and enter travel expenses and mileage from the road.

Outright offers a free account, but small businesses are more likely to use the Plus version ($9.95 per month), which offers more features than the free version.

Xero: Share Your Business Numbers Online

With Xero online accounting, you can share access to the latest numbers and check cash flow in real-time. Once loaded, Xero offers a dashboard to quickly view your bank balances, invoices, bills and expense claims. There's also an interactive graph to show money going in and out; you can also monitor specific data accounts from the dashboard.  One standout feature in Xero is the capability to collaborate online so small business employees can work as a team on financials. You can share your data and collaborate with your accountant and bookkeeper to get the advice you need. Xero lets you invite an unlimited number of people for free; you control what each person can see.  The invoicing system lets you customize invoices and connect with your customers through online invoicing. There are also options to create repeating invoices and schedule bill payments, and all payments, returns and credits are tracked automatically.  Pricing for Xero starts at $19 per month. Mobile apps for Apple, Android and Blackberry are available. Third-party add-ons can expand Xero functionality by incorporating CRM, inventory management, invoicing, job systems and other specialized business tasks.