Friday, February 6, 2015

How to File Taxes: Signs You Should NOT Pay for Tax Prep / If you can't top the standard deduction, then DIY this year

Jeff Reeves for Investor Place writes: Learning how to file taxes is a rite of passage for Americans, and almost everyone can remember their first experience with tax forms.
W-2s, 1040s, 1099s– oh my!
But figuring out how to file taxes is as much mind games as math, with the enormity of the U.S. tax code intimidating many filers. In addition to the fear that you’re missing something on your tax returns and could be open to an IRS audit, there’s also the hope that you could find some magical loophole to unlock a mammoth tax refund.
But despite the convoluted nature of the tax code and the challenge some folks have in figuring out how to file taxes, the vast majority of Americans don’t have anything to fear come tax time.
And most importantly, they certainly don’t have to pay a hundred bucks or more to a tax preparation firm simply to a simple one-page tax return using the standard Form 1040.

No Need to Itemize? Then File Yourself and Save!

There are indeed cases where complex, itemized returns make sense — and where a qualified tax professional can assuredly find you a bigger refund than you could on your own. But most folks can fill out a 1040 in an hour or two and still be sure they are getting the maximum tax return from the IRS.
If you’re unfamiliar, the process of “itemizing” means rounding up specific documentation for specific expenses that qualify you for a tax break. And while there are many items that may apply for some kind of special tax treatment, the important thing to remember is that there are also a lot of rules that limit what you can itemize – and how much.
On top of that, there is a “standard deduction” that is often bigger than any itemized deduction you could come up with. For tax year 2014, standard deduction amounts are $6,200 for single filers or those married but filing separately, $9,100 for those defined as “head of household,” and $12,400 for married taxpayers filing jointly.
To be clear, this is a no-strings-attached deduction that the IRS extends to everyone. And the only reason you would NOT take the standard deduction is if all those quirky expenses you have add up to a greater amount.
Considering the high bar set by the standard deduction, this means many folks are better off simply taking this fixed amount from the IRS.
And if you do? Well, there’s no need to itemize — and no need for extra tax forms, tracking down receipts or doing complex math.
That makes it much easier to file by yourself and save.

When You SHOULD Pay for Tax Prep

So when does it make sense to itemize? Well, there are actually some very simple signs that you could reach an amount bigger than the standard deduction.
In fact, Publication 501 from the IRS itself offers these five cases for when itemizing makes sense:
  1. You have incurred large out-of-pocket medical expenses (that is, bills YOU paid and not your insurer)
  2. You own a home and have paid a lot of mortgage interest in the last year
  3. You own or operate a business
  4. You have suffered theft or property damage
  5. You made big contributions to charity
Remember the standard deduction that applies to you as you go through this checklist. For instance, are you a wealthy single filer who donated $4,000 to charity last year and paid another $4,000 in mortgage interest? Well, you’re already over your $6,200 standard deduction right there with just these two items.
And keep in mind that tax preparation itself can be itemized and deducted on your returns. If you’re not itemizing, you don’t get the break… but if you’re already over the threshold then it’s much easier to justify the expense, because it gets knocked off your taxes anyway.
Deciding on whether it’s worth digging through all your old documents and itemizing your return starts with figuring out what your standard deduction is. And after that, check the five tips above to see if you can get above or near that amount.