Should you hire a tax preparer or DIY?

Here's a question from a Twitter follower who's striking out on his own:

I usually avoid tax questions, and for good reason: I'm not a CPA or tax preparer, so anything dealing with the specifics of a return, etc. is more than I'm qualified to answer. This, though, is a general question and important to answer since so many people are going through career transitions and need to make similar decisions.

Your employment status shouldn't necessarily dictate whether you do your taxes on your own or hire someone. You need to consider the complexity of your return and how confident you are that you can do it without errors that might hold up a potential refund or trigger an audit.

Even though I held only one full time job in most years, for example, I still used a CPA to file my taxes. It cost more than just using Turbo Tax, but I've never been comfortable enough with the dizzying tax forms to want to do even a basic return myself.

If you're uncomfortable with filing taxes on your own, hire a qualified CPA or tax preparer. It will save you headaches, and possibly money down the road. Thanks for the question.

Why you're probably paying too much in property taxes

When did you buy your house? If it was in the last five years, chances are you're paying too much for property taxes and it might be tough for you to appeal to have them lowered.

(I have to credit CNN for inspiring this post, since they did a report on the issue this morning). The problem is that most municipalities only schedule property tax reassessments every three to five years. What was happening five years ago? You guessed it: we were in the middle of the housing boom. So if you own, your crib is almost certainly worth less than you bought it for, provided you bought in 2007 or before. And if your property hasn't been reassessed by local authorities since you bought it, you're paying taxes on the over-inflated value of the house, not what it's currently worth.

Don't own? Don't think this doesn't affect you. The rent you pay is directly tied to your landlord's cost of ownership, which includes the mortgage and property taxes. That's going to be especially true if you're renting from a private owner and not a large management company.

So what can you do? In most places, there's a formal appeals process you can go through to get your property reassessed. Check with your local authorities for the procedures. They'll have to follow whatever those steps are to re-evaluate how much you pay. But don't expect that to happen quickly, or for your local government to be eager to lower your taxes.

The recession has hit local governments hard, and nearly half their revenues come from property taxes. I live in Shaker Heights, which has Ohio's highest property tax rate and where the city is now asking voters to approve a hike in that tax to support the schools. In short, your appeal could starve them of money right when they need it most. That means make sure you have your ducks in a row before you shoot for that appeal.

Good luck and have a great weekend.

Single mom wonders about tax withholding

With April 15 around the corner, most of us are focused on getting our returns in on time or on getting whatever refund we're owed. But right now's also a good time to think about preparing for next year's tax season by adjusting your withholding for the current year. That's what one friend asked me about recently:

I'm never quite sure how to fill out my W2 forms. I'm not sure what number I should put down for withholding, although I was told not to put down more than 2 to avoid owing the government. Also, for the state, I don't know whether it is better to claim an exemption for my dependent or myself.

My first piece of advice here is that whenever you're unsure about a tax issue, it's always best to consult with an accountant. That doesn't mean you have to go out and hire one, but most people either know someone personally or know someone who knows someone who prepares taxes for a living and asking that person for five minutes of their time costs nothing.

Now, here's my totally (non-legal, non-cpa) opinion: instead of just punching in a 0, 1 or 2 on your W-4 (that's the withholding form; the W-2 is the tax statement your employer sends you at the end of every year), read the actual instructions and follow them. the W-4 is more than a form, it's a worksheet designed to help you estimate in advance which deductions you're eligible for and to structure your withholding around those. In short, it's a way to make sure that you're keeping all the money you should keep all year long, instead of giving it to the government, which is what happens when you get a big tax refund every year.

As a single mother, it's entirely possible that you may be eligible for more than two deductions as you might qualify, for example, as head-of-household or for a child tax credit or earned income tax credit. You might also be eligible for a deduction for qualifying childcare expenses. Going through the worksheet and talking with an accountant or tax preparer might reveal that you should actually put a 3 or 4, instead of a 1 or 2.

Being concerned about owing the government is legitimate; in that case you could still do the worksheet and then subtract one or two from the number it suggests just to stay on the safe side.

Good luck.

image courtesy photoxpress

How can I save as much of my tax refund as possible?

A great question from one of my formspring followers:

As one of the fortunate folks who MAY be getting a refund, what tips would you suggest to save as much as one can of said refund?

I can't say this enough to people: getting a refund only means you've paid the government more than you should have all year long. They take that money, use it for other stuff and give it back to you months later with no interest. Great deal for them, sucks for you.

Were I you, I'd readjust my withholding to make sure you're only paying what you should and hold onto more money throughout the year. That's a better way to save because you'd get that full year to earn interest on all that money rather than getting it all at once having received no interest from the government at all.

But that won't solve the dilemma of how to save the refund you already have coming. My advice would be to start wherever you can get the biggest return. Often that's by paying down debt as opposed to putting the money into checking, savings or investments. Sounds counter intuitive but it's not.

Think about it: if you have a credit card balance that you're paying 18 percent interest on, you save more -- at least in the short term -- by paying that balance down or off than you would by putting the same amount of cash into an account or investment that returns you five percent.

If you have no credit card debt, then look to beef up your emergency savings. You should have at least three months' worth of living expenses stashed away in cash somewhere (and by somewhere I don't mean under a mattress).

If you've done both of those things, you're in great shape and might want to try this little trick that would help you save AND reduce your tax burden for next year. Open an IRA or contribute to the one you currently have by putting the money you got from this year's tax refund into that account.

When next year's taxes come around, some of that money that you put in might be tax deductible, as is the case with many IRA contributions. Check with your financial adviser of the bank handling your IRA to be sure of the rules and exact tax ramifications. Good luck.

image: Viola Joyner/photoxpress.com

Avoid these top tax mistakes

Last week I wrote about the unexpected $5,600 tax bill that's my 2010 debt burden. I did that to myself but you can avoid my mistake, and the top five mistakes that cost taxpayers each year, according to Michael Ellis, a certified public accountant and the new resident tax expert here on the Money Corner. I asked Mike to give you some tips since tax time is here.

Underpaying your taxes

As an employee:

1.) Underpaying taxes or under withholding taxes. Whether you're self-employed or an employee, your taxes are due throughout the year to the IRS and your own state. The IRS requires that taxes be paid as taxable income is earned, which is why instead of receiving your actual “gross” salary, taxpayers you get your “net", which is the amount you are entitled after state and federal taxes are withheld every pay period.

However, the amount of taxes withheld is determined by you when you fill out the W-4 with your employer. Claim too many allowances and you may underpay your taxes and find that you owe a significant amount more -- including penalties and interest for underpaying your taxes. The easiest way to fix this pitfall is to pay close attention to your W-4 when you fill it out and reassess your allowances every year to account for changes in your tax situation.

As a self employed taxpayer:

2.) If you're self-employed, you are responsible for making your own tax payments. The simplest way to do this is to make quarterly estimated tax payments to the IRS and state. Estimate your tax liability for the year based on either previous year's earnings or current year known taxable income and write quarterly checks to US Treasury and your state's revenue department. This is done with a voucher issued by IRS (1040-ES) and most state tax agencies. You may also make your payments online.

Failure to make these deposits usually results in substantial underpayment of taxes and subsequent penalties and interest. You will find yourself in a constant uphill battle to bring your tax payments up to date as you will probably still be earning taxable income as you try to catch up. The key to avoiding this issue is withholding at least 25% of every self employed check your receive in a separate account to use for paying your taxes. In some situations you may need to withhold up to 40% of your self employed income depending on your deductions and amount of income.

Missed deductions:

As a self-employed taxpayer:

3.) When self-employed, you are responsible for keeping your own records and receipts for business deductions that directly and indirectly relate to your business activity. Keep three things in mind when trying to determine what's deductible: Is the expense “ordinary” and “necessary” for your business to operate and is the expense “reasonable” in amount?

Use this criteria to be sure your expenses are deductible and you will substantially reduce your tax liability.

An easy way to avoid this problem is to always have a separate bank account for business activity that you use exclusively for business transactions. This way you will have a 12-month record of all income and expenses. Lastly, be sure to keep receipts for your business transactions and stay organized! Once the receipts get out of control, the likelihood of missed deductions increases.

Credits

4.) Tax credits are available for a variety of common expenses and situations that go unnoticed every year. Depending on your tax preparation method (tax preparer, CPA, boxed software, etc.) you may need to do a little research yourself to see what’s available.

The best way to do this is to simply Google “2009 tax credits” and you will find an abundance of tax credit-related articles that may help you plan and keep records for eligible spending like education, energy efficient property expenses, child tax credits or retirement savings credits.

Finally, if you use a qualified tax preparer, you may be able to plan for refundable credits such as the earned income credit and first time homebuyer credit by analyzing taxable income and delaying or accelerating income to help force you into eligibility. This is a tool best offered by tax professionals that may save you thousands of dollars.

Refunds

5.) The way you receive your refund may also save you money. Over the past 5 years, Refund Anticipation Loans, or RALs, have become very popular among eager taxpayers. These loans (usually issued by affiliated banks) will immediately issue your refund to you instead of waiting for the refund to be issued from the IRS or state.

But BE CAREFUL! The cost of these loans can vary widely but expect to pay between 3 percent and 5 percent interest for the benefit of a very short term loan. If you file your taxes electronically, your return could get to you in as little as a week. Meanwhile, the cost of a refund anticipation loan could be equivalent to a 97% to 2000% APR depending on the size of the refund and the actual refund dispersing date. In short, it's not worth it.

Michael C. Ellis is a CPA with Ellis and Company LLC in Germantown, Maryland.

image: Michelle Meiklejohn/freedigitalphotos.net

More money, more problems

Last year this time I started on a personal crusade to get rid of almost $9,000 in credit card debt. It took me less than a year, but I got it done, and used this blog to tell the story and challenge you all to get rid of your own burden of consumer debt.

I wish I could tell you that after you get rid of one big problem, no more pop up but we all know that's not life. And since I believe that the best way to deal with problems -- financial or otherwise -- is confronting them directly, I'm going to share my latest challenge with you. I found out last month that I owe the IRS to the tune of more than five grand. Yep, that much.

How I got there is fairly simple and all my fault: I had significant freelance income for a few years that I didn't have taxes withheld from and it caught up with me. The good thing is I'm not ignoring the problem anymore and since the credit card debt is gone I should be able to knock it out pretty quickly. The bad news is this pushes back some other goals I had for the cash I freed up by no longer having to make a credit card payment.

Since this is a new year, I'm going to use my screw up as a learning opportunity for you by doing a new series of posts on tax strategies, with the help of Michael Ellis, a certified public accountant who runs a tax preparation business in the DMV. I hope that that, along with my $0 Balance Challenge to get rid of your credit card debt, will help you all leave 2010 in far better financial shape than you came in.

image: Michelle Meiklejohn/freedigitalphotos.net

Obama lays more stimulus plans

Is the economy moving in the right direction, and if so, does it need more government help to keep it going that way?

President Obama said this morning that the economy swung further from recession toward growth than at any time in the past three decades, but that a recovery is still so feeble that more stimulus help was needed. His plan includes:

• eliminating the capital gains tax on and giving other tax breaks to small businesses;
• more spending to upgrade transportation and communication infrastructure;
• incentives for individuals to upgrade their homes to make them more energy efficient.
  

In this or any other recession, I've long said that there can be no recovery without jobs, so I'm a fan of the small business tax breaks and the infrastructure plans if they boost hiring. It'd be a failure if businesses take the tax breaks and run without hiring anyone, so hopefully there will be some safeguards in place.

I also like the infrastructure spending, but I desperately hope that includes significant funding for high-speed rail and other projects that move our transportation grid into the 21st century and away from fossil fuel dependence.

Your thoughts on the plan?

Kids get cribs in homebuyer tax credit scheme

I would love to have taken advantage of the $8,000 homebuyer tax credit the government was giving out this year. All you needed to do was make below a certain income and have not owned a home in the last three years and the credit was yours if you bought a new crib (which you were already likely to be getting at a steep discount and with a mortgage with a low rate). I fell back because I wasn't ready to buy yet but apparently, there were some pretty affluent children who were. That's right: more than 580 people under age 18 received tax credits worth more than $4 million under the program, which was meant to help legitimate first-time homebuyers and to prevent more foreclosures. Of course those homes weren't bought by the kids themselves but by their parents who wanted to get around the government's income guidelines by committing fraud. Of course that was revealed last week, as Congress is in a debate over whether to extend the credit beyond this year. Check out some of these stories on it: ABC News Wall Street Journal Bloomberg

photo: freedigitalphotos.net

I'm unemployed. Should I take money from my retirement account?

Another good question from twitter:

Don’t raid your retirement even to put food on the table when you’re out of work. Agree or disagree?

For the most part, I agree. That is if by "raid your retirement", you mean take an early withdrawal from a tax-deferred account like a 401(k) or 403(b). With a few exceptions like taking cash for a downpayment if you're a first-time homebuyer, early withdrawals from these plans do far more long-term damage than short-term good. For one, you lose the principal (the amount you take out) and thus any interest you'd make on that money over the years. That could be a substantial loss if you're in your 20s or 30s and still have two decades to pile on that interest.

Second, by taking an early withdrawal, you'll pay a heavy penalty on top of being immediately assessed taxes on money that you otherwise wouldn't pay until after you've retired, when your tax rate would be lower anyway. If you're in dire straits now, think how you'll feel when the government's tax bill comes at the end of the year.

That said, if taking money from your retirement is your only option and you're really, seriously on the verge of starving, it's probably better to not starve. But for most people who are still capable of finding some kind of way to put food on the table (have you filed unemployment or sought part-time work??), this is an absolute, positive last-resort of all last-resorts.

It's tax day

I was going to post the audio from my appearance on the Michael Eric Dyson show yesterday, but unfortunately they're not posting archived shows on the web yet.

But this is more important: today's the tax filing deadline, so if you haven't filed yet you need to get to the post office or file an extension. As is always the case, I'm a late filer so my extension paperwork was done last week.

A question for all the late filers: what was the hold up for you this year? And if you've already filed, did you owe Uncle Sam or get a rebate? If you got a refund, what did you do with the money?

It's a recession; should I stop contributing to my 401(k)

A question from a reader:

My company recently suspended its 401(k) match. They used to match up to 6 percent of employee contributions -- now they match none. I'd taken advantage of it (and built up a nice start to my retirement savings) in recent years, but after they announced the match suspension (a few weeks ago) I lowered my contribution back down to 3 percent.

So here's the thing: it's a recession. And my money is getting increasingly tight (we're not even going to TALK about the pay cut they want us to take here). I know I should be saving, but is it okay if I just eliminate my contributions all together and have that extra 3 percent stay in my paycheck? What should I be thinking about (beyond setting myself up for the future)? What do you suggest I do? I'm 25: I would like to buy a new pair of shoes or something, not just work so I can pay my bills.

I understand your concern. Most of the questions I get are about 401(k) plans and with the economy being what it is being worried makes a ton of sense.
But I can never advocate making a short-term decision when looking at a long-term problem. I'll use myself as an example: I started my first 401(k) maxing out but quickly figured out I had a cash flow problem. What I should have done is what you did: rolling back my contribution just enough to still get the company match, but no less. What I did was pull completely out for about a year or so. that was a mistake.

Why? Because when you're young, what matters is not how much money you're putting in, it's how many shares you accumulate. The principle of compound interest is at work, meaning you accumulate enough shares on a regular basis, and over the long term those shares increase in value and give you a better return on your investment.

Right now (and I've said this before), the market is on sale. Everything is cheap. And while that doesn't make every stock or mutual fund a good investment, it does mean that accumulating shares of good stocks or funds is easier to do. So even though you're worried about the economy, to an extent the turmoil in the markets works in your favor. But that's only if you keep accumulating shares by contributing to your 401(k).

There are a few questions you should ask yourself. How much money would really go back into your paycheck after taxes if you stop making your 3 percent contribution? I don't know how much you make, but it's entirely possible that the tax benefit you lose by not contributing would negate any after-tax cash you'd get back. Would it really be worth it if you'd have to pay an extra, say $75 in taxes if all you were getting back after tax was $125 each pay? Find a 401(k) calculator and do the math before you act.

Also, I know you want to live and enjoy your youth but are you sure the ONLY place you could cut back is your 401(k)? If you really want a few new pairs of shoes, why not try and shift some other discretionary spending. Cut back on cable, maybe? Fewer meals out? Not as much long-distance driving on weekends? Whatever it is, there's usually some discretionary money that you can shift around to make a difference.

Last, do you have any credit card debt? If you do, think of the money that's going to pay off whatever you bought as your discretionary spending right now. If you're still paying off some shoes you bought last year (with interest), does it really make sense to take money from your nascent nest egg to have fun with. Think of your credit card balance as the bill coming due for fun you've already had but didn't pay for.

Real economic changs is up to you, not this guy

While Barack Obama was being sworn in, the stock market was tumbling. The Dow had its biggest Inauguration Day loss ever, of more than 300 points.

When the stock market takes dips like it did yesterday it's a buying opportunity because shares are cheap. It's like shopping at the mall during a sale: you can buy twice as many pairs of shoes at half off as you could when they were full price. The difference with stocks is that when prices come back up, you can't resell the shoes and make money; with stocks you can.

But the big questions are why did the market fall so much and is that a bad sign for the economy under Obama? Reality check: no one has the answer to either question. I've heard commentators speculate everything from another round of bad news for banks to wealthy investors being worried that Obama will repeal the cozy tax cuts they got from Bush (another reality check: Obama's already said he won't immediately raise anyone's taxes and a tax cut could well be part of his stimulus package).

Either way, here's a few words from Obama's speech that everyone should take to heart if they're really interested in seeing the economy and their own finances improve:

Our economy is badly weakened, a consequence of greed and irresponsibility on the part of some, but also our collective failure to make hard choices and prepare the nation for a new age.

"Our collective failure to make hard choices". Collective, y'all. Sure there were a great many greedy folks on Wall Street and elsewhere who made bad loans and absconded with shareholders' money. But they're not the only reason the economy is where it is: If you're like me and still paying off purchases made months ago, plus interest; or if you're still spending way more than you save or invest; part of the problem rests with you, too.

Ultimately we can all wait for an Obama stimulus or the stock or housing or job markets to turn around, but if we all don't make the decision now to save more of our incomes when we get our jobs back, to only buy houses we can afford with down payments and under terms we can understand, and start saving for the retirement we know we'll have to foot (because with deficit spending, social security just won't be around), any recovery will only be shallow and temporary.

So, are you really ready for change?

A life-changing, budget-crashing, celebratory event

Sorry for the pre/post New Year's hiatuses. There's much to talk about in the economy that I'll get caught up on this week, particularly the Obama administration's proposed $300 billion tax cuts (and what there's a good chance they'll lead to higher taxes later), and a few reader questions I've gotten over the past few weeks.

But the real news, at least in my life, is that I've had a series of life-altering events that are affecting my own finances and have kept me away from blogging. Since Dec. 15, I've moved from Cincinnati to Cleveland, left my job as a reporter to become editor of Catalyst Ohio magazine and and in the process of securing custody of my 12-year-old son, Malik, moving him from Pennsylvania and enrolling him in school here in Ohio.

It goes without saying that something like this alters life dramatically in all kinds of ways, not the least of which is financially. Already, I've reconfigured my budget to account for higher spending on food, gasoline, clothes and haircuts, and my health insurance premium contribution will also increase. Some of this, though, will be offset by a decrease in my tax burden (I've ranted in the past about the ridiculousness of my own taxes).

In any event, I'll keep chronicling the financial aspects of the change here. Wish us luck.