Taxes


By now, you should have started receiving information in the mail regarding your taxes—1099s, W-2s, etc. Hopefully you’ve been setting these aside in a safe place for when you are ready to file your 2012 taxes.

We’ve talked here before about tax preparation, and whether you should do-it-yourself or hire a tax professional to prep your return. Both options have merit; however, we are of the opinion that those people with complex tax situations should not attempt to do it themselves. Paying the cost of hiring a professional can be well worth it in complex tax situations.

Even if you have a simple tax return, you may feel more comfortable hiring out the job. Whatever situation you are in, we came across the post “Tax Prep Costs: What’s it worth to you? by guest poster Richard Barrington over at Get Rich Slowly. Barrington takes a look at an annual survey Get Rich Slowly does on the average cost of a number of tax preparation options. This is a great resource for anyone trying to decide how they want to file their 2012 returns.

Additionally, Barrington makes a few good points about hiring a tax professional:

“Getting professional help with tax preparation may be more important than ever with respect to the 2012 tax year, because the tax code wasn’t completely set until the passage of legislation to avoid the fiscal cliff. While most of the discussion of the fiscal cliff focused on tax rates for 2013, some changes, such as reinstating certain energy-efficiency tax credits, were made retroactive to 2012.

This means that the tax code for 2012 wasn’t even set when the year ended. Unless you have the time and resources to keep track of the final changes, some assistance – either via software or a paid professional – might be crucial this time around.”

  • “According to IRS statistics, more than 110 million tax refunds were issued last year, averaging $2,803 apiece. So, getting what you’re entitled to can more than pay for the cost of tax preparation. Even if you don’t get a refund, the difference between paying too much and paying the right amount can similarly outweigh the cost of paying for tax preparation.
  • The cost of making a mistake on your taxes could add more to your tax bill in penalties than you would have paid to have a professional prepare your return.
  • A paid preparer might be able to give you advice on actions you could take now to reduce your tax bill in future years, so there could be a payoff beyond just this year’s return.
  • You have to weigh the cost of having someone else prepare your taxes against the amount of time it would take you to do it. After all, your time is valuable.”

Whatever you decide, make sure you have all the relevant information gathered together before you begin.

 

  • Disclaimer: The information on this blog is not meant for specific financial advice. The ideas/opinions stated are not suited for everyone, and readers should use their own judgment in applying them in their financial lives.

Happy New Year! Now that it’s 2013, we’d thought we’d do a quick review of a post we first did in January 2012 (updated for 2013). We think everyone should take some time to review your finances at the beginning of every year.

Throughout the year, it’s easy to get distracted from your finances. Other things in life take up your time and energy, often leaving your finances in the background. As 2013 gets underway, consider setting some time aside to make sure your finances are in order. Working on the following now can help you avoid problems throughout the year when time gets away from you.

  • Review your budget – Take the time to review your budget, checking for any obvious changes that may need to be made. Research lower cost alternatives to expenses that seem to have crept up over time. Reallocate dollars that went unspent to expenses that had a shortfall. And if you don’t have a budget yet, create one!
  • Review and update your financial goals – Review the progress you made in the past year on your financial goals and add any new goals you may have. Take time to consider what your next step might be in advancing those goals. If your goals are no longer relevant in your life, think about what you want to do with any funds you may have collected for that goal.
  • Review your credit report – Help ensure that your identity is safe and that your credit report reflects accurate information. (www.annualcreditreport.com)
  • Prepare for tax filing – Even if you know you will be filing an extension, start collecting all the relevant tax information and documents as they start coming in. Ensure everything is ready and in order before you sit down to do your taxes or send the information to your tax preparer to avoid delays and mistakes. Also, if you find that you are getting a large refund or owe a large amount, take the time to review and adjust your withholding to put more money in your pocket throughout the year or ease the pain of a large tax bill next year.
  • Set up automatic bill pay – If you have not done so already, and it’s a service your bank offers, you should look into automatic bill pay. This will give you some relief during the year by paying your bills for you, so you won’t have to worry about setting aside time monthly to do so.

Obviously, doing the above will not make working on your finances during the year optional. You will still need to spend time on your finances, even if it’s just to make sure you’re avoiding mistakes and problems. But, the above steps will help set up your 2013 finances right.

 

  • Disclaimer: The information on this blog is not meant for specific financial advice. The ideas/opinions stated are not suited for everyone, and readers should use their own judgment in applying them in their financial lives.

 

As the tax filing deadline quickly approaches, how are you handling your taxes? Do you prepare and file them yourself? Have a relative or friend handle them for you? Do you hire an accountant?

 

However you handle the preparation and filing, how is it working out for you? While we don’t prepare and file taxes at our financial planning firm, we do assist some of our clients with investment related tax information. Also, we often will review their taxes after filing to ensure that nothing crucial was missed. And what we often find is that some of those who are preparing and filing their own taxes really shouldn’t be.

 

That’s not to say that everyone that files themselves shouldn’t be. It’s typically fine for someone with a relatively simple tax situation to prepare their own taxes without problems. Or if you have more than a passing knowledge about tax rules and regulations, preparing your own taxes should be fine. However, the more income you have, the more deductions, the more investments, etc, the higher likelihood that preparing your own taxes may not be a good idea.

 

The question that comes into play is how much is saving some money really worth to you? Are you spending countless hours sorting and prepping your tax info, dealing with headaches, and then still worrying at the end that you might have missed something or done something incorrectly? In our opinion, if this is how you spend every tax season, it would probably make more sense for you to hire an accountant.

 

Not that all accountants are equal either. If you are going to go down that road, make sure you find an accountant you are comfortable with and who you feel would be able to handle the level of complexity your tax situation lends.

 

With the popularity of tax software and online tax filing sites like TurboTax, “do-it-yourself” taxes are becoming more popular. However, just because it is an option for you, doesn’t mean you should utilize it, even if it will save you some money. Who knows, maybe the accountant you decide to hire will find a deduction you were missing and will pay for themselves!

We know that sounds crazy, but we’re not talking about minimizing your tax refund through credits and deductions at filing time. We’re talking about adjusting your withholding if you are consistently receiving large refunds year over year. This means that you’re likely paying the government more than you should. Why would anyone want to do that? That’s money that you could be using during the year!

 

We’re not advocating owing taxes at filing time either, but you should try to get as close to break even as you can. This is the perfect time of year to review whether you need to make any changes. As you prepare to file your 2010 return, look over your numbers. How does your withholding number look compared to what you actually owed? Do you think you need to make a change? If you’re unsure, there is information on the IRS website and a withholding calculator to help you determine.

 

Arguments for large tax refunds

There are those who would argue for large tax refunds. They may like the excitement of getting that money or feel it’s the only way they can save for that summer vacation every year. Here are some common arguments we have heard and our reasoning about why they don’t work.

 

  • It feels like free money – While it may feel that way, it certainly isn’t “free money.” It’s your money that you worked for! It’s just being given back to you later than you should have received it. If you’re withholding taxes from your paycheck at a higher rate than necessary, you may really be missing out during the year when the money could be useful (even if it’s for savings).

 

  • It’s the only way I can save – Whatever it’s for, some argue that they count on the refund as savings. And if it is a significant chunk of money, you may feel that you don’t have the discipline to save that much money on your own. But it’s completely interest free! And even though interest rates are low right now, some really is better than none! Compound interest has a major impact on saving money, which you can’t take advantage of it you are getting that money back in a refund. So, a simple way to alternatively save is to set up an automatic savings plan that takes the additional amount you might received in your paycheck due to adjusting your withholding and transferring it into a savings account the day your check is deposited. All you have to do then is not touch it. And since you were living without that money before, you should be able to continue to do so.

 

Take some time to review your withholding, even if you don’t make any changes. It may be worth knowing just how much you may be missing out on during the year.