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Don't fear your taxes

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Posted: Thursday, January 4, 2007 12:00 pm | Updated: 4:53 pm, Wed Aug 15, 2012.

By Don Bolding

Killeen Daily Herald

The deeper into the 21st century the nation gets, the more important the Internet is in computing and filing income tax returns.

It's easier than in most spheres of activity to do it the old way – with paper, pencil, stamp and envelope – but the old way is the hardest and slowest.

"The IRS Web site, irs.gov, has made filing your taxes easier than ever," said Internal Revenue spokesman Clay Sanford of Dallas. "You can find step-by-step information to prepare your return, review tax law changes, locate e-filing tax preparers by ZIP code and even track your refund."

The most commonly used forms are available, as they traditionally have been, at IRS service centers, post offices and municipal libraries; taxpayers can file handwritten paper returns as soon as they get all needed documents.

The IRS begins receiving electronically filed returns Jan. 12, but most people don't get their W-2s and 1099s until the end of January because employers and financial institutions have until Jan. 31 to issue them. The W-2 is a statement of earnings for an employee.

Various forms of 1099s certify Social Security income and retirement income from other sources, interest, dividends and self-employment income from steady clients or customers.

But all forms, instructions and other literature are available for download at irs.gov, as well as links to commercial tax preparation companies that will file returns the taxpayer prepares on the computer free of charge.

Different companies have different criteria for which returns they will file for free, but generally, most people or couples who made less than $52,000 in 2006 can qualify.

The links can still be used to file returns for a fee, if needed, and most firms will offer refund anticipation loans and other rapid-response products and possibly other financial services. These will not be free.

The IRS Web site asks people to look for the "free file" program, starting Jan. 16.

Other options for computing returns include software packages available at electronics and discount stores, and storefront offices where preparers will take information and prepare a return for a taxpayer, always for a fee.

About these, Sanford said, "Make sure you ask about fees, get references and determine if the preparer's credentials meet your needs. Everyone is responsible for what's placed on their tax return whether they complete it themselves or if it's done by a paid tax preparer."

The bread and butter of most such firms is the refund anticipation loan, which a collaborating bank will issue to a qualifying customer. Lines form out the door the first couple of weeks in February with people with simple returns who qualify for the Earned Income Tax Credit, which can add several thousand dollars to the refunds of the working poor.

The major nationwide firms will guide honest customers through various legal and administrative pitfalls that can come with these loans, and they have extensive in-service training that qualifies some preparers to work with very complex returns.

Big franchises often retain certified public accountants and enrolled agents, licensed by the IRS to represent taxpayers, to trouble-shoot difficult problems. Their software for individual returns can handle sole-ownership businesses.

But while some small independent preparers are honest experts, some are marginally competent, some will cheat on returns for customers and some will vastly overcharge. Experts urge taxpayers to check references, look at qualifications and price-shop.

Sanford advised the public to look at IRS educational materials to recognize illegal schemes to avoid taxes. Even honest mistakes can be expensive, and willful participation in tax fraud can bring years in jail.

Certified public accountants are usually the best bet for businesses and often for individuals with the most complex returns.

The American Association of Retired Persons sets up locations with trained volunteers to help with returns starting Feb. 1.

Sanford said about 25 percent of Texas' 9.4 million filers in 2004 claimed itemized deductions, which involves preparing a Schedule A and probably other forms, complicating the return but reducing taxable income beyond what the standard deduction can do.

Among the usual qualifying items are large out-of-pocket medical and dental expenses and home mortgage interest and real estate taxes. Once the line is crossed (see box), then all sorts of expenses can increase the deduction. But everything has to be documented.

Sanford stressed that people visiting irs.gov should use the "EITC Assistant" to determine eligibility for the Earned Income Tax Credit. "It shows how to determine your filing status and how to determine if your children meet the definition of qualifying children," he said.

About company retirement savings accounts, he said, "For 2006, the limit on elective deferrals under a salary reduction agreement that can be contributed to a qualified plan increases to $15,000, or $20,000 for persons 50 or older.

For Savings Incentive Match Plans for Employees, the limit remains at $10,000 but increases to $14,500 for people 50 or over.

"Also, for the 2006 tax year, taxpayers may make gifts of up to $12,000 per person and exclude the amount from the gift tax. Those receiving the gifts are not required to pay taxes on the amount received."

He advised using the Web site's "Withholding Calculator" to adjust the amount withheld from paychecks. "You can put some money back in your pocket if too much is being withheld, but if not enough is, you can owe taxes at the end of the year."

The "Where's My Refund?" tab can track a current-year refund and help find one from previous years.

Sanford urged taxpayers to click on the blue e-file logo on irs.gov to learn about electronic filing, saying 73 million people e-filed last year, 20 million from home computers. The process reduces the burden on the IRS and therefore its own use of tax dollars and speeds the processing of returns.

Contact Don Bolding at dbolding@kdhnews.com

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