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Being a kid has many perks. You get summer vacations, superhero costumes are acceptable garb for most occasions and a firm belief that you’re destined to live in the White House is adorable. Plus, you don’t have to file taxes–or, if you do, your parents curse the “kiddie tax” and complete the forms for you. A 1985 New Yorker cartoon sums up the jealousy adults feel about this fact well, “Remember, son, these are your tax-free years. Make the most of them.”
But now, you’re gainfully employed –which is a good thing–and ready to undertake an adult rite of passage: filing your tax return at the last minute. (Ask your parents to tell you about the lines at the US Postal Service before the advent of online filing.) Sure, you could get an automatic six month extension by filing form 4868. But you’d still have to fill out that form and pay all you owe by April 15. The IRS takes deadlines very seriously–or at least those it imposes on taxpayers, if not itself. Moreover, if you’re an employee who has taxes withheld from your paycheck, you’re likely to be getting a refund anyway. So really, there’s no reason not to tackle your 1040 now.
Paying taxes is not fun, but if you’re prepared filing can be painless and even free.
Free, you say? In 2003, eager to head off free tax preparation by the Internal Revenue Service, a group of for-profit tax software companies,operating as the Free File Alliance, agreed to provide free filing for low and moderate income taxpayers. Each of the 14 alliance companies sets its own eligibility criteria, but anyone with 2013 adjusted gross income of $58,000 or less will be able to find at least one free federal filing options.
The IRS vets the software for security and privacy standards and offers a handy Help Me Find Free File Software tool, which uses your age, estimated adjusted gross income and home state to recommend the best software for you. There are also yes or no questions about your earned income tax credit eligibility (if you’re childless, you can’t claim this credit if you earned more than $14,340 in 2013 or were younger than 25 at the end of the year) and whether you or your spouse received military pay last year. When determining what software is right for you, keep in mind that some will prepare select state returns for free as well, while others will hit you up with a charge for state filing that can run to $40 or more.
The tax software market is dominated by Intuit’s TurboTax program, with H&R Block software a distant second. Both companies offer easy to use programs with a fair amount of explanation and produced identical results when I tested them (which, of course, they should). Free options will cover the average 20-something wage-earner’s tax filing needs. The sites can even import W-2 information for you, although it may be worth entering the information manually at least once so you understand what is on there and just how much is withheld from your paycheck. (A W-2 reports your annual wages and the amount already withheld to pay federal and state income, Social Security and Medicare taxes. Your employer sends the IRS a copy and the IRS computer matches the information on it against your 1040, so if the numbers on your W-2 are wrong, ask immediately for a corrected form. Ditto for any 1099s you’ve gotten reporting interest or miscellaneous income.)
For all the talk of “free filing,” if you’re self-employed or do a little freelancing and have to file Schedule C, you’ll likely have to shell out for a paid version of the software—-up to $99.99 list (but you can get it for $79.99 on Amazon) for the TurboTax Home & Business version. If you’re an investor, check out the offers from your broker or mutual fund company; Vanguard and Fidelity, among others, offer discounted access to TurboTax. The other catch is that both TurboTax and H&R Block charge extra to electronically prepare and file your state returns. (Insult to injury department: TurboTax also upped its prices for filing after March 21.)
A cheaper option is the third largest player in the market, TaxAct, which offers free federal filing no matter what forms you must fill out or what you earn. It charges just $17.99 for an “ultimate” version with state filing included.
As your return gets more complicated however—say you’re self-employed and pay other independent contractors or Grandma left you some shares in partnerships that generate indecipherable Schedule Ks—you may want to consider upgrading to human advice. “I would caution people,” says Clarence Kehoe, head of the tax department at accounting firm Anchin Block & Anchin, “under the old garbage in, garbage out scenario – the information you get out of that computer is going to be as good as the information you put in. You have to be careful.”
Hiring a pro can run into hundreds of dollars. “Most people who are starting out really can’t justify going to a tax preparer,” says Margaret Starner, a financial advisor with Raymond James. But for people who feel they need guidance beyond what software (or their parents) can provide she recommends going to a preparer one year, and then, after seeing how a pro does it, using that example to do it yourself. “You should understand every line on your return,’’ Starner says. (Or at least have a good enough idea that if you enter something wrong in TurboTax you’ll be able to notice when it spits errors.)
Be careful whom you hire—here are 11 questions to ask when hiring a tax preparer. Ultimately your tax return is your legal responsibility and neither “my tax pro was a dishonest idiot” or “the software didn’t ask me” is a valid excuse for excluding income or grabbing deductions and credits you’re not entitled to. (You really don’t want to mess with the IRS; you could waste the best years of your life on hold waiting to plead your case with a human being at the IRS and if you let problems fester you could be hit with tax liens that sink your credit scores for years.) On the flip side, if you don’t know what you’re doing or skip sections in the software you could miss out on a bigger refund. The IRS won’t mind, but your bank account might.
For more read Kelly Phillips Erbs’, “A Beginner’s Guide To Taxes: Do I Need To Hire A Tax Preparer Or Can I Do My Return Myself?”
Getting Organized
But we are getting a bit ahead of ourselves. Kehoe points out, “Planning for your taxes is a yearlong event, not something you do on April 14th.”Adding, “Maybe this is just me because after a little while you lose your memory, but it’s very very hard to remember what you did on January 1st a year and a half later.”
***More about tax planning and guides can be found on this Isidor Hefter blog site.
