It’s January. Your W-2 and 1099 forms will be on their way to you soon, and you can begin preparing your federal tax return. You can almost taste the refund — or perhaps you’re dreading the final payment. Or, maybe it’s the paperwork that you really dread, so you’re planning to put it off until the last minute.
I’m neither an accountant nor a tax attorney, so I can’t give you financial advice, or tell you how to handle various situations. If you have a lot of questions, you need to check the IRS publications, or get yourself a professional to advise you and/or prepare your federal tax return. However, I can acquaint you with your options for preparing and filing your own return, and the paperwork you’ll need to have on hand.
When I was a child, my father would sit for hours at the kitchen table, surrounded by paperwork, in order to prepare our family’s tax return. The only other option was to hire a professional, and we couldn’t afford that.
Today, you have many more options for preparing your own federal tax return. They include: traditional paper filing, using tax preparation software to prepare and/or file your return, or preparing and filing your return using an online system.
Preparing Your Own Federal Tax Return: Paper Filing
Many people still feel more secure preparing a tax return with good old paper and pencil. Paper forms and booklets are still available if you choose to do this; check with your local library or post office.
Paper filing is also the least expensive option for many, since you don’t need to purchase software or pay a fee for online filing (however, there are free-file options available online). With paper filing, you only pay for a stamp, envelope, and making a copy of your return.
Paper filing does, however, have a higher error rate than other methods — 20 to 21 percent according to MsMoney.com. It is also likely to take more of your time.
Preparing Your Own Federal Tax Return: Tax Preparation Software
Tax preparation software has been available at least since the early 1980’s, when home computers began to be more common. There are many software packages available now; brand names include TurboTax, TaxACT, and TaxCut. Tax preparation software guides you through the entire process and checks your return for errors. It may also offer additional help and services. Tax preparation software may be purchased on CD or downloaded to your computer, and costs range from a free Basic edition of TaxACT to $89.95 for premier editions of TaxCut and TurboTax.
If you plan to purchase software for preparing your federal tax return, be sure to consider the following:
Is this the software for the correct year? The IRS changes rules each year. To avoid mistakes, you must use the tax software for the current year. You should never try to use last year’s software. Remember, the date will be for the year that just ended (it’s 2008 as I write this, so I would need the software for 2007).
Does this software have the features I need? Each package comes in different versions, ranging from basic to premier. Make sure you get the version that offers the services you really need.
Will this software work with my money management software? If you are using software to track expenses and balance your checkbook, you may be able to export this information to your tax preparation software.
Can I prepare my state tax return with this software? State returns may be part of the package, or there may be an extra charge for preparing state returns.
To use the tax preparation software, you’ll need to get all of your paperwork together just like you would for a paper return (I’ll cover this at the end of the article). The software will then take you through an interview process, asking you for basics like your name and social security number, and then asking for numbers from W-2 and other forms you may have on hand. It will also ask you questions about things like self-employment and investments, requesting more information if needed for your return.
You can stop the process of preparing your federal tax return at any time, and come back to it later. Preparing your tax return may be less stressful if you do it in smaller chunks of time.
When the interview process is finished, you will be able to review and print your return. You will then have the option of either signing and mailing in a paper return, or filing your return electronically, which results in a faster refund. Electronic filing may be included in your software package, or it may require an extra fee.
Preparing Your Own Federal Tax Return: Preparing and Filing Online
The major tax preparation software companies all offer versions of their products that are completely online. You don’t need to download or install any software — just log into a website, fill out the same type of interview that you would with the traditional software, and then print and mail or e-file. All of your federal tax return information is stored on a secure server — you can stop in the middle, log out, and come back to where you left off.
Online services are available in basic, deluxe, and premier editions, just like the traditional software, but the cost is slightly lower — ranging from $9.95 (TaxACT Deluxe) to $79.95 for premier levels. State returns may or may not be offered, and may or may not incur an extra fee.
Now, about free filing. According to the IRS website, their Free File program will be available this year to taxpayers whose 2007 adjusted gross income was less than $54,000. All you have to do is visit the Free File page and select one of their partners to file with. In order to get free filing, you must start at the IRS web page.
However, some online services are offering free filing services without income restrictions. TurboTax offers a very limited free service (they suggest using it only for very simple returns, like a 1040EZ). TaxACT is offering free standard service for any type of return. Their Deluxe service is only $9.95, and adds additional advice and technical support, as well as the ability to import last year’s information (if you used their service before).
While the fees for online services may be less than the cost of purchasing software, if you have multiple returns to prepare (like yours and your children’s), you may be better off with the software. You can prepare multiple returns for one price with the software, while online you might have to pay a separate fee for each return.
Preparing Your Own Federal Tax Return: Getting Ready
Getting all of the items you need to prepare your own federal tax return is essential to getting the maximum refund (or the lowest payment to the IRS). If you don’t have your receipts and paperwork, you won’t be able to take all of the deductions you’re entitled to. Here are some tips for getting ready to prepare your own federal tax return.
If you’re using money management software to track your expenses, check that all of your bank and credit card transactions have been entered before you print or export the information.
Make sure you have the paper receipts and/or statements to back up your expenses. Sort them into file folders by category — business expenses, volunteer expenses, medical expenses, child care expenses, etc. (organize this early in the year and your tax preparation will be much smoother) If you have a small business that will be included in your return, get those receipts ready too.
Get all of the W-2, 1099, and other tax statements you may have received together in one file folder. Make sure you’ve received everything that you should have received. W-2 forms must be mailed by January 31, so you should receive them by early February. You may also need information about stock trades, real estate transactions, IRA contributions, etc.
Download and print (or order by mail) any IRS forms and publications you may need. IRS forms and publications are available at http://www.irs.gov/formspubs/index.html.
Preparing Your Own Federal Tax Return: Getting Help
Of course, you can call on a professional for help — but you are probably preparing your own federal tax return so that you won’t have to pay the professional!
If you are using tax preparation software or an online service, professional help and advice may be included. If it is, be sure to take advantage of it.
The IRS has free publications on hundreds of tax topics; you can download or order them at http://www.irs.gov/formspubs/index.html. If you need live help, you can reach the IRS at 1-800-829-1040 to ask questions about preparing your federal tax return or about an IRS notice you have received.
Free community tax preparation assistance programs are often available, especially for low income or elderly taxpayers. Check with your local library or local social service organizations, or call the IRS at 1-800-829-1040 to find a location near you.
Preparing Your Own Federal Tax Return: Getting the Refund
If you know you’re not getting a refund, my apologies. You can skip this part. If you are, the fastest way to get your refund is to file electronically and have your refund deposited directly to your bank account. This normally takes only 10-15 days. According to William Perez of About.com, a paper check takes about seven days longer to process, not including mailing time.
Given the speed of direct deposit, don’t be in too much of a hurry to get your refund. A Refund Anticipation Loan simply isn’t worth it — you’ll lose part of your refund to interest and fees, while possibly getting your money only a week or two early. Even if you’re that desperate, it’s worth it to look into other options for covering your immediate financial needs.
Preparing Your Own Federal Tax Return: Get Started Now
You’ve read the article. All that remains is to do it. To avoid stress, start preparing your own federal tax return now.
SOURCES
Ms. Money, “Preparing Taxes: Do It Yourself”, http://www.msmoney.com/mm/planning/taxes/preparing_tax.htm
Internal Revenue Service, “Free File Home”, http://www.irs.gov/efile/article/0,,id=118986,00.html
William Perez, “What Is the Safest Way to Get a Refund”, http://taxes.about.com/od/refunds/f/safestrefund.htm
