Tax Prep 2016
Tax prep season is in full swing and the good news is that due to a local Washington DC holiday, the tax -filing deadline is April 18th, rather than the traditional April 15th, so you will have an extra three days. That doesn’t mean that you should dawdle. In fact, there may be a good incentive to get your act together earlier this tax season: fraud prevention. Last year the IRS acknowledged that criminals had accessed IRS.gov to steal information on nearly 400,000 taxpayers and states are also on high alert, after the filing of fraudulent returns, which prompted TurboTax to halt e-filings. While the IRS announced several measures the agency says will prevent tax fraud, filing early may be your best bet to prevent others from trying to file a return in your name. Another anti-fraud tip to remember: the IRS never initiates contact with taxpayers about their accounts through e-mail, text messages or other social media. If you get an unsolicited e-mail claiming to come from the IRS, do not open attachments or click on any links and forward it to the IRS.
Whether you prepare your own returns or engage a professional, create a file called “2015 Taxes”. In it, put last year’s return, which will be your guide to what’s missing. Be on the lookout for tax documents that are rolling in, including 1099’s and W-2s and information from bank, investment/mutual fund companies and lenders should have all sent tax documents by mid-February. If you didn't receive them, they may be available online. Gather your credit card summaries and review checking accounts for deductions, like charitable donations and job search costs.
This is the second tax season where you will need to tell the government whether or not you have health insurance. Taxpayers are not required to send the IRS information forms or other proof of health care coverage when filing their tax return. However, if you have coverage through the Marketplace and qualify for a premium tax credit, you must file a tax return with Form 1095-A to claim the credit and to reconcile any advance payments made on their behalf in 2015. A reminder, the penalty for not having health insurance has increased: it is the greater of $325 per adult or 2 percent of your taxable income. There are a number of exemptions - go to HealthCare.gov to see if you qualify.
Many of you have asked me whether or not you need to hire CPA. If you have a complicated financial life, you may want to pay up for a professional. For example, those who are self-employed may want someone who is familiar with Schedule C; who can advise on the best type of retirement plan to use; and who will let you know if you should file a Form 1099 to report any payments you made to others. Or if you had a lot of investment activity, sold property, have to file an estate tax return for someone else, or if you are one of the over 5 million taxpayers who are subject to Alternative Minimum Tax, you may want to guidance to help minimize the tax consequences. If this is the first year that you are hiring a tax preparer, make sure that he or she is legitimate -- use the IRS database to check on credentials.
Low-and moderate-income taxpayers should use the Volunteer Income Tax Assistance or and Tax Counseling for the Elderly, which is operated by the AARP Foundation’s Tax Aide Program. If eligible, you can get FREE help by visiting one of the more than 12,000 community-based tax help sites staffed by volunteers. To find the nearest site, use the IRS' VITA/TCE Site Locator.
If you are going it alone and your income is $62,000 or less, the IRS provides free tax prep software called “Free File”. If you don’t qualify, you are left with three main choices: Turbo Tax, H&R Block and Tax Act. Most tax preparers that I spoke to say that Turbo Tax may be the best bet, even though it costs more than its competitors. They cite Turbo Tax’s easier to use platform and the interface’s ability to save time and reduce errors.
Whether you prepare your own returns or hire a pro, be sure to e-file, because the IRS says that the the error rate for a paper return is about 20 percent, compared with an e-file return error rate of about one percent. And if you are due a refund, it will come faster if you e-file.
If you are worried about an audit, take heart in the fact that due to IRS budget cuts, audits of individual taxpayers fell to the lowest rate in 11 years. Less than one percent (0.84%) of individual taxpayers – just over 1.2 million individuals -- were audited in the 2015 fiscal year, the lowest level since 2004. That doesn't mean that you should go cray. The top audit red flags include: Not reporting income, a large change in income, being self-employed and taking higher-than-average deductions. And the highest earners, especially those with incomes of more than $1 million, are much more likely to be audited than everyone else. Just have plenty of back up records and documentation if you fall into one of these categories.