Tuesday, August 26, 2008

So, you know you need to file your tax returns, but how complicated will filing be?

Let's keep it simple. In order to accurately complete your tax returns, you first need to be aware that there are different forms you must use. These forms, in the tax world, are known as "Schedules", and there are a few to choose from. For example, you would choose a "Schedule A" to deduct your mortgage interest or medical expenses. A "Schedule D" should be used to list your stock transactions. For many, even this information can be confusing. I have a colleague who was an IRS Revenue Agent (or auditor) and his opinion is that individuals should not try to complete their returns on their own. The same mistakes tend to be made time and time again. In my experience, people neglect to include invalid dependants, forget to include IRA/401K distribution, or even omit their 1099-misc income or business income. How can you make sure you avoid common errors such as these? My suggestion would be to have a professional complete your return. It may cost more to let someone else take over, but the peace of mind that you will gain, knowing it will be correct and complete, will make it worth it.

Now, I have dealt with clients who begin the tax return process assuming it is as easy as plugging the information into a tax program, but they often discover that's not the case. There are "details" that are unknown that can end up costing you significantly in the end. For example, a day trader, who buys and sells stocks on a regular basis, may not be aware that if he/she doesn't enter their purchase price on the "Schedule D" of the stocks they sell, then the IRS will count the entire amount as income for them, which in turn will greatly increase their taxable income for the year, and create a higher tax bill. In another example we'll use a rental property owner. Let's say you own three rental properties that you have made income from during the year, then in July one of your tenants decides to purchase your home. What Schedules will you need? In this situation, you would have to use a "Schedule E" for your rental property income, and then also a "Schedule D" for capitals gain income/loss.

Needless to say, different situations require their own unique filing process. For most people, filling out a tax return, and doing it right, can be extremely complex. It typically requires a lot more personal attention than computer software can provide. My point is this, seek professional help for your tax returns and I promise, you will at least save the money you would spend on Tylenol for your migraine...