If you're excited because you got a big refund, the reality is that you just provided the IRS with an interest-free loan
Riverwoods, IL (Vocus) January 26, 2007
Along with the first job and a first apartment, another rite of passage into adulthood happens for millions of young Americans each spring: the first time filing income tax returns by themselves. And, although hundreds of millions of Americans have made this transition over the past 90-plus year history of the modern U.S. income tax, it really has gotten more complex to do your taxes than it was even 10 years ago, according to CCH, a Wolters Kluwer business and a leading provider of tax and accounting information, software and services.
"The instruction manual alone for the Form 1040 is 84 pages, not including 60 additional pages to explain the accompanying 1040 schedules," said David Bergstein, CPA, a tax analyst for CCH CompleteTax, an online tax program for the do-it-yourself tax filer. "That's intimidating for anyone, let alone someone who's filing his taxes on his own for the first time."
Below, CCH outlines what individuals coming of income-tax age need to know as they head out on their maiden income tax voyage.
Do I need to file a tax return?
Assuming you are at least 18 years old and your 2006 gross income is at least $8,450 (or $16,900 if married filing jointly), you generally have to file an income tax return. If you are under age 18, your parents can include your income on their return. Even if you do not otherwise have to file a return, you should if you want to get a refund of any federal income tax withheld. You also should file if you are eligible for any credits, including a special federal telephone excise tax paid credit available to all eligible households for 2006.
What information do I need to start to prepare my return?
Among the key materials you should have on hand when you start working on your tax return:
- Your tax return from 2005. So, if your parents are still holding on to your records from last year, make sure you get them before you start preparing your 2006 return. Also, if you got married this year and you and your spouse are filing jointly, you'll need your spouse's tax return from last year as well.
- Your Social Security number as well as the Social Security number for your spouse or children, if applicable.
- All W-2s (the form from your employer listing your wages and taxes withheld during 2006), 1099s (statements related to dividend income, proceeds from selling mutual funds, etc., provided by your financial services institutions), and mortgage interest statements or other statements related to income such as bank or brokerage statements.
- All statements related to expenses that you hope to claim on your tax return, including receipts from charitable organizations.
- Your bank's name, your routing number and account number if you are expecting a tax refund and want it deposited directly into your bank account (all this information can be found on the front of your checks).
"You should have a single file where you keep this information, so you can check items off the list as you gather them, and then contact institutions if you have not received the information you need, for example, a W-2 from an employer or a bank statement," said Bergstein.
How should I prepare my return?
Generally, that's driven by how involved you want to be in the process, how complicated your tax situation is and how much you're willing to pay to have your tax returns completed.
The majority of individuals rely on a professional tax preparer to complete their returns. However, a growing number of individuals are using online or software programs to prepare their taxes.
"As more taxpayers become adept at using computers, most will find that online tax preparation programs, such as CompleteTax, offer a very good value," according to Bergstein. Taxpayers need to use care in evaluating the different options because some programs start with a base price, but then tack on additional costs, which can quickly add up. Whether a program provides tax preparation for both federal and state income tax returns, how the programs present information and the types of support offered also vary.
"Ultimately, shopping for a tax preparation program is like shopping for any other financial service," said Bergstein. "You need to ask: does the service meet your needs with the support you want at a price you can afford?"
Taxpayers who have complicated tax situations should seek help from a professional preparer.
"If you've just inherited a considerable amount of money, gone through a divorce or had some other major life-changing event that has an impact on your personal finances, you should speak with a professional tax preparer about how this could affect your tax situation and ways you may be able to minimize this impact," said Bergstein.
What are common mistakes I should try to avoid?
Among the most common mistakes you want to avoid are:
- Forgetting to include a Social Security number. Make sure to list all required Social Security numbers on your return, including children claimed as dependents.
- Math errors. Check your math twice as numbers that don't add up can trigger audits.
- Overlooking a statement. Accurately report all statements (W-2, 1099, 1098 forms, etc.).
- Forgetting a tax form. Include all of the necessary forms with your return.
- Not having proof of deductions. Make sure you can substantiate your deductions with receipts, logs or some other proof.
- Throwing away tax information. Keep all receipts and tax records for at least three years. After this time, the chances of being audited are reduced.
What are my filing options?
Regardless of whether you rely on a computer program or a tax professional to prepare your return, you can choose to either electronically file your return or mail a hard copy of your return to the IRS.
Increasingly, individuals are electing to e-file, and, among the fastest growing areas of e-filing are self-filers, with 20 million individuals e-filing their own 2005 returns.
E-filing is not only generally easier but it also can mean getting a refund in just two weeks compared to the six or more weeks it can take to receive a tax refund from a mailed return. If you elect to have your tax refund electronically deposited, it can be even faster.
After I file my return and pay what I owe or get my refund, am I done?
Even after you've filed your return, your work may not be done.
"If you're excited because you got a big refund, the reality is that you just provided the IRS with an interest-free loan," Bergstein said. "Talk to your employer about adjusting your withholdings. This year, you should try to return some of that refund to your savings and next year the tax laws will change so that you can automatically channel all or part of your return to a retirement account. If you don't get in the habit of spending the refund, it's a great way to painlessly build up your 401(k)."
On the flip side, if you owed a lot, you also need to adjust your withholdings appropriately to ensure you don't find yourself in a penalty situation of underpaying your taxes in future years.
About CCH CompleteTax
CCH CompleteTax, an online tax preparation and e-filing service for the do-it-yourself taxpayer, continues to set the standard when it comes to making online tax prep and e-filing easy, efficient and affordable. CompleteTax offers comprehensive support to help taxpayers through each step and allows them to prepare and e-file a federal income tax return for just $25.95 and a state income tax return for $12.95. Taxpayers can try before they buy, as CompleteTax does not require payment until a return is ready to be e-filed or printed and mailed.
About CCH, a Wolters Kluwer business
CCH, a Wolters Kluwer business (http://www.CCHGroup.com) is a leading provider of tax and accounting law information, software and services. It has served tax, accounting and business professionals and their clients since 1913. Among its market-leading products are The ProSystem fx® Office, CCH® Tax Research NetWork™, Accounting Research Manager® and the U.S. Master Tax Guide®. CCH is based in Riverwoods, Ill.
Wolters Kluwer is a leading global information services and publishing company. The company provides products and services for professionals in the health, tax, accounting, corporate, financial services, legal and regulatory, and education sectors. Wolters Kluwer has annual revenues (2005) of €3.4 billion, employs approximately 18,400 people worldwide and maintains operations across Europe, North America, and Asia Pacific. Wolters Kluwer is headquartered in Amsterdam, the Netherlands. Its shares are quoted on the Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices. For more information, visit http://www.wolterskluwer.com.