A taxing time

guest commentary by David Potts

By now all of your important tax documents should have arrived in the mail. That is unless you are an owner of a partnership or subchapter S corporation or the beneficiary of an estate or trust and you must wait until that entity’s tax return is completed.

Whatever your motivation you have decided you’re up for the challenge. The challenge of preparing your own income tax returns. After all, how hard could it be?

Where do you start? For many people it is just a matter of logging into Turbotax and answering the program’s interview questions and voila, your refund is on the way. And if all your income is from working as an employee and it’s reported on a W-2, then it probably is that simple.

But what if you qualify to itemize your deductions? What if you paid college tuition? What if you had a distribution from your IRA? No problem. TurboTax guarantees that their tax calculations are 100% accurate. But a note of caution; they’re guaranteeing the math is correct, not that you understand and answer their questions correctly.

Over the years I’ve seen many taxpayers cost themselves money while using TurboTax and it wasn’t TurboTax’s fault. It was their fault because they didn’t take a little extra time to understand the tax laws that affected their income taxes and therefore they didn’t answer the questions properly. If you plan to prepare your own income taxes this year, by all means, use TurboTax. It’s great software. But take a little time to understand the tax laws behind the questions. Here are a few tips to follow when preparing your own income taxes this year.

If you’re going to prepare your own income tax returns then your first stop should be the IRS website. Find “Publication 17 — Your Federal Income Tax For Individuals.” Publication 17 is well written and easy for most people to understand. It has 269 pages excluding the index, but don’t let that intimidate you. It’s a reference manual. When you open it with Adobe Reader a table of contents can be seen on the left. Select and read the topic that’s applicable to you.

Normally I would advise you to focus on the sections that are titled “What’s New”. Not this year. This year, BEWARE. Publication 17 is already out of date. It doesn’t reflect the changes made by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 signed into law December 17, 2010. For example, page 1 of Publication 17 lists expired tax benefits including “the deduction for educator expenses in figuring AGI”, but the Tax Relief Act extended this deduction through 2010 and 2011.

Does that mean Publication 17 is worthless? No, it still explains the tax laws well. Just remember to read the “Form 1040 Instructions” in tandem with Publication 17. The Form 1040 Instructions are up to date and include the changes made by the Tax Relief Act of 2010. Focus on the “What’s New” section of these instructions to identify the tax law changes that affect 2010.

If you are a conspiracy theorists and don’t trust the Government’s publications, there are commercial tax guides available. J.K. Lasser’s Your Income Tax 2011 and Ernst and Young Tax Guide 2011 are generally available at most stores that sell books, but again, use caution. The published books don’t include the tax law changes made by the Tax Relief Act either. However, they publishers provide websites where updates to these guides are available.

What if a person was to spend a little bit of time organizing his income tax information, logging into TurboTax, perusing publication 17 or another tax preparation guide, and after 15 or 30 minutes became stressed or confused and shrank from the challenge of preparing his or her own income tax returns. What’s their next option? It is of course, to get somebody else to prepare your tax returns. And depending on your situation, you might be able to get it prepared for you free!

The Internal Revenue Service administers the Volunteer Income Tax Assistance program or VITA for short. If you make less than $50,000 you might qualify to have trained and certified volunteers from various organizations prepare your income tax returns for free. The IRS publishes a list of VITA sites by state and county on the IRS website. This is a great option for a lot of taxpayers. I have a friend that prepares tax returns for VITA at the RSVP location at 401 N. 13th St. in Fort Smith. Go by and ask if Floyd is working. I’ll vouch for him.

However, there are times when it would be downright foolish for a person to prepare his or her own income tax return. Most successful small business owners, professionals, and investors are money ahead when they engage a certified public accountant to prepare their income tax returns. The time and frustration a CPA saves you along with his or her experience and knowledge of the Internal Revenue Code and the IRS will make you money, not cost you. It’s kind of like a rebate. You pay your CPA professional fees, the U.S. Treasury takes a lot less of your money for income taxes. You just have to exercise good judgment and know when to ask for help.

But for you committed do-it-your-selfers, those of you who never need to ask for help: Go for it. Prepare your own income tax returns. No guts, no glory. What do you have to lose? Your time? Your money? Don’t worry about making a mistake. The IRS will let you know if you did something wrong!

About Potts
David Potts is a certified public accountant also accredited in business valuation. Owner of Potts & Company, Certified Public Accountants for more than 25 years, his practice focuses on small and medium size businesses and their owners in the areas of taxation, accounting and bookkeeping, business valuation and business advisory services. He is a Fort Smith native and a graduate of the University of Arkansas. You can follow more of his thoughts at ThePottsReport.com. Although every effort is made to provide you accurate and timely tax information, it is general in nature and not specific to your facts and circumstances. Consult a qualified tax professional to discuss your particular case.

Also, feel free to e-mail topic suggestions or questions to [email protected]