One of my friends recently asked the following question about adjusting the withholding on his paycheck in order to minimize overpaying his income tax:

We recently just bought a house. We’ve never itemized my taxes before because we didn’t have enough to come close to the standard deduction. Now, however, clearly we will. We’ll have approximately $30k in write-off’s between the property tax and mortgage interest. The difference between this and the standard deduction (~$10k) is ~$20k. Using the 25% tax bracket, this means we’ll get back $5k in taxes (compared to last year). How much should I adjust my w4 exemptions so that we can get this money in our pay checks instead of a big check from the fed’s at the end of the year?

The gist of the scenario is that the difference between this year and last year is that this year he will be able to include $30,000 in itemized deductions rather than take the $10,000 from the standard deduction. How should he adjust his Form W-4 exemptions so that he doesn’t unnecessarily overpay his taxes through withholding?

The simple, for me, answer is to turn to the IRS’s 2008 Withholding Calculator because that’s the official answer (but that would be too easy!). The “rule of thumb” is that each of the exemptions on your W-4 represents a dependent deduction and each dependent deduction is worth approximately $3,400. The purpose of the W-4 was so that you could indicate how many dependent children you had and so you can repurpose this to cover all the other deductions you have on a basis of ~$3,400 per exemption. Based on the rule of thumb, the answer appears to be 9 exemptions.

Now comes the question of whether the couple both puts 9 or if one person puts 9 and the other puts 1. Since you’re adjusting your total tax liability between two people, I believe the answer is that one person puts 9 and the other puts in 1 but I’m not 100% sure. If both were to claim 9 exemptions (total of 18!), you would double counting and thus underpaying by 9 exemption’s worth. I’m not a tax expert but a few readers are, so hopefully someone can chime in on whether this is correct.

Ultimately, to be 100% sure, I’d check the IRS 2008 Withholding Calculator and then speak to a professional tax accountant.

Sometimes you do your taxes on April 14th or 15th and you discover you owe the IRS (you actually owe the United States Treasury, the IRS is just there to bust your kneecaps if you don’t) more than what you can get your hands on in one day. Maybe you put too many exemptions or you underpaid your estimated taxes, whatever the case, you’re in a pickle and you need some help. The IRS sympathizes. They aren’t heartless automatons there just to suck the marrow from your bones, they’re willing to lend you a hand and let you pay off what you owe in installments. Here how you set that up. (and investigate why you had this shortfall so you don’t have to do it again next year!)

You have two options in setting up an installment agreement, through an online payment agreement webapp or through the telephone. Before you set up the installment agreement, you have to do some homework and make sure you can pay the one-time setup fees.

How Much?

To set up the payment plan, you have to first figure out how much you owe. If you don’t know, you can call the IRS to request copies of your tax returns so you can figure that out. The total amount should be the original tax you owe, plus penalties and interest. It may help to get an accountant or someone experienced with this type of math to help you out.

Request the Plan

After you have the amount, you can set up the installment plan in one of two ways:

• Call the IRS at 1-800-829-1040.
• Use the Online Payment Agreement Application. You can only use this if you owe less than $25,000. If you owe more, you have to call.

There is the third option of filling out Form 9465: Installment Agreement Request and mailing it in but that takes longer, every day that passes is more interest and penalties tacked on. It’s better to use the online or call options.

Fees

According to Form 9465, there is a one-time fee based on how you plan on paying:

• Direct debit installment agreement - $52
• Payroll deduction installment agreement - $105
• Online payment agreement - $105

Rejection!

There is a possibility the IRS could request your request for an installment agreement but they do say that if you owe less than $10,000 and you 1) have timely filed all income tax returns and paid any income tax due, and have not entered into an installment plan in the last five years, and 2) the IRS determines you can’t pay the tax owed in full and you prove it, and 3) you agree to pay the full amount you owe within 3 years and comply with tax laws; then you will be okay.

Basically, it sounds like as long as you aren’t screwing with the IRS, have your ducks in a row, and aren’t trying to pull one over on them, they’ll approve it.

(Photo by alykat)

SVB had a post on Thursday about how she would be outsourcing tax preparation this year, beginning with the motivations and then an essential questionnaire you need to go through to find the right professional to work with. I won’t go into how you select the right accountant or accounting firm, she does a great job, but I will go into why I considered and opted to outsource tax preparation.

Several years ago, a friend told me that she paid H&R Block $350 to prepare her taxes. I was shocked. I felt her tax situation was straightforward (she owned a home, had one income, nothing else noteworthy that I was aware of) but she was drawn into the idea that it was a professional doing her taxes and that she was safe against the horrors of an audit. To me, $350 is too much for tax preparation for her situation but she was buying “peace of mine,” and there are many cases where I’d overpay for peace of mind.

That being said, I’m still pretty stubborn, something my beautiful wife can attest to, and as a typical alpha male I feel like I need to be in control and do things myself. I’m also a personal finance blogger. I feel that I should be well versed in the arts of personal finance and that I should be doing my own taxes. Lastly, I’m frugal, why would I paid hundreds of dollars to do something I can do on TurboTax for a few bucks? I will be outsourcing tax preparation this year.

The motivations for outsourcing tax preparation were very much like my friend’s. The biggest concern is an audit. It’s my belief that audits are only absolutely horrible (they’re still horrible and a headache, it’s a matter of severity) for people who are disorganized or not 100% honest on tax returns. So, since I’m 100% honest, I’ve outsourced accounting services for the business in order to handle the disorganized part. I may be organized compared to normal people, but I’m not organized compared to accountants or IRS agent! Tax preparation is a component of the service the CPA provides and one I’m happy to take advantage of.

There comes a time when you have to recognize your limitations and let professionals do the job. For each person, that’s different for different jobs. I may be well-read about tax information but I’m certainly not qualified, or interested in, managing the day to day accounting affairs of any business, let alone mine. When it comes to replacing a roof, something that will happen this summer, I will gladly outsource that job unless we have roofers in the area who think we can do it ourselves (that’s the frugal in me coming out, not the stubborn!).

(Photo by prima seadiva)

Procrastination usually doesn’t usually have concrete and actual added costs in your personal life. You put off rolling over an IRA or changing your 401(k) contribution, you don’t feel any costs (you may lose potential gains or avoid potential losses, but it’s never that concrete) However, in the case of tax preparation there is a real cost to putting it off.

TurboTax does this every year (as long as I can remember) so you have absolutely no excuse. Silver lining finders will say that they incentivize people to file their taxes early by increasing the cost to file two weeks or so before April 15th, cynics will say that TurboTax is gouging people. Either way, it costs you five bucks more you lazy bum. The new prices are (price doesn’t include state filing):

• Free: Still Free!
• Deluxe: $49.95
• Premier: $74.95
• Home & Business: $99.95

Fortunately, you can’t increase the price of FREE, so their Free Edition is still free (here’s the full rundown on all the free tax filing resources).

Doing your taxes is unavoidable. Almost everyone has to do it (you should file even if you don’t have to this year because of the economic stimulus check) and everyone has to do it by April 15th. In fact, since most people get a refund, you have a vested financial interest in doing your taxes as early as possible so you can get your own money back as soon as possible; so why do people avoid it? They avoid it because it’s a pain in the you-know-what.

Think of all the other things that you wouldn’t do willingly but that you still do because it’s good for you… like get up early in the morning to go to a meeting at work. Like run on the treadmill to shed a few pounds. Like not eat double stuffed Oreos because they make your butt look fat. Like wake up early to dress your kids and make sure they eat breakfast. Like go with your spouse to Bass Pro Shops/Gander Mountain (or Ann Taylor/Macy’s/MAC). Like watching The Little Mermaid every single day for two months because your daughter loves Ariel and Sebastian.

See how many things we do that we don’t like to? (or don’t do but would love to?) Taxes are like those, except instead of a spouse/child getting upset, it’s Uncle Sam and he holds a serious grudge. If you were going to do your taxes on TurboTax but didn’t because you were putting it off, it’s too late; just don’t make this mistake next year! There’s no reason why you should give TurboTax your money when you can use it to buy your kid a new Disney movie to love every single day for two months.

(by the way, you have less than two weeks left!)

(Photo by parl)

Amy asked a very good question in the comments of my stimulus package post:

Please post information on if you had direct deposit for your tax return but have since closed the account how do you go about removing that information and getting on the mailing list?

This is particularly important for folks waiting on the 2008 tax stimulus check since they may have heard that you can get your stimulus check faster if the IRS has your direct deposit information on file. But, what happens if your direct deposit information was input wrong, changed, or made no longer valid between the time you file and the time the IRS tries to make the deposit? The IRS will send you a check, according to Publication 17.

Unfortunately, there appears to be no way to change that information after you have filed.

While this may be disconcerting for some, even if such a form existed, it likely wouldn’t be processed in time to make a difference anyway. By the time they processed the form, the IRS would’ve tried direct depositing to the old account, failed, and mailed you a check anyway. Sadly, they don’t have a very fast response time on anything.

Have you been awaiting word on when you expect your stimulus package? First, check the stimulus calculator located near the end of my original 2008 Stimulus Package Explained article. If you are eligible for a check, when you can expect it will depend on the last two digits of your social security number.

If they have your direct deposit information available on file, then you follow this schedule:

• 00 - 20: May 2
• 21 - 75: May 9
• 76 - 99: May 16

If they do not have your direct deposit information, then this is your schedule:

• 00 - 09: May 16
• 10 - 18: May 23
• 19 - 25: May 30
• 26 - 38: June 6
• 39 - 51: June 13
• 52 - 63: June 20
• 64 - 75: June 27
• 76 - 87: July 4
• 88 - 99: July 11

So if your social security number is 000-00-0034 then you will receive the stimulus package amount on May 9th if you have direct deposit and you will receive the stimulus package check on June 6th. As you can see, you get the money nearly a month earlier if they have your direct deposit information.

How do you give them your direct deposit information? You give it to them when you file your return. Be sure to input your direct deposit information on your 1040 on line 74 (a-d). Once they have it there, you can get your check considerably sooner. Don’t be a fool, direct deposit.

I’ve been working full time for five years now and have used TurboTax for the last four (I did it by hand the first year, I have no idea why!). I’ve never walked into a tax preparation store like an H&R Block or a Jackson Hewitt but my friends have and walked away with experiences that hardly warranted the $300 fees they paid. On one hand, my tax situation had been fairly simple for the last four years. Single income (one year I had two W-2s but that’s hardly rare), standard deduction, twenty minutes in TurboTax and I was done. I went to an itemized deduction two years ago because of the mortgage interest but that hardly registered. Two years ago I even added on a Schedule C for income generated from side ventures, again that wasn’t much of a curveball for TurboTax. I don’t have a complicated situation… why would I pay $300 for someone to ask the same questions a box would ask?

What’s your take on tax preparation? Worth it? Not worth it?