Did you know that 30% of taxpayers file by the first week of February? I found it difficult to believe but apparently it’s true, according to an email I received from the folks at TaxCut. 30% of people file between January 1st and February 7th. Of course, the other 70% file on April 15th!

Why File So Early?

People file early because they want their tax refund as quickly as possible. Why wait until April 15th to file when the government owes you money? If your only income is from your job (and maybe some bank interest), chances are you the government owes you a tax refund unless you adjusted your tax withholding. If you didn’t adjust your withholdings on your W-4, I’m fairly confident the government will owe you money and by not filing ASAP you are extending the interest free loan.

The reason why people even have to wait in until the first week of February is because employers and banks have until January 31st to mail out W-2s and 1099-INTs. However, that doesn’t mean you have to wait until the first week to begin the filing process. If you have your December pay stub, you will have pretty accurate numbers to use as placeholders. You can look up all your bank interest by calling or logging in to your bank account and looking for a tax form. While I would wait until the official W-2 form arrives before e-filing (especially since they will ask for information not typically printed on your stub), nothing stops you from filling out the form now and updating the numbers when your W-2 arrives.

What You Can Do Now

So, want to get a jump? First, check to see if you qualify for free tax preparation. There’s no sense paying for software if you can get it for free. If you earn under $52,000 a year, you can access the IRS Free File Program (details to come Jan 16th) as well.

If you don’t qualify, you have the option of going online or buying the software in a box. In the past, I used TurboTax Online a few times. I don’t think there’s much difference between TurboTax and TaxCut, outside of pricing. I personally like the online version because I’m comfortable entering all that sensitive information online but if you aren’t, the software from a box is just as good.

With the exception of your income, you already have every other piece of information. You already know all of your tax deductions, all the tax credits you should be eligible for (if not, the tax preparation software will ask you), and everything else the form or software will require. You’re just missing the official income numbers, which will arrive by early February. Fill out everything else and wait for your official tax forms. With your placeholder numbers, you have a good idea of the refund (or tax due). If you end up owing tax, just wait until April!

I always e-file and I always opt for direct deposit. By e-filing, you don’t have to worry about the post office losing it or having your sensitive information floating around. By direct depositing, you get your money much faster. If you e-file your taxes on February 6th and requested direct deposit, you can get your rebate within two weeks. Last year, if you filed within the first week of February, you received the direct deposit by February 13th! (2008 schedule)

(Photo: thetruthabout)

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.

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!).

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!)

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.

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?

Last night I had a flat tire and drove my donut-riding self over to Costco where they were able to plug the leak. (I love buying tires at Costco, especially now that they opened a store right by my house!) While they were fixing the leak, I had 45 minutes to kill and wandered around the warehouse. I meandered over to the tax section and picked up a copy of Quicken 2007 Home & Business. I’ve been meaning to get some sort of tax software package (Nickel raves about it and his 2304982039 years of data) and wasn’t sure if I should go with Quicken 2008 or Quickbooks. I decided I would read reviews, install the Quickbooks Simple Start trial and then install Quicken 2007 to do a real comparison.

My Needs

A lot of people have sworn by personal finance management software like Quicken but I had never tried it for myself. The main reason is because I didn’t want to spend money on software that would manage a process I already had a good handle on. Part of it was learning curve, part of it was me being cheap, but that all came to a head as I felt I needed some sort of accounting software for my side business.

Quickbooks

Quickbooks is powerful. If you run a business with inventories, invoices, and the full “light” nine – Quickbooks blows Quicken away. Quickbooks has great reporting features and some niceties that Quicken simply wasn’t designed for. For example, with Quickbooks you itemize all of your invoices and then all of your collections separately. If you perform work, you send out an invoice. When you receive a check, you record the collection (and this was just with their simplest package, Quickbooks Simple Start!). There are also a lot of great features behind the scenes such as the ability to export accounting versions and have that data sync back up after your accountant has worked with the books. Ultimately, Quickbooks is for the serious business owner looking to have a little more control over their books. If you’re a serious serious business owner, you probably want to outsource your accounting (who knows, I’m not at that level in terms of accounting complexity so I’m not a good person to rely on for that recommendation).

Quicken

Quicken is a personal finance management application first and accounting package second, even with the “Business” label. For my business, which has few invoices, no inventory, and a simple accounting structure, it’s perfect. For our personal finances, it’s great in that it has integration with nearly ever bank, company, or brokerage we work with (I have yet to find one it doesn’t integrate with) so I no longer need to log into my accounts via the web, Quicken does it for me, downloads the data, and integrates it with all the other data.

Verdict: Quicken

With a simple business structure and a need for personal finance management, I felt that Quicken was the right version for me. It cost a mere $70 at Costco, which will be tax deductible, it was a discount compared to Amazon or Intuit.

I just published a list of Quicken 2009 discount codes that can save you some cash if you’re looking to get the newest edition.

Why Not Online Versions?

I know the online versions are secure and I know sites like Mint.com are free, but I don’t like the idea of having my data stored elsewhere. (Mint doesn’t store anything, they leverage Yodlee, but the data is still floating around out there) Is this irrational? Perhaps, but I surrender little by leaving it locally on my hard drive.

I have yet to fully play with all the features Quicken provides but I hope to in the coming weeks (after the honeymoon). I know there are a lot of Quicken guru’s out there so please share any tips or hacks you may have (like this one by Nickel on how he manages his various CDs), thanks!

This promotion has ended, thank you to everyone who entered!

Earlier this week I shared a list of free tax preparation services, so why not end the week with a tax-related giveaway? I was contacted by a PR representative of H&R Block and offered two online codes that would allow two hardworking Americans the ability to take advantage of H&R Block’s TaxCut online service absolutely free.

I ask two things of you:

• Please read this list of free tax preparation services. Don’t enter if you can get it for free!
• Please share with me either the craziest tax related story you heard, the more ridiculous tax deduction you’ve ever heard, or your favorite tax related joke in the comments. (no story/deduction/joke, no entry!)

How will I pick the winner? One winner will be selected at random, one winner will be selected by me.

When does it end? I will select two winners on February 15th, email them, and the PR company will send out the codes as soon as they can. If I email you on the 15th and you don’t respond by the end of the business day on the 19th (Tuesday), I’m picking someone else (sorry!). Tax day is coming up soon so I don’t want to dilly dally, whatever the heck that means.

Good luck!

I bet the first thing you thought after you screamed “Happy New Year!” was how it was now time to do your taxes. (no? me neither) Unfortunately, it’s now February and it’s time to start thinking about doing taxes! Wheee! To help you along, I wanted to outline all the free resources you have for tax preparation. By this I mean I’m listing every single way I think you can get absolutely free tax preparation based on your financial situation. Some tax prep companies offer free tax filing if your situation is simple (1040EZ, or plain 1040), the IRS offers free tax filing if your adjusted gross income was under $54,000 in 2007 (it’s through third party companies), and some other companies offer free tax preparation for their customers as a fringe benefit. I’ll try to list them all. If I miss one that you know of (one that expands on the group of eligible taxpayers, we don’t need another company that offers free tax prep for the same groups already covered below), please leave a comment or email me and I’ll add to this list.

Why do companies offer free tax filing?

Companies don’t do things out of the goodness of their hearts, so where’s the catch? It appears that many of these companies offer free federal tax filing in the hopes that you’ll sign up for their state tax filing services too. With many of the programs it’s easy for them (and thus easier for you) to transfer the data over and recalculate for your state taxes. They also hope to capture you as a recurring customer since your tax information will be stored in their databases and thus you’ll have a history with them. Finally, some will try to make money off services such as “refund anticipation loans” or “money back loans.” Those “loans” are horrible deals for the consumer, which means they make tax prep companies lots of money. (If you e-file, the IRS estimates that it takes around 8-15 days with direct deposit to get your tax rebate!)

How good could these freebies be?

I haven’t tried them all, but William Perez of About.com has tried a few and wrote about their advantages and disadvantages. I don’t know how accurate that article is because it’s not dated, but it’s a start. I think that most of the major companies are going to give you great free service. The field is simply too competitive for them to risk standing up a sub-par “free” version. Today’s free customer is tomorrow’s paying customer. If my free experience is bad, there will never be a paid experience!

Now, onto the offers!

IRS freefile

The IRS freefile program is designed for those with an AGI under $54,000 in 2007 and some of the companies that offer these services also put age restrictions as well. For example, Free1040TaxReturn.com states: “Free Federal online tax preparation and e-File if your adjusted gross income is $54,000 or less and you are age 49 or under.” (emphasis mine) I suspect that has to deal more with handling the added complexities of Social Security and Medicare and isn’t age discrimination. With any of those companies listed, you’ll definitely get free federal tax filing and e-filing; you may have to pay extra for state. The IRS also offers a wizard to help determine which company is best for you.

One caveat is that not every company listed follows the $54,000 AGI rule the same way. As you’ll see in the description below of TurboTax’s offering, the $54,000 AGI rule only applies to active duty military.

TurboTax

TurboTax offers free tax filing if you:

• earned $30,000 in adjusted gross income, or,
• qualify for earned income credit with an AGI up to $39,783, or,
• served as active duty military with an AGI of $54,000 or less.

As an added bonus, you get free state filing if you live in Alabama, Arkansas, Arizona, Georgia, Idaho, Iowa, Kentucky, Massachusetts, Michigan, Minnesota, Missouri, New York, North Dakota, North Carolina, Oklahoma, Oregon, Rhode Islane, South Carolina, Vermont, or West Virginia.

What does TurboTax cover in their free version? Your standard 1040, 1040A, and 1040EZ forms along with a bunch of schedules. They provide a list of what’s covered in the free version. The first part of that list shows the included forms, the second part shows the forms not included. One notable form excluded from the free filing is Schedule D: Capital Gains and Losses.

TaxAct

TaxAct offers free federal tax filing of 1040, 1040A, and 1040EZ along with free e-filing, with no income restrictions (state filing is, as expected, extra). I was wondering if they had any catches (I realize they say “no catches! no gimmicks!” but c’mon… who takes marketing at face value!?) and discovered this list of “Included IRS Forms.” From what I can tell, it contains everything I could possibly need including Schedule C: Profit/Loss from Business. In fact, I wrote up this review of TaxAct and give it a B+ back in March of 2005. It’s nearly three years later, I might have to try them again and update that review.

State Farm Customers

State Farm is offering free tax filing through TurboTax for its customers.

Just Need Some Assistance?

If you’re just looking for a little extra help but not full blown preparation (or you don’t qualify for any of the above programs), you can turn to the IRS Volunteer Income Tax Assistance (VITA) Program or the Tax Counseling for the Elderly (TCE) Program if you qualify. To learn more about either program and their criteria, please visit this IRS page.

Basically, if your adjusted gross income is under $52,000, you are eligible to participate in the IRS’ Free File program:

The Free File program is a free federal tax preparation and electronic filing program for eligible taxpayers developed through a partnership between the Internal Revenue Service (IRS) and the Free File Alliance LLC, a group of private sector tax software companies. … Free File allows taxpayers with an Adjusted Gross Income (AGI) of $52,000 or less in 2006 to e-file their federal tax returns for free. That means 70 percent of all taxpayers – 95 million taxpayers – can take advantage of the Free File program.

So, if you’re eligible, don’t waste money buying tax preparation software or services because you’re eligible to get it for free, just keep an eye out for upselling tactics (where they try to get you to buy other services, that’s why they’re offering federal absolutely free). Check the Free File site after the 16th of January for further details!