Troy Reichlein, CPA had tips for filing your own taxes.
- Dependency Exemptions: Not just for kids. With the economy the way that it is a lot of people are looking for work and have fallen on hard times. If you have a person living with you that you are providing support for, you may be able to claim them as dependent. It doesn't matter if they are a relative or not. Provided they earn under $3,700 of taxable income, and you provide at least half of their support, you can claim them as a dependent. For a parent the rules are even easier because the parent does not have to live with you. If you help support a parent you can claim them as a dependent even though they still live separately from you. In determining support, if your parent receives say $18,000 in social security benefits spends $8,000 supporting themself and puts the other $10,000 in savings, then you only need provide more than $8,000 of support, not the full $18,000. A lot of people don't know this. (See IRS Publication 17 for more details.)
- Energy Tax Credits: Pretty much everyone knows about the State energy credits for buying a new dishwasher or refrigerator, and a lot of people have heard about the federal tax credits for energy reduction purchases, but a lot of people are intimidated by the paperwork you must fill out in order to claim the credit. The tax credits can apply to a new skylight, front door, patio door, etc. that you put in during 2011. Likewise if your husband bought a bunch of insulation at the hardware store one weekend and insulated the attic that can qualify. I had a client who purchased a house and prior to closing the mortgage company made them put a vapor barrier under the house - that's where you have someone come in and go under the crawl space and put a layer of plastic down on the ground to keep moisture from coming up - that qualifies as an energy tax credit on your federal tax return. (Use IRS Form 5695 to claim the credit.)
- File for Free: The IRS has a new program called Free File where people who earn less than $57,000 can file their tax returns online using free tax software. The IRS estimates that 70% of all taxpayers nationwide are eligible to use the free software, and to do it it is important that you start the process on the IRS website. Once there you will see a selection of vendors to choose from. This service is excellent for people with just a couple of W-2s and some of the more common deductions such as mortgage interest and property taxes.
- Be smart about where you spend your time preparing your tax return: Every year people spend their time and energy digging through their receipts trying to find expenses for medical deductions and miscellaneous itemized deductions. The reality of these deductions is that you have to have a very large amount of them in order to get an actual deduction for them, and that is because there is a threshold that must be met. What I tell people is to think about what went on during the year prior to spending time on these and if you had some expenses for medical or job related, use the ouch factor. If paying for them was harder then normal but didn't financially hurt during the year, you probably still won't have enough to get the deduction. But if you had some of those expenses and they hurt - ouch! - paying for that really stung! - then you might qualify for them and it may be worth your time to go through those receipts.
- New 1099 Rules (The PayPal 1099): The IRS is always working on ways of cracking down on income people earn and don't report. One new law is that companies that process credit and debit card transactions are now required to send out a 1099 and the end of each year listing the total amount of transactions you had during the previous year. Not a big deal? PayPal is one of these types of service providers and they have started issuing 1099s to people, affectionately called the PayPal 1099, and it lists the total amount of transactions you had during the year. So if you use places like Ebay or Craigslist, to sell items, such as a car or a boat, and you use PayPal to collect the money, you could get one of these new 1099s. There's no need to panic, but what you do need to do is report the transaction on your tax return, most commonly on Schedule D, and list when and how much you originally bought the car or boat for, and then when and how much you sold it for. If you sold it for a profit, you will have a taxable gain on the sale and you will owe tax on it. If you don't report it at all you run the risk that the IRS will count the entire amount of the sale as taxable income and send you a nice letter requesting you send them some more money (with penalties and interest of course!) And one side note on this, if you sell a car for example and you make money on it you owe taxes on it, but if you sell it for a loss you do not get a tax deduction for it. That's just the way it is.
- Excess Social Security Taxes: While this doesn't happen often, if you or someone you know moved from one job to another during the year, and they received a severance package, it could push their income above the social security tax threshold ($106,800) for the year. If that person then went and got another job with a new employer, that employer also withheld social security taxes on your wages even though you already reached the cap. If this happens you can take as a credit on your tax return the excess social security taxes withheld and get the money back. There is no separate form to file for this, it just gets listed on Line 69 of Form 1040. A lot of people never pay attention to this because it isn't something you normally deal with on your return and it isn't like your normal federal income tax withholding either - where if you make a mistake they will correct your return and send you the refund. If you don't catch this on your own no one will tell you about it.