Expert gives advice on tax preparation

While accounting software and the Internet have made filing more accessible to the mathematically challenged, most tax experts think technology has not eliminated the advantages of turning records over to a certified public accountant.

"I think any time you can have an objective expert do your returns, you've got go with that," said Southeast Missouri State University professor and accounting expert Gary Johnson. "They can find things that perhaps you haven't seen, they give you good clean records, they keep track of your documentation. But there is always a price tag attached to doing it that way so it's not something that everyone can afford."

Johnson believes for most people the value of a long-term relationship with a CPA outweighs the money they might save by doing taxes themselves.

But many intrepid spirits will do it themselves. And it's easier than ever. Those with adjusted gross incomes of under $50,000 can electronically file their returns for free through the IRS Web site. Last year over 5 million people used this technology.

For these folks and anyone else nervous about the tax man, Johnson and others have some advice to give.

Tips

"Use the simplest 1040 form that you qualify for. This will also provide the greatest benefits and save you some confusion," said Johnson.

Some people get into trouble right off the bat by choosing the wrong 1040 form (the standard form for income taxes).

The most basic form is the 1040 EZ. This is for people who are not claiming dependents, are under the age of 65 and have a taxable income less than $100,000. The intermediate form is the 1040a, which has mostly the same criteria except that the filer is claiming dependents and only has certain basic tax credits. The majority of Americans file one of these first two non-itemized forms. Some people, however, file the 1040 form.

People who fall into this category would be self-employed, have had significant capital gains events over the past year, or have other types of income that require itemized listing. Any type of software system should steer the user towards the correct form, said Johnson.

"Make sure your filing status is the right one," said Johnson.

As an example Johnson pointed out the "head of the household" status as one some qualified people overlook. "Head of the household" is a tax exemption for unmarried people who carry the majority of the financial burden for one or more dependents. This status means lower rates than the ones for those who file as single or married filing separately.

Johnson said people should also be aware of all the tax credits they may qualify for.

Thanks to the Military Tax Relief Act of 2003, enlisted men and women serving in combat zones overseas are not taxed on any of their income. For officers, the first $6,529 monthly is not taxable.

There is also the Child Tax Credit, another one that was new in 2003. This credit gives $1,000 for every dependent child under the age of 17. The sum of this credit can not be higher than the filer's liability and is subject to certain upper thresholds of taxable income.

The Earned Income Tax Credit was designed decades ago to assist low-income earners. It is available to those with income less than $37,263 and who meet certain other qualifications generally requiring dependents. But the IRS said in 2004 one in five eligible recipients did not file for the EITC and missed out on a refund worth as much as $4,400.

Those who have invested in education may also have money coming their way. Parents paying their child's tuition should not overlook the college tax credit, which returns up to $2,000 of credit per student.

Teachers can also get refunds of up to $250 if they've purchased supplies for their classrooms and saved the receipts.

And lastly, cautions Johnson, don't forget to do the easy parts. "People laugh when I tell them this, but sign your tax forms and make absolutely sure your math is right. The majority of mistakes probably come from those two things," he said.

Pitfalls

There are some other pitfalls to watch out for during tax time.

The experts say withholding too much from your monthly paycheck with the idea of getting a big year-end refund is not wise.

"A lot of people use the withholding as a savings plan," said local CPA Thomas Higgins. "They do this because they can't save or don't have a vehicle to save, so when I talk to someone who has a large refund coming back, I talk to them about putting the money away in a credit union or somewhere where it can earn interest. People sometimes say 'It's the only way I can save for a vacation' or whatever, but what you're doing is basically lending the government money without interest for a year."

But if you do get that big refund and are offered a "refund anticipation loan" from your tax preparer, don't take it, say the experts.

"I personally would not be in favor of those. My guess is they're always at a reasonably high rate," said Johnson.

Some tax services like H&R Block offer refund anticipation loans which are short-term advances on the tax payers own money. These loans have one-time fees and charge high interest.

In December, H&R Block agreed to pay $62.5 million to settle class action lawsuits challenging the fairness of these loans. The settlement will be distributed to more than 8 million customers who took the loans between 1998 and 2005.

"It's always nice to have the money, but if you e-file and have it sent directly to your account, it'll be very quick, so unless you're in dire need I'd say wait," said Johnson.

New for 2005

Southeast professor Tony Varnon said the changes from year to year can be daunting. "Not too long ago I got the update on tax changes resulting from Katrina, and it's about the size of the Bible," he said. "It's things you don't even think about because Katrina had an impact on the mileage reimbursement you can claim. Before Katrina it was 40.8 cents, and after it was 45 cents per mile. Now that's a big deal if you own a small business ...

"If I didn't have to teach taxes, I'm not sure I would even do my own tax returns," Varnon said.

One positive change is that fiscal year 2005 looks like it will be a great year for procrastinators. April 15 falls on a Saturday, so taxpayers get two extra days to file their returns. The last date for filing is April 17. Higgins said people coming to his office who want their taxes filed on time should bring in their records no later than April 2.

For those who cannot meet the April 17 deadline, the automatic extension has also increased. The extension, which was previously four months, has been standardized at six months, giving laggards until Nov. 17 to file.

Also new this year, the IRS has closed a longtime loophole that allowed people who donated cars to charity the right to determine the fair market value of the car and claim that as a deduction.

"If you donate a vehicle to charity now it's dependent on how much the organization sells the vehicle for," said Higgins.

Also new for small business owners in 2005 is the "Domestic Productions Activities Deduction." This is a 3 percent tax break rewarding small businesses, mainly of the manufacturing variety, for operating and selling in the U.S. market.

For more details on all of these deductions visit www.irs.gov.

tgreaney@semissourian.com

335-6611, extension 245