Your Money_ The Missing Manual - J. D. Roth [119]
But even if you like doing your own taxes to save money or because you think it's kind of fun (some people do!), it still might be worth hiring a pro. Professional tax advisers include tax attorneys, certified public accountants, tax preparers, and enrolled agents. To learn more about the different kinds of tax professionals, see http://tinyurl.com/taxfolks.
I used to do my own taxes. Then one year, as an experiment, I paid an accountant to do my taxes and did them on my own. The accountant earned back far more than his fee by cutting my tax bill below what I thought was due. Now I pay him every year, and I'm happy to do so.
Tip
If you decide to hire someone to do your taxes, give yourself plenty of time—don't wait until April 1st to start looking!
The more complicated your taxes are, the more likely you need a pro's help. And remember that things you do throughout the year (not just at tax time) can have an impact on your taxes. So don't try to manage your money in ways that are out of your league. This is especially important before you make any big transactions (like giving money to your cousin Jim or selling a business). If you're not careful, you can run up your tax bill quickly without knowing it. If you don't understand the tax implications of a particular money move, ask a financial adviser for advice.
Don't cheat
Whatever you do, never, ever cheat on your taxes—it's not worth it. Getting upset about owing money doesn't do any good; just pay your taxes and move on. Still, you should absolutely do what you can to pay only the amount you're legally obligated to pay. Take all of the deductions you're entitled to. And remember: If you owe a lot, it means you had a good year.
Tip
If you don't like how high your taxes are or how they're being spent, take it up with your local politicians, not your tax professional—and definitely not the IRS.
Other moves
One of the best tax moves you can make is to save for retirement by putting money into a 401(k) or an IRA. These accounts (which you'll explore in detail in Chapter 13) are tax advantaged, meaning either contributions or withdrawals are tax free, and the money in the accounts grows tax free.
If you itemize deductions, donating to charity is another smart tax tactic. For example, you can donate your old car instead of trading it in. That way you do some good in the world, avoid the hassle of dealing with a dealership, and get a tax break.
Finally, every year, visit the IRS website (www.irs.gov) or ask your tax professional to learn about any new tax credits or deductions you may qualify for. If you bought a home in 2009, for example, you may be eligible for an $8,000 first-time homebuyer's credit.
On The Money: Avoiding Audits
It's one of the most dreaded phrases in the English language: "You're being audited." Each year, about 1% of American taxpayers get audited. When the IRS audits you, they review your tax return to confirm that everything is correct. Fortunately, if you have an average income and a normal tax return, you don't have much to worry about. (But the IRS always audits a certain number of people at random, so no one is totally safe.)
Most returns are processed by IRS computers programmed to watch for anything odd. An item that falls outside the norm may be "flagged" so that an IRS employee can review it to see if there's actually a need for an audit. Common ways to raise red flags with the IRS include:
Incomplete or sloppy returns. Math errors and missing info make the IRS cranky. If the agency's computers can't make sense of what you file, they'll flag your return. And make sure all your info is the same on both your federal and state returns.
Unreported income. This is a no-brainer: If you file a return but don't report all your income, you're headed for trouble. You have to report all your interest, dividends, and other income.
Abnormal income. If your income is suspiciously low or high, you're five