1. I use Turbo Tax to file my taxes instead of a tax preparer like H & R Block or Liberty Tax Service or Jackson Hewitt. I estimate that I have saved $150 per year since 2004 by doing my taxes myself instead of using a tax service. Indeed, I wish I had learned to do my taxes and switched to Turbo Tax earlier. Since learning how to do my taxes myself, I have taught 5 friends to do their taxes themselves with Turbo Tax and I should be able to teach you as well. Or I can point you to places where you can learn. In the meantime, here's the guidance on who should consider using Turbo Tax:
*If you are a salaried person with a fixed income,or indeed anyone with a fixed income and you usually take the standard deduction instead of itemizing (I will explain this in a future post for those who need the information if I get any requests), you should definitely go with e-filing your taxes. If your income falls within $57,000 a year, you may in fact be able to file your taxes for free on the IRS website itself- check out if you are eligible. If you are not eligible to file for free, you should still definitely go with using Turbo Tax (which I use) or Tax Act. I use the online version of Turbo Tax, but you can also pick up the boxed software version from Costco or any bookstore like Barnes & Nobles or Borders.
*If you are a salaried person with stock investments and espp and option sales but with no deductions to itemize, then you should still go with using Turbo Tax. I fall into this category. There have been some unusual years when I had to report a Traditional to Roth conversion and when I had to report contributions to an HSA account (which is a tax-sheltered account for medical expenses which can be opened in conjunction with a IRS approved high-deductible HSA health plan), but I was able to input these into Turbo Tax without any heartburn.
*If you itemize, you should still visit the Turbo Tax website and explore the different versions. There are 5 versions in all - Free, Deluxe, Premier, Home & Business and Business and you can try any of them for free. You only pay when you actually file. Isn't that cool? In fact, I have a friend who runs her own business and uses a tax preparer but models her taxes in Turbo Tax every year before going to the tax preparer, which I thought was pretty smart.
I find it so convenient to use Turbo Tax for several reasons. For one thing, page by page you are guided by questions so you do not miss any income, any deductions, any exemptions and any credits. Also, as you enter the information, your tax refund (positive or negative) updates in real time in the top right hand corner. Also, the program advises you on how you might be able to lower your taxes by taking advantage of tax sheltered accounts, lets you know if you are at risk of incurring the dreaded AMT or Alternative Minimum Tax and tells you where you fall statistically among the nation's tax payers. You can file both your federal and your state taxes on Turbo Tax. I understand all the tax preparers now have an online DIY version in the style of Turbo Tax but I have not explored or used them and I would be interested to know how they compare with Turbo Tax.
Moving on to other ways to lower your tax every year following my lead:
2. I do some tax-loss selling every year. As I said, some of my savings are in stocks. Besides investing in mutual funds through tax-sheltered accounts such as a 401K, IRA, HSA and 529 (which I hope you are familiar with and contribute to), I have been investing directly in stocks since late 2003. No one wants a stock to turn out to be a dud, but when a stock does turn out to be a lemon (and they frequently do) and loses a significant amount of value and has no hope of recovery soon, you can sell the stock and take a loss. As blue as taking a loss might make you feel, there is a silver lining to this cloud - you are allowed to offset the loss against gains from sales of stock that you made in the year and even against your regular income. You are allowed to offset up to $3000 a year. I have taken advantage of this in some years. If you want to learn more about Tax-Loss Selling, this Investopedia link provides you with more information. Investopedia is a veritable encyclopedia for investment information. If you like your information in a fun, entertaining and easy to read way, then you can also check out Motley Fool on which you can find all kinds of information related to stock investments and individual stocks written in layman's language.
Moving on...
3. I invest in mutual funds only in tax-sheltered accounts. The reason I do this is because mutual funds have something known as a capital gains distribution. You can find the definition by clicking on this Investopedia link. When I was new to mutual funds investing, discovering that you could incur a taxable capital gains distribution even on a fund that had lost value was one of the nasty surprises. There are all sorts of mutual funds and not all of them will have taxable capital gains distributions, but I decided to make my life simpler by investing in mutual funds only in tax-sheltered accounts such as 401Ks, IRAs, 529s and HSAs.
4. Lastly I try to manage my IRS tax withholding, so that there are no big shocks come tax time. For this you have to learn how to correctly fill the W4 that you submit to your company's payroll manager. The IRS website offers information on this and has a handy W4 calculator, but the general rule is that the fewer deductions you put on the W4, for instance if you put 0 or 1, then the more tax is withheld from your paycheck. And conversely, the more deductions you put, for instance if you put 6 or 7 or 12, then much less tax is withheld from your paycheck. It is not a good idea to have less tax withheld from your paycheck than you owe, because you will owe this plus penalties to the IRS when tax time comes around. If you have too much tax withheld on the other hand, then it amounts to you giving the IRS an interest-free loan - which of course you will get back as a refund at tax-time. After experiencing the first situation - where I owed a huge chunk of money, I prefer to err in favor of giving the IRS a tax-free loan and getting back a refund, so that's been the way to go for me.
Hope you enjoyed this article - check back for more articles like this - with actionable ideas for your job, money, investments, health and peace of mind
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