Question: Should I use tax software or a CPA to prepare my income tax return?
Answer: Deciding on self-preparing or having a CPA prepare your income tax return can be critical. Make an informed decision. There are certain factors you should consider:
1. Complexity of your tax return- You don't know what you don't know! Tax professionals or CPA's can help you navigate through complex tax law and ensure you are claiming all the deductions you are eligible for. Tax software interviews can sometimes be difficult to understand and may not have adequate guidance for complex situations. Taxpayers often lack the expertise to interpret and answer the questions posed within the interview within the tax software.
2. Cost- Preparing your taxes on your own may result in lower tax preparation costs in the short run. But working with a trusted tax professional or CPA can help you get your entire refund. According to everydollar.com, research shows that a tax professional gets you on average approximately $800 more in refund from the IRS. The average refund for taxpayers who used tax software was $1,824. While, the average refund for taxpayers who used a paid tax professional was $2,615.
3. Time- Self-Preparing may result in many hours of preparation time, confusion, and stress depending upon your tax situation. After preparation, you still may be uncertain if you have prepared the income tax return accurately. Working with a reputable experienced tax professional or CPA can ease your anxiety with knowing your return has been properly prepared and can address all of your tax concerns and issues. You will also spend a fraction of the time working with a tax professional.
Question: How do I reduce my income tax liability?
Answer: Starting a side business might help reduce your tax liability. If you have a talent that you want to actively turn into a money making venture, starting a business might be an option for you. Say for instance your business does not make a profit, this might be counterintuitive to the reason you started the business, but is typically the case with most startups. The IRS will allow you to deduct the loss incurred in your business from the other salary and income you earned. This results in you paying less in taxes.
You should be aware that you must establish the business with the intention of making a profit. The IRS is clear on the specific activities that determine if your business is engaged for profit or simply a hobby. The general rule is that if you have not made a profit in the last three out of five years, the IRS will classify your business as a hobby. This may be extended to profit made in the last two out of seven years for horse trading, breeding or racing.
If the IRS classifies your business as a hobby, you won’t be permitted to deduct losses. However, in certain situations you may be able to use hobby expenses to reduce your taxes.
For instance, personal expenses such as home mortgage deduction, which could also be claimed as hobby loss expenses, are deducted in full. Other expenses such as depreciation or amortization, wages, advertising, and insurance premiums may be permitted. However, you must have hobby income in order to deduct those expenses.
Question: How many years of tax returns should I retain?
Answer: The IRS has guidelines on tax return record retention. You can visit irs.gov for further details. To be on the safe side you should "Keep your records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later, if you file a claim for credit or refund after you file your return.
Keep records for 6 years if you do not report income that you should report, and it is more than 25 percent of the gross income shown on your return. Keep records for 7 years if you file a claim for a loss from worthless securities or bad debt deduction.”
Question: Can I deduct mileage for a second job?
Answer: You may deduct the expenses associated with traveling between the jobs only on the days you work both jobs. The travel from your house to the first job and from your second job to your house in addition to the travel to and from work on the days you work one job only are considered commuting. Commuting expenses are not deductible.
Question: Can I claim head of household although I am married?
Answer: As a married individual, there are typically two filing statuses you can choose and that is Married Filing Jointly or Married Filing Separately.
You may be able to file as head of household if you meet all of the following criteria:
1. Your spouse did not live in your home during the last 6 months of the tax year.
2. You provided more than 50 percent of the cost of taking care of a home for the year.
3. A qualifying person lived with you for more than half the year. A qualifying person is a child, relative, or parent. Parents do not have to live with you to be considered a qualifying person.
Carletta Beckwith CPA LLC is a firm that provides premiere income tax preparation, tax planning, and financial planning services. Carletta Beckwith is a licensed CPA and CFP® and shares her extensive industry knowledge to deliver superior customer service and personalized attention to her clients. To learn more about the services she provides visit www.beckwithcpa.com.