Tips for cutting the cost of getting your taxes done
Many taxpayers stress about the size of their tax bills this time of year, but many more may be stressing about the size of the bill to calculate their tax bills. It now costs $188, on average, to have a tax preparer do a Form 1040, according to the National Society of Accountants. Itemize and add a state return, and the average rises to $294.
For many people, the struggle to find affordable, high-quality tax preparers is real, but experts say five things can help rein in the cost.
See if you can get free help
The IRS programs — Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) — provide free tax prep services generally to people who make $54,000 or less, have disabilities, are older than 60 or speak limited English. This can be a huge money-saver if you qualify.
Read the contract
“Typically, tax preparers that want a long-term relationship with you will have some type of an engagement letter. That will help you understand how the preparer’s fees work, and it may give you a heads-up on whether there will be charges for things such as extra copies of your return.
Preparers can’t base their fees on a percentage of your tax refund amounT, and they can’t charge you a separate fee for having the IRS direct-deposit your refund.
Start early, get organized
Tax preparers often charge more as the April filing deadline nears, so the earlier you get your documents to them, the more you could save. Many preparers draw a line in the sand somewhere around the last week of March. After that, fees often start rising.
Ask for a break if you need it
Negotiating tax-prep fees isn’t very common, but sometimes it’s OK to ask for a discount.
“If you’re having a bad year and you’ve been with somebody for a long time and something’s happened, somebody’s lost a job, you’ve lost a spouse, you’ve had something that’s out of the ordinary, I think there’s nothing wrong with calling your preparer and saying, Is there anything you can do for me?
How to Get Your Taxes Done Right
Taxes. If you’re like most, you’re not a big fan of this five-letter word. While it’s true that income tax preparation can be frustrating and complicated, knowing these basics can save you money, time, and stress.
1) Understand Taxable Income
The amount of taxes you pay is based on your taxable income rather than your total income. Reducing taxable income means you pay less come tax time.
2) Don’t Miss Any Tax Deductions
Because deductions reduce your taxable income, the more deductions you have the less you’ll owe in taxes. That means you don’t want to miss any if you’re itemizing. Download our Tax Preparation Checklist to make sure you’ve got everything you need.
3) Take Advantage of Tax Credits
Tax credits are a big deal because they reduce your tax bill dollar for dollar, rather than just reducing your taxable income. Find a good tax pro in your area to help you take advantage of every possible credit like child care or small business expenses.
4) Pay Attention to Your Withholdings
Withholdings are a percentage of your paycheck your employer sets aside to cover your taxes. We recommend adjusting your withholdings so you break even. You won’t get a big refund from the IRS but you won’t send them a huge check.
5) Determine If You Need a Tax Pro
If your tax situation is simple, you may be able to handle it on your own. Once your financial life gets a little more complicated though, having a pro check for every possible deduction and credit is worth it.
Ways to Reduce Your Taxes for Next Year
Feed the IRA, lower your taxes
One reason that financial advisers consistently recommend contributions to a retirement plan as the best way to reduce a tax bill is that most of those contributions—depending on the type of plan—are essentially tax write-offs that don’t require itemization.
Because the money you contribute to a traditional IRA is a pre-tax contribution, it lowers your total taxable income. This means you will owe less in income taxes, regardless of whether you itemize or take the standard deduction. And because in recent years contributions made until the tax deadline have been applied to the return for the previous year, they have been popular among people who scramble to soften the blow of a large tax bill.
Flex your spending power
Sometimes, to save money on the tax bill, you must spend money elsewhere. Many employers offer a benefit that allows people to chip away at the tax bill using money they had planned on spending anyway, such as dependent care or medical expenses.
Flexible spending plans are pre-tax plans that allow certain expenses—such as dependent care, medical expenses and health insurance—to be paid with tax-exempt dollars. Employers deduct pre-determined, tax-free amounts from paychecks and place them in an administered account that releases the funds when the expenses are incurred. And, because contributing to a flexible spending account also reduces your gross income, your taxable income becomes even lower—keeping more in your wallet.
The first is the “use it or lose it” stipulation, which comes into play if the pre-tax funds aren’t used in accordance with the rules. Let’s say that Mom deducts pre-tax money to pay the day-care center, but then Grandma starts to take care of the baby. Unless Grandma operates a licensed, approved day-care center and charges for the care of the baby, any pre-tax money Mom set aside for day-care is lost.
Second, you can’t use child care for a tax credit. Because the tax benefit was given in the flex-spending plan, that money cannot be used for a credit unless the amount spent exceeds what was deducted pre-tax. Other child-care expenses not paid with pre-tax money, such as some summer camps, would not be impacted.
Give back
Charitable contributions offer a tried-and-tested way to reduce the tax bill—and there are a number of ways to give back beyond writing a check. Toys, books, clothes and other used household items may be donated to shelters or other charitable organizations that support the needy.
Expenses stemming from volunteer work can also be a tax benefit, but be careful about what you try to deduct: Your time itself is not deductible, but if you absorb the cost of travel to an event where you represent the charity—whether as a convention delegate or as a scoutmaster driving scouts to a campground—those expenses may be deductible. If you buy an item such as a printer and donate it to a charity for its own use, that also may be a write-off. And remember, your total tax deductions must exceed the standard deduction before they may be applied.
Bundle contributions
For taxpayers who need extra tax savings, there’s a nice little tactic that Thompson recommends as a way of itemizing deductions every other year. By “bundling” some contributions, taxpayers can put what is essentially two years’ worth of deductions into a single year, vaulting their deductions over the standard threshold and thereby allowing the use of all of the smaller, otherwise-forgotten deductions.
Take, for example, the person who makes a gift to a church on a weekly basis. One approach might be to take the amount donated over the course of a year and—at the end of the year—match it with a lump-sum amount representing what would have been the next year’s donations.
And now that the bundled contribution has taken you beyond the standard deduction, feel free to start piling on all of those other smaller write-offs, too. Start with your wardrobe: Don’t forget to clean out your closet and donate clothes in the latter part of the year to take advantage of as many donations as possible. It’s a smarter idea than opening your wallet in order to save taxes.
Buy stuff (but only if you need it)
There’s a common misconception that buying “stuff” at the end of the year—something like a new laptop computer—can be a quick and easy deduction for your business.
It may be, but make sure it’s something that you needed to buy regardless of the tax write-off potential, Thompson said. The amount that’s actually a deduction for “stuff” is usually only a fraction of its true cost. Because many products have a life expectancy of several years, the value is often depreciated, and the deduction is calculated over several years unless the item can be expensed or bonus depreciation taken. In reality, a $500 computer might save only a few dollars in taxes.
Those with home-based businesses also may have some write-offs for the use of their homes, but there are plenty of rules defining what is and what is not deductible here. Only a fraction of home expenses—such as utilities or insurance—is covered, because the expense is only applied to the portion of the house where you work.