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Prepare Your Tax Returns for Free And Get a Faster IRS Refund
Don't Waste Your Money on Preparers and Fast Refund Scams
Have Your Taxes Prepared for Free and Get a Speedy Refund
Every tax season, millions of Americans waste money on tax preparation services they could get for free and get ripped off trying collecting their own refund money from the Internal Revenue Service. The IRS in recent years has tried to make it easier for most people to file their tax returns electronically and has sped up the refund process, making it unnecessary to shell out hundreds of dollars.
Free Preparation
This Hub will detail free places to get tax preparation below. But it must be said upfront that the best way to get free preparation is to do your own tax returns. Taxes are made out to be heinously complex, and for people with sophisticated financial lives, they are. Many people, however, don’t have extensive investments or business partnerships. They live more simply. For them, filling out tax forms isn’t nearly as complicated as it’s made out to be. Two-thirds of Americans, for example, claim the standard deduction, which means they don’t have to tally receipts and justify expenses should get they audited. You’re most likely to claim the standard deduction if you rent your home instead of own it or live in a state with no income tax (for example Texas, Florida, Tennessee, Alaska, Wyoming, New Hampshire, Washington).
A family of four with young children that has only paychecks as income should be able to prepare a tax return in under an hour. They will report only their wages minus anything withheld for retirement accounts and state and local taxes. They will then claim the standard deduction (for 2010 it is $11,400 for married couples filing jointly and $5,700 for single filers), four personal exemptions (currently worth $3,650 per person). You’ll notice that effectively makes the first $26,000 of their income tax-free. They’ll derive additional benefit by claiming $2,000 in tax credits for their children as well as additional tax credits for any day care or nanny expenses. These are easy and common deductions and credits to claim. Because tax credits are a dollar-for-dollar reduction in tax liability (while deductions merely reduce the amount of income subject to tax), the sum total of these calculations is a family of four doesn’t even begin to pay federal income tax until it earns more than $44,000. This is a large reason for the recent finding by the Tax Policy Center that 47 percent of Americans pay no federal income tax. The median U.S. income, after all, was $52,029 in 2008, according to the U.S. Census Bureau.
Note: Families with lower incomes may also get cash back even if they owe nothing because of the Earned Income Tax Credit. Some companies charge a fortune to claim this benefit. Don’t pay them.
Of course, changing the oil in a car is relatively simple too, yet most of us take it to a garage. The difference is, we tend to distrust mechanics and shop around for good ones. Most people are so intimidated by the tax code they don’t exercise the same scrutiny when choosing a tax preparer. As a result, they pay high fees for unnecessary services. The dirty little secret of the tax preparation industry is most of its employees are no more qualified to prepare your tax returns than you. Many preparers have only a high school education and but for some training (less than what a mechanic undergoes, I might add) most of their store front employees don’t know the difference between a section of the tax code and the technical manual for a refrigerator. In the worst cases, these preparers are actively trying to scam you into claiming bogus benefits that could land you in a world of hurt with the tax man.
The IRS knows this, which is why it has proposed to regulate tax preparers for the first time. If you’re still determined to get someone else to prepare your own returns, know the IRS also is trying to make it easier to get help. It’s free if you earn less than $58,000.
For several years now, the IRS has operated the “Free File Alliance.” Different preparation companies offer different services for different people, and the parameters to qualify change every year. Most parameters are age-based. For example, H&R Block offers free preparation and electronic filing to taxpayers earning less than $58,000 and are 51 years old or younger. About a dozen other less-known companies make similar offers. Note the small print, however: You’ll often still pay for preparation of any state tax forms (which is easy enough to do yourself once your federal return is complete) and extra fees apply for claiming the Earned Income Tax Credit.
If your income is under $50,000 you can also get free tax preparation help from IRS-trained volunteers. The IRS operates a Volunteer Income Tax Assistance program, which operates clinics in communities around the country. Call 1-800-906-9887 to locate a site near you or check the IRS Web site page on it here. The AARP also offers free help to senior citizens in cooperation with the IRS.
Fast Refunds
A quest for a fast refund also drives people unnecessarily to pay a premium to have their taxes prepared. Some preparation firms offer to give you your refund within 24 hours – for a price. A steep price. These products are Refund Anticipation Loans, which carry interest rates in the triple digits when annualized. In 2009, some 7.2 million Americans paid $600 million to get their refunds faster than the IRS can deliver them, according to the National Consumer Law Center, a Boston-based organization. What these people may not have understood was they could have had their refund for free in as little as a week for free from the IRS had they simply filed their return electronically and elected for direct deposit into their bank account. My own refund processed in five business days last year when I did this. It’s simply not worth paying $50 to $100 or more for the privilege of having your own money a few days earlier, no matter how desperate you are.
Finally, getting a large refund is nothing to be happy about. It just means you’ve given the government your money to use for a year, interest-free. Say you’re getting a $2,400 refund. Think about how you might have used an extra $200 per month last year. You can this money in your paycheck by claiming more exemptions to your W-4 form at work (although you’ll give up the lump sum next April).