Saturday, March 26, 2011

Tips for filing your income tax returns

Most  find that the federal tax code is too complicated for them to prepare their own taxes. If you decide to hire someone to prepare your federal return, make sure that your preparer has the proper background and experience.

Here are some of the most important considerations follow:

• If you have a complicated return, you should consider using a CPA, enrolled agent or attorney. Such preparers will likely be more expensive than others; however, they are also required to demonstrate continued education in order to maintain their credentials.

• If you have a relatively straightforward return -- even if you itemize -- you should consider using AARP volunteer preparers. This program is available throughout the United States.

The IRS monitors the training of AARP volunteers, and none of them can prepare taxes unless they undergo the proper training and pass a comprehensive test prepared by the IRS. Moreover, AARP uses very sophisticated software that ensures consumers that all proper deductions and credits are taken into consideration.

There is no cost for this service. You do not have to be an AARP member, and there is no age limitation. The only disadvantage is that because the program is so popular, you may have a long wait during the day to have your return prepared. Call your local AARP chapter to find out where and when you can use this service. Ask them what restrictions apply. You don't want to wait all day and find out your return cannot be prepared by AARP.

• You should make sure that there are no complaints made against your preparer. Check with the Better Business Bureau.

• If your preparer is not a CPA, enrolled agent or lawyer, you should ask whether he has any professional designation, and what the requirements are for that designation.

• Avoid any preparer who bases his compensation on the size of your refund. Don't be afraid to ask how he computes his fee. Is it a fixed price based on the type of return? You should not employ a preparer without having a pretty good idea as to what the cost will be. Don't hesitate to ask for references.

• Ask the preparer if he has a Preparer Tax Identification Number (PTIN). This is a new IRS requirement. Do not use a preparer without one.

• Before you meet with the preparer, you should be well organized. Have all your records specifying income, amounts withheld, brokerage statements, deductions, past year return (if applicable), and the Social Security numbers of all your dependents. The less organized you are, the more it will cost to have your return prepared, and the result is much more likely to be inaccurate.

One important tax change for 2010 is related to traditional IRA conversions to Roth IRAs. There are no longer any income limitations for this conversion, starting in 2010.

The entire amount of the conversion you made in 2010 has to be reported as taxable income; however, you can elect to report half the income in 2011 and half in 2012. In order for you to make a conversion for 2010, you would have had to make it by December 31, 2010.

However, you should consider making conversions in the future. Roth IRAs provide significant long-term advantages. Specifically, after a five-year holding period, and after age 59 1/2, all withdrawals, including earnings, are tax-free; moreover, you have no restrictions on when you can make withdrawals.

Roth IRAs have significant advantages for retirement and estate planning. You should discuss these options with your financial planner or attorney.