Deducting Tax Advice Fees

I tend to prepare my own taxes, but came across a post yesterday asking if tax advisory fees can be deducted from returns. The answer is technically yes, but the average taxpayer is unlikely to qualify.

Tax preparation fees fall under "miscellaneous itemized deductions." Other items in this category include job search fees, union, dues, legal fees related to tax advice, and even safety deposit box fees (provided that they hold investment related goods).

However, miscellaneous deductions are only deductible to the extent they exceed 2% of your adjusted gross income. So, if your income was $100k and you had $3k in miscellaneous expenses, then you would only qualify for a deduction of $1,0000. It should also be noted that while investment advice qualifies under miscellaneous itemized deductions, broker commissions don't.

You can read more about the wonderful world of miscellaneous itemized deductions in Pub 529 (note this is a pdf document) over at the IRS website.

Image: Blmurch @ Flickr

FULL DISCLOSURE, I'm not a CPA and don't pretend to be. Consult a tax attorney or CPA for your specific tax questions.

Most Overlooked Tax Credits and Deductions

It's approaching that time of the year. It's a time that no one is particularly fond of, but if you have to pay taxes -- you might as well only pay your fair share. H&R Block recently posted an article on its website about the top 10 overlooked credits and deductions. The top 10 are listed below.

1) Earned Income Credit
- Available to low-income workers.

2) Child Tax Credit
- $1,000 for each child, the amount you can claim for each child decreases once your adjusted gross income hits $75,000 as a single filer or $110,000 jointly filing.

3) Saver's Credit
- Get credit for up to half you contribute to a retirement plan. Restrictions apply.

4) Education Tax Benefits
- Hope Credit: 100% credit of first $1,100 and 50% next $1,100 per student for tuition and fees with a max of $1,650. Restricted to your first two years of college.
- Lifetime Learning Credit: Credit of 20% annual tuition and fees. Max $2,000. Unlimited number of years.
- Tuition and Fees Deduction: Allows you to deduct up to $4,000 for tuition and fees.
- Student Loan Interest Deduction: Deduct up to $2,500 per return for interest paid on student loans.

5) Medical Expenses
- Deduction available if you spend more than 7.5% of your income on medical expenses (you must itemize to claim).

6) Moving Expenses
- You can claim this even if you don't itemize so long as your move was 1) job related, 2) would have increased commute by more than 50 miles, 3) were employed full time at least 39 weeks during the 12 months after you moved, 4) your moving expenses weren't reimbursed by your employer.

7) State & Local Taxes
- If you itemize, you can claim your state and local sales tax or income tax. You will need receipts if you choose to claim the sales tax deduction.

8) Charitable Donations
- If you itemize you can deduct these, but keep your receipts for money donations, items donated, or mileage while driving for charity.

9) Out of Pocket Job Expenses
- These are deductible provided you keep records and are not reimbursed by your employer.

10) Self-employment Deductions
- Half your self-employment tax, up to $112,000 of new or used business equipment purchased this year, your home or office furniture if its used solely for your business.

You can also follow the link here to read more about each credit (but whatever you do, if you have H&R Block prepare your taxes -- please don't sign a tax refund loan).

Why Tax Refund Loans Make Bad Financial Sense

It's getting to be tax season which means a slew of tax preparation companies will spring into action and in the process begin to push tax refund loans on consumers. Reports state that nearly 12 million Americans take companies up on these offers -- and fatten the bottom lines for return preparation companies in the process.

There are a few factors at work here. The first is that people love receiving tax refunds. However, say you receive a $2,150 refund. The important thing to remember is the government is really just returning the excess money you paid over what you owe. It's not free money -- its your money that you just gave to the government interest free for a year. Second, what the tax preparation companies tend not to advertise is that these loans are similar to payday loans and charge APR's often in excess of 100%. A $100 finance charge on an average refund of $2,150 has an APR of 178%.

If you are receiving a large refund you've already given the IRS a good deal, don't give the tax preparation firm an even better deal. If you use a tax refund as a way to force yourself to save money open an online savings account (ING, HSBC, and E*Trade all are easy to use and allow you to link multiple accounts). Take the amount of taxes you owed the previous year, divide by 12, and set up an automatic savings plan with the online savings account to regularly deduct a portion of that amount out of your checking monthly, weekly, or bi-weekly. This way you don't make an interest free loan to Uncle Sam and you are able to actually earn some interest yourself in an FDIC insured account.

Read more about Refund Anticipation Loans @ Wikipedia

Image: RBereig @ Flickr

Tax Crunch Time

Only a little over a week till tax time is here. With that in mind, here's are some quick links to what other blogs are saying about it.

Getting Green has an article about 10 Ways to Avoid an Audit.

Additionally, the IRS has a list of the top five most overlooked items by taxpayers in their 2006 tax returns.

Those of you paying someone to prepare your taxes may be interested in the article on TaxProf Blog about the government charging 125 Jackson Hewitt franchises with tax preparation fraud.

People using popular tax preparation software packages like TurboTax or TaxCut can find coupon codes for H&R Block's TaxCut software over at FIRE Financial.

Living Almost Large has a nice article about her philosophy as to when it makes sense to pay off a mortgage early.

If you are still hungry for more tax goodness, Don't Mess with Taxes has a variety of other Tax related links.

...don't forget to thank your local IRS auditor for all the wonder this time of year brings.

Tax Time: Big Time Write-offs

If you have a home business or office you can legally write-off a lot of things you might not expect (provided they have a use related to your office). Like most laws, tax laws use the terminology that is vague at best and baffling to most. Luckily there are CPA types who love this stuff that the rest of us find mind-numbingly boring.

To write off an item it must be "reasonable and customary" and connected to a trade or business. The good thing is that as the CPA says in this article, "there's almost nothing that isn't deductible under the right circumstances." This article describes tax write-offs for car, mileage, educator expenses, big screen TV, and higher education expenses. While it might be a good start, a better place to get deductions obviously is to call up your local CPA.

MSN Money: Taxes

Don't Forget the Telephone Tax Break

The government has offered to give $30-$60 back to each American in the form of a telephone break. Any money you can get back from the tax man is good and you may say that you had a professional file your return so you are safe. Think again. The IRS is estimating that 10 million Americans already have forgotten to file for the credit costing them $300-$600 million dollars in lost refunds. Already file? No problem. There is a form you complete in less than 30 mins to collect your money. Here is a step by step tutorial to bypass the fluff and get your money fast.

Read full article here.

TurboTax vs. TaxCut

By now if you haven't seen a commercial yet or heard of TurboTax (Intuit) or TaxCut (H&R Block) consider yourself sheltered fortunate. I even heard an advertisement for one of the packages while shopping this week. I'll break down exactly what they are and how they compare in this post.

What Do They Do?
---------------------
Both programs are software packages that you can pick up at any local chain or electronics retailer (Wal-Mart, Best Buy, Circuit City, Target). The programs install and being by asking you a series of questions - an "interview" as the programs refer to them. Questions range from how many children do you have and are you married to the size and number of charitable deductions you made over the year. Your responses are dropped down into the tax form in the appropriate area after submission and calculations are made. After the process is completed the programs allow you to print off a completed form to mail or send in electronically "e-file."

New Features
------------------
The big push this year has been to push "audit protection" features which of course entitle the companies to extra fees. Both companies offer similar services so this is a wash. However, if you e-file TaxCut throws the service in for free. TurboTax will cost you around $40 for the protection.

Transferring Data
----------------------
You can save yourself a sizable chunk of time if you avoid re-inventing the wheel and import your data from other programs. TaxCut and TurboTax vary slightly on which programs they play nice with.

TurboTax can talk with:

1. Quicken and QuickBooks
2. W-2, 1099, 1098
3. TaxAct
4. TaxCut
5. Anything that can create a .txf file
6. Microsoft Money
7. ItsDeductible
8. Quicken Rental Property Manager

TaxCut can talk with:

1. TurboTax
2. H&R Block Deduction Pro
3. Deduction Pro
4. Money
5. Quicken

Tech Support
---------------------
Both companies have phone, chat and email support. I haven't used the feature on either package to be able to give much guidance here. From reading up TaxCut's "Ask a Tax Advisor," (another way for H&R block to throw work to its accountants) costs $19.95 per question (federal or state). TaxCut also runs a blog which is free to view. TurboTax has a "Live Tax Advice feature" where you can talk one on one for FEDERAL tax questions ONLY and is more expensive at $39.95 per question.

Pricing
---------------
TurboTax

• Free Federal: Free
• Deluxe: $29.95 (Fed Only)
• Premier: $49.95 (Fed Only, need this if you have investments)
• Home & Business: $74.95 (Fed Only, Schedule C's included)
• Note - State returns cost an extra $24.95
  

TaxCut:

• Basic + E-file: $9.95 (1040EZ only simple returns)
• Premium + E-file: $19.95 (More in depth plus 1 ask a tax advisor session free, State extra)
• Premium + State + E-file: $39.95 (State + Fed + everything in the Premium)
  

The quick recommendation: In my opinion the average taxpayer will get a better value from TaxCut. It is less expensive, you get state and federal returns, and can talk to an advisor if you have a question and won't get charged extra.

You can buy either package online from the source TaxCut.com or TurboTax.com

That's all folks...

++++ UPDATE 02/28/07++++

Additionally, it has been brought to my attention that while TurboTax's free edition supports only the 1040EZ filing, TaxCut supports 1040EZ, 1040A, and 1040 forms: You have to purchase the Deluxe or Premier to get those forms with TurboTax.