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Preparing your 2014 Taxes

Tax Prep Software versus CPA: What’s Right for You?

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January 7  |  Uncategorized  |   admin

Preparing your taxes for 2014 will be a daunting task. With every important job comes the question of whether or not individuals should prepare their taxes themselves or hire a professional. While the ever improving selection of tax preparation software certainly makes it easier and cheaper to do your own taxes, there are intangible costs of doing them yourself as opposed to hiring a Certified Public Accountants (CPAs).

The Advantages of Using Tax Software
Price

There is no way around the fact that you will pay less for a software package than you will to hire a CPA or another qualified tax professional. The price of tax preparation software ranges from the $25 to $120 range to websites that offer the service for free. On the other hand, the least expensive tax preparers will cost at least $150 and a CPA is likely to charge at least twice that amount. The upfront savings of using tax software over an accountant is one of the most attractive benefits of filing your own taxes. Beware of hidden costs: many software companies charge you an additional amount to prepare the state tax return and then add additional fees for e-filing your return. THERE IS NO FREE LUNCH!!!

Speed
Once you have all the necessary documents in front of you, it is possible to complete your own taxes in a few hours. In contrast, the best professionals can prepare the taxes with you during your appointment or, it may take longer depending on the complexity: from several days to a few weeks to complete the returns and file your forms.

Simplicity
Good tax preparation software walks you through the process very quickly and easily. For those who have only a W-2, (or few sources of income and deductions), then there is little need to sit down with an accountant to sort it all out.

The Benefits of Hiring a Professional Accountant
Better Software
CPA’s typically pay around $3,000 to $15,000 for their software, which is far more sophisticated than the tax preparation software sold to consumers. These more advanced programs have the ability to quickly scan your information and organize line items and forms correctly. By automating much of the data entry and organization, there’s less chance for human error to hurt your tax return.

Human Touch
A good tax professional can interpret your tax information and know the tax implications that may affect you. Like a good family doctor that knows your medical history, you can develop a relationship with an accountant so that he or she understands your family’s financial situation and future goals. Tax professionals are often able to make valuable tax savings suggestions that a software program just can’t anticipate. The value of this advice can easily exceed the additional cost of consulting with a professional. For example, a tax accountant can provide you advice on tax-friendly ways to save for your children’s education, or how to reduce taxes on your capital gains.

CPA’s Can Answer Your Questions Year Round
As a trusted professional, a good CPA will be able to answer important questions that arise not just during your annual consultation, but at other times during the year.

A CPA Saves You Time When Handling Complicated Issues
Taxpayers who find themselves at the center of complicated business and investment matters may even have the skill to sort through their taxes on their own, but is it worth their time? A professional tax preparer is so familiar with the system, he or she can quickly and easily accomplish tasks that might take even skilled taxpayers hours of research. For busy non-tax professionals, their time can generally be better spent earning money in their area of expertise. Even if your tax situation is straightforward, hiring a professional will save you the time and stress of doing your taxes.

The Bottom Line
Ultimately, there is no universally correct answer to the question of hiring a tax professional or doing your taxes yourself with software. There are tangible and intangible costs and benefits in making your choice. Your comfort and familiarity with IRS rules will be part of your decision, but the complexity of your finances should be the key deciding factor. Those with a single employer and few investments may save hundreds of dollars by preparing their own taxes, while those taxpayers with more sophisticated issues stock options, passive activities, business income or rental properties will find the expense of hiring a CPA to be worth their peace of mind and potential tax savings.

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Tax Tips for 2014 That You Need to Know

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January 6  |  Uncategorized  |   admin

The Patient Protection and Affordable Care Act health insurance mandate goes into effect

Starting in 2014, you must carry a minimum level of health insurance for yourself, your spouse, and your dependents, or possibly pay a fine.

If you have adequate health insurance through your employer, you purchase coverage yourself, or you are enrolled in a government program such as Medicaid, you don’t have to do anything different.

If you qualify for an exception; for example, if your income is too low for you to be required to file a return, you won’t have to pay the fine.

If you don’t have coverage or qualify for an exception, you could get hit with a tax penalty of up to 1% of your yearly income or $95 per person for 2014, whichever is higher. The penalties go up in 2015.

New 3.8% Medicare Investment Tax

The Affordable Care Act also mandated an additional 3.8% tax on investment income, including interest, dividends, capital gains, rental and royalty income.

This special tax is collected for Medicare, starting in 2013. You only pay it if your modified adjusted gross income is $200,000 or more ($250,000 if filing jointly, or $125,000 if married filing separately).

You pay the 3.8% tax in addition to tax you already pay on investment income. For example, if you pay 20% tax on a long-term capital gain, your total tax on the gain is 23.8% (20% + 3.8%).

New Medicare Health Insurance Tax on wages

The Affordable Care Act levies a special tax on the wages and other earned income of high-income taxpayers.

You must pay this tax if you earn more than $200,000 in wages, compensation, and self-employment income ($250,000 if filing jointly, or $125,000 if married and filing separately).

Your employer generally withholds the Additional Medicare Tax from your pay. If you’re self-employed, you should plan for this tax when you calculate your estimated taxes.

This tax went into effect for 2013.

Simplified option for home office deduction

The IRS may have good news for you if you work at home as an employee or are self-employed and take a home office deduction.

Starting in 2013, you can use a simplified option for determining your deduction, based on $5 per square foot of home use for business (up to 300 square feet).

When you take the simplified deduction, you can still deduct mortgage interest and real estate taxes in full as itemized deductions. In addition, you don’t have to worry about calculating depreciation on your home, or recapturing depreciation later when you sell your home.

Energy credits

Thanks to an extension through 2015, you can still get an energy efficiency tax credit for qualifying energy-efficient products such as windows and doors, biomass stoves, and insulation.

The credit is 10% of the cost of your qualified energy efficiency improvements installed during the year, plus any residential energy property costs.

Your total credit for all years after 2005 cannot be more than $500.

Reminder: IRS e-file starts late this year

The IRS will begin processing individual income tax returns starting on January 31, 2015. The IRS is getting a late start accepting e-file returns this year because of the sequester.

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