Tip 1- Know which records to keep.

Before you can streamline your record keeping, you must first know what documents you will need when you file your 2010 tax return. With so many changes to tax laws, this can become a confusing yet not impossible task.  The following documents should be kept for use when you file your next tax return.

• Proof of income – The IRS wants to know exactly how much money you make each year, therefore it stands to reason that you want to keep records on all earnings.  This includes payroll records, 1099s, investment records, spousal support and any other taxable income.
• Deductions - There are certain expenses that can help you lower your tax liability which reduces the amount of taxes you are responsible for paying.  These deductions are important in that they either lower what you will owe the IRS if you have a tax bill or increase the amount of money you will receive back in the form of a tax return.  Common deductions include but are not limited to charitable donations, interest paid on your mortgage, tuition expenses, business expenses (for the self-employed), child care expenses and spousal or child support payments.  Keep any receipts that may be used to support a tax deduction.

Tip 2- Keep important documents organized.

While it is important to keep all of these documents, it is also recommended you do so in an orderly fashion.  Whether you intend on filing your tax return on your own or if you hire a tax professional, having your records organized will expedite the process and save time for everyone involved. Keeping and organizing physical records is necessary in the event you find yourself facing an audit after filing your tax return. You may also decide to keep electronic records by using spreadsheets or software that helps you organize your records. Here is how you can get started.

• Establish one place where you will keep all of your physical documentation. This can be accomplished with a very basic filing system. Label your main folder Tax Documents 2010.
• Make a checklist that includes all of the documents that you will need when you file your tax return, this way you will know which documents you need to keep.
• Create a separate file for each of the following: income and earnings, interest statements or other documentation from your bank or financial institution, personal expenses or deductions, business expenses and deductions, and any receipts or documentation that may be used to support tax credits.

These are the very basic files you would need to organize your taxes. The more complicated your situation in regards to taxes, the more files you may have to add to track and organize necessary documentation.

When the time comes to file your income tax return you will have all of the necessary documentation to either complete your return on your own or hand it over to a tax professional. Once your tax return is filed, take all the information you have saved throughout the year and place it inside one large envelope to be saved for future reference. Organizing your tax records as you go is the easiest way to avoid losing documentation that could cost you money in the long run.

This article is provided by Back Taxes Help LLC, a company designed to help you with various IRS tax problems. For self-help tax information or tax professional help, please visit BackTaxesHelp.com

So, what do you do if you owe the IRS money?  Certainly, don’t panic.  The important thing to do is to stay level headed.  There are plenty of options you can consider in making sure the IRS gets their money.  But you’ll want to act fast to get your plan in order and rid yourself of the debt as soon as possible.

What to do if you know you’re going to owe money to the IRS

Avoid tax penalties

First, don’t hesitate to file.  Even if you know you’re going to owe income taxes this year, you’ll want to go ahead and file by April 15^th.  According to an article at SmartMoney.com, you’ll have to pay a 5% per month penalty.  The failure to file penalty will be charged until it reaches 25% or more of what you owe!  SmartMoney provides   the below example:

If your unpaid balance on April 15 is $8,000, you’ll rack up monthly failure-to-file penalties of $400 until you “max out” at $2,000. After that, you’ll be charged interest until you settle your account (as mentioned, the current monthly rate is 0.833%).

Filing extensions

You might consider filing an extension using form 4868, but keep in mind, an extension of time to file is not an extension of time to pay.  Penalties and interest will still accumulate on your debt.  According to the IRS, interest is generally 1/2 % to 1% for each month or part of the month the tax is not paid.

Options if you can’t pay your income taxes

Bottom line, if you can’t pay your income taxes, it’s time to explore your options.  Keep in mind, owing the IRS is a form of debt.  You’ll want to take action to get the IRS paid off fast!  Here are some ideas to consider in no specific order.

1.  Savings

Can you draw on your personal savings to pay the tax bill?  An unexpected tax bill is reason enough to pull money from your emergency savings fund and pay it off immediately.  However, I wouldn’t recommend leaving less than $1000 in your savings account.  If you’re already under this amount, you might consider some of the other options listed or even an installment agreement discussed below.

2.  Sell something

While it may be hard to part with something you value, it may be a good idea to sell a more expensive car or recreational item such as a boat or motorcycle to pay off your debt.  Remember, being in debt is serious, especially when you owe the IRS.  Don’t play games.

3.  Pay some of the debt

You may not be able to pay the entire balance in full, but pay what you can since what you owe is subject to interest.  Again, if you set up an installment or payment agreement the government will charge you between 1/2 % to 1% for each month or part of the month the tax is not paid.

4.  Offer in Compromise

An offer in compromise (OIC) is an agreement between you and the IRS that settles your tax liabilities for less than the full amount owed. Keep in mind, an offer in compromise is generally not accepted if the IRS believes the liability can be paid in full or through a payment agreement.

5.  Family and friends

While this may not work some people, others may be able to ask family or friends to help get them over this hump in the road.  My personal recommendation here is to pay family and friends back as soon as possible and never ask for the loan without a sure way to repay or ability to make payments each month.

6.  Other loans

Taking out another loan to pay the IRS would be a last resort option in my opinion.  You probably won’t be able to beat the interest rate the IRS offers with a personal loan from your bank, or even a home equity loan.   And I certainly wouldn’t use a credit card if that’s something you’re thinking about.  Still, having all the options on the table for consideration will help you choose the right approach for your situation.

7.  Installment or payment agreement

What is an installment agreement?  An installment or payment agreement is an agreement with the IRS to pay your taxes in payments over time.

How do you set up an installment agreement to pay your income taxes?

If you have $25,000 or less in combined tax, penalties, and interest you are eligible to request an installment payment plan.  According to the IRS, you can call the number on your tax bill or use the Online Payment Agreement (OPA).  You can also complete a fill-in request by using form 9465.

Once you submit the request, you will receive a written notification telling you whether or not the terms of your installment agreement have been accepted, or if some modification is necessary.  According to SmartMoney you can submit your own terms and the approval is generally automatic if you owe $25,000 or less.

What if you owe more than $25,000?  According to the IRS, you may still be eligible.  But, you’ll need to also complete form 433F.

Will you still get tax refunds if you have an installment agreement?

As a side note, any refund due to you in a future year will be applied to the amount you owe.  The IRS automatically applies the refund to the taxes owed.  If the amount of your refund doesn’t pay off the tax debt, your installment agreement will continue until the terms are met.

Final thoughts

Quite often I’ve heard Dave Ramsey mention you don’t want to owe the IRS.  Get them paid off as soon as possible so that you can get on with your life!  If you move to an installment agreement, do what you can to pay extra payments each month to minimize interest charges.  Also, after figuring out your approach to pay, make sure you plan appropriately for the current tax year.  The last thing you want to do is increase your debt by owing more when you file taxes again next year.  If you’re having trouble planning, consider finding a tax professional or CPA to help.  Work with this person to minimize a tax refund as well as owing any money.

What do you think about these options?

In a recent article at SmartMoney.com, Jami Makan discusses three great ideas for lessening the financial burden of getting your taxes prepared.

1. Look for group discounts for family members.  Also keep an eye out for referral offers and special coupons being presented on social networking sites such as Linked In.
2. Do some of the work yourself online and then have it reviewed in person.  Some companies are offering considerable discounts from what you would pay by having the work done by a pro.
3. Avoid the tax time rush.  Work with tax preparers to get your taxes done earlier for a discount, or some will even provide a discount if you have them done after April 15^th.  Of course you’ll have to file an extension.

And now, on with the personal finance blog post links and roundup…

Personal Finance Links

I hope you’ll take a few minutes out of your day to explore these interesting and helpful posts from other personal finance blogs.

• Bible Money Matters: PT Money provided a guest post this week on the top 10 tax credits to take advantage of.  Personally, I like the first time home buyer tax credit this year available to new and existing home buyers!
• Wise Bread: An interesting post that provides 7 ways to cut your food bill without clipping a single coupon.  Personally, we are coupon clippers because we play the grocery game.  But this post provides some good suggestions to help save money on what can be one of the biggest budget busters!  My favorite tip?  I like the weekly food run.  All those little trips typically add up to spending more than what you would with just one trip.
• Free Money Finance: Everyone wants to impress their boss, right?  Well, do what your boss wants you to do!  J  You’re guaranteed to improve your performance if you exhibit the behaviors mentioned in this post.  They may seem obvious, but many people don’t do them.  I like the behavior of streamlining processes to save money and time.  Some processes can just bog us down and keep the company and people from being productive!
• Thrive Blog: Looking for some ways to save money on your cell?  I didn’t know about OverMyMinute.com.  What a cool service!  Or, avoid calling information.  I was just dinged over $10 on my latest bill between my wife and me calling to get phone numbers.  Agh!
• The Simple Dollar: The title of this post, “Why Work”, caught my eye this week.  This is an inspiring post exploring why we work, what keeps us from doing what we really enjoy and how to bridge the gap to do what you love.  As an aside, I believe we can glorify God in whatever we choose to do as long as it’s ethical and moral.

One Money Design Around the Web

This week I discussed how much to save for retirement in my article at Bible Money Matters.  I’ve decided not to join the panic about retirement savings. Read my post to learn why!

Personal Finance Blog Carnivals

What is a personal finance blog carnival?  If you’re interested in learning more, here is a great definition from BlogCarnival.com:

Blog Carnivals typically collect together links pointing to blog articles on a particular topic. A Blog Carnival is like a magazine. It has a title, a topic, editors, contributors, and an audience. Editions of the carnival typically come out on a regular basis. Each edition is a special blog article that consists of links to all the contributions that have been submitted, often with the editor’s opinions or remarks.

The benefits for the reader include reading a wide variety of content about personal finance.  A further benefit is the ability to interact with the writer or other readers in the comments.

One Money Design was recently featured in Carnival of Personal Finance #244: The Fiscally Irresponsible TV Characters Edition

According to the IRS, the amount of tax your employer withholds depends on a few things:

1. The income you earn.  The more income you earn, obviously, the higher your tax liability.
2. The information you’re providing in the  form you turn into your employer.

What is the W-4 form and the purpose of withholding allowances?

The W-4 is a form you complete for your employer that’s used to determine how much income tax to withhold from your paycheck.

The form collects three types of information according to the IRS:  1) whether or not you want to withhold money at the single or married rate; 2) the total amount of withholding allowances you want to claim; 3) any additional amount you would like withheld.  The more withholding allowances you specify on the W-4, the fewer taxes withheld.

When to make changes to your withholding allowances

If you’re like our family, we’ve had a lot of life changes in recent years that have resulted in a need to modify our W-4.  I think this may be typical for a young family.  J

We’ve received some fairly large returns in the past and would rather have the extra money to manage towards our financial goals each month.  So, after receiving some of these hefty income tax refunds we’ve submitted new W-4’s specifying an increased number of withholding allowances.

The IRS provides some guidance on when to update your W-4.  Basically, as with our family, you’ll want to revisit your withholding allowances for major changes in life such as marital status, birth of a child or perhaps the purchase of a home.  Also keep in mind, any changes related to exemptions, adjustments, deductions, or credits you become eligible for will require you to revisit your withholding allowances.

Your W-4 can be updated at any point in time through the tax year.

Adjusting your withholding allowances

If you want an easy way to determine your allowances, you can use the IRS tax withholding calculator.  The hardest part about the calculator is making sure you have the right information handy.  So, here are a few tips the IRS provides before using the program:

• Have your most recent pay stubs handy.
• Have your most recent income tax return handy.
• Estimate values if necessary, remembering that the results can only be as accurate as the input you provide.

The calculator will take you through 5 different steps or pages requesting information.  Again, as long as you have the information handy the process is quite easy and answering the questions shouldn’t take more than 10 minutes.  For your convenience, I’ve provided a summary of each step below:

Step 1: General information is requested in this step.  You’ll need to provide the filing status for your 2010 income tax return (married, single, etc.) and specify as to whether or not someone claim you as a dependent?

Step 2: Enter any child tax credits and other credits you’re eligible to receive.

Step 3: Enter income and withholding information.  This is where you’ll need your pay stub to help you determine how much in taxes have already been withheld to date so that it’s not counted twice.

Step 4: Enter any adjustments to salary such as a contribution to an IRA or education loan interest you may be paying this year.

Step 5: Finally, enter any deductions.  This is where you can enter your itemized deductions or select the standard deduction.

Based on all the information you submit, the calculator will tell you your anticipated income tax for 2010.  The results will also tell you how much tax you’ll have withheld for the year and whether or not you’ll have an overpayment or if you will underpay your income taxes.

Now, here’s the best part.  The calculator provides you direction as to how many allowances you should consider submitting on your W-4.  With this information you can print off a new W-4 (see link below), complete the information (including your new amount of allowances) and submit to your employer’s human resources department.

This being said, keep in mind I’m not a tax professional.  If you’re concerned at all you may over or under pay taxes (even after using the calculator), please consult with a tax professional!

Have you increased or decreased your withholding allowances in the past?  What did you find helpful or confusing in this process you can share to help other readers?

Helpful links to help you adjust your witholding allowances

• W-4 form
• Withholding Calculator
• More about Tax Withholding

Is an income tax refund bad?

In “3 Reasons Why a Big Income Tax Refund Is a Horrible Thing” Craig Ford, explains three reasons why a big tax income refund is a bad idea:

A big tax return simply means you did not properly calculate and estimate your taxes

A big tax return means that you let the government hold your money for up to 16 months.  By the way, the government did not give you any interest on that money.

We think psychologically different about found money than earned money.

I enjoyed Craig’s post and particularly the conversation that took place in the comments section.  As an aside, I love reading blog posts such as this one with the valued added comments from all the different perspectives (FYI – this type of discussion displays the true value of a blog).

Is an income tax refund good?

It was an interesting read because like Craig it’s been ingrained in my head to avoid income tax refunds like the plague.  But as you would find in the comments of Craig’s post there are a lot of people who are fine with receiving a refund.

Here are a few of the reasons I picked up from the comments as to why an income tax refund might not be such a bad thing for some people:

• The interest I could earn myself each year on the money is minimal.  Unless you’re withholding too much it may not make a difference.
• I’m concerned with making a mistake and owing at the end of the year, so no changes in allowances are made.  It’s too confusing to change anything.
• I’m much more likely to do something wise with a large refund than receiving the money in monthly installments.

To the further the point on the last bullet, I read an article by Financial Samurai on why tax refunds are good for most people because people can’t save.  He dares to go where many have not been willing to go in discussing the very idea why he thinks income tax refunds are actually not a bad thing.  Here’s why:

You have to ask yourself whether you have the discipline of saving that extra $200 a month, or using it to pay down debt. Most people are not disciplined enough to pay down debt and avoid buying junk. This is why we have such massive debt problems in the first place!

Because of this reason, Samurai thinks it’s better for people to get an income tax refund.  He believes people will manage a larger sum of money better than that money in monthly payments.

So, it becomes an interesting discussion (as it did in the comments of Craig’s post).  Are income tax refunds good or bad?

My take on income tax refunds

Unfortunately, I agree with Financial Samurai, in that most people may not be disciplined enough to manage the extra money wisely each month.  But I also agree with Craig that it’s not a good idea to receive an income tax refund each year.

Personally, I’d like to see people have the extra money each month to make headway in paying down debt, giving more, or building their savings.  Not having the money each month for these areas can be costly.  Let’s dive a little bit deeper.

1.  Income tax refunds are good for emergency situations

If an emergency arises, even a few extra hundred dollars in savings can help (assuming the emergency fund isn’t already fully funded).  Maintenance repairs are great examples.  The money in savings can help if something needs to be fixed on the car or house and avoid the use of a credit card.  While that money may not earn much interest for the given year, it’s too costly for it to not be available until you receive your refund.

2.  Income tax refunds are good for giving situations

Assuming you’ve given or tithed based on your gross income, the income tax refund or extra money each month isn’t typically used for this purpose.  But it is used if you’re stretching your giving beyond the tithe or giving to Christian ministries.  In those cases, the giving will help fund and provide for ministry or church operations each month.

3.  Income tax refunds are good for Debt situations

As Craig mentions in his post, not using the extra money for paying off debt can be costly too.  The interest can grow on credit cards through out the year.  Having the money to pay down this debt each month can help you make faster headway and avoid the additional interest charges.

Personally, I’m in favor of helping people learn to manage money wisely each month through good budgeting and expense management practices.  And if there is still a tendency to spend the extra money, automatic withdrawals or bank drafts can be set up across each of the three areas mentioned to avoid the temptation.

What’s your take on income tax refunds; good or bad?  But, wait!  Before you express your opinion here in the comments, head on over to both Craig’s post and Samurai’s post and let them know your thoughts.  Afterwards, leave me a comment here so I’ll know to go see what you wrote.  I’m interested to see what you think.

The FSA annual grace period (AGP)

But in 2005, the IRS offered a 2 ½ month grace period (known as the “annual grace period” (AGP)) that employers, if they chose to do so, can use in their plans.  So, it’s important to know if your employer has decided to use the 2 ½ month grace period, you still have time to use your 2009 health care savings.

Don’t rely on the FSA grace period

While the grace period can be a great benefit, it’s important that you don’t become reliant on the grace period and begin to see it as the actual due date for spending.  This could cause problems when trying to use up all of the current year’s balance by the end of the year.  In other words, if you rely on this year’s grace period to spend last year’s savings, you now have less time in the year to spend current year savings and may end up needing to use the grace period again (using it as the actual due date).

At the same time, the grace period has been provided as a nice benefit to the FSA’s.  Sometimes it is difficult to use up all of the funds by the end of the year.  A “use it, or lose it” strategy can be somewhat harsh, especially if you’ve contributed a lot of money to your FSA.  Perhaps you over contributed in one year.  The grace period simply offers you some extra time to spend your FSA balance.

The FSA run-out date

You need to also keep in mind another important date associated with the FSA.  It is called the “Run-Out date.”  It is a date that marks the cut off for filing claims for the previous year.  In other words, all claims have to be submitted by the run-out date.  If you do not submit a claim before the run-out date, you will forfeit any remaining balance in the account.

Check to see if your employer offers the FSA grace period

• Check to see if your employer offers the annual grace period by either contacting your HR department or checking on the website of your company’s plan administrator.
• Check to see what types of accounts are offered as a part of the grace period.  Some employers may limit the plan types.
• Fill free to call or go and visit with your HR department to understand the specific rules your employer has put into place.  While checking benefits online is a convenient option, you don’t want to misinterpret any rules.  Again, the idea is for you to avoid losing any money!

Friendly reminders for general FSA tracking

Make sure you keep all of your receipts

There are several times throughout the year I’m asked to submit a receipt to substantiate the purchase.  I typically keep a separate folder in my financial file for such expenses.

Respond promptly for any requests to substantiate spending

When asked to substantiate a purchase, make sure you do so right away.  Without prompt substantiation some accounts can be frozen.

File claims promptly

How will you pay for medical expenses if you use an FSA?  With an FSA the money is taken from your paycheck as a before tax benefit.  So, how do you purchase or pay for medical expenses if your employer doesn’t offer an FSA card to withdraw from this account?

To be honest, it’s difficult for most people to use cash out of their monthly budget to pay in advance for the expense before it can be reimbursed.  Therefore, many people may use a credit card and then file a claim.  Once the payment is received the balance on the credit card is paid.  In this case it is important to promptly file claims for reimbursement because in some cases it could take a few weeks to receive your check.

Review both your current year and previous years’ accounts

It’s important to review balances and transactions for both current year and previous year if you’re in-between.  As the new year begins, any spending will typically come from your previous year if you have a balance.  Once the balance is used, spending will withdraw from your current year account.

It’s a good idea to keep an eye on spending, especially if it falls in the grace period.  You’ll also want to make sure you’re submitting claims promptly.

Final thoughts

The best way to use an FSA account is with some good estimating of expenses.  You really don’t have to be concerned with the grace period or run-out date if you’ve estimated accurately.  You can only provide accurate estimates if you’re tracking actual health care costs and staying aware of what expenses might be on the horizon.  But keep in mind, it’s and estimate so it’s not perfect.  The ideal situation is to either run out of funds right at the end of the year (a little bit early), or be in a situation to use up your funds within a 1 month grace period.

What do you think about the annual grace period and run-out date offered by some employers?

Obviously, the credit was getting a lot of attention when it was announced, but now people are paying more attention since it’s time to file taxes.  I thought I would do a little bit of research to cover some of the most important information as well as provide what I found related to filing for the credit.

The difference between a tax credit and a deduction is also important to keep in mind.  A credit is a reduction in the amount of taxes owed to the federal government.  A deduction is a reduction in the amount of income that is taxed.  If you owe $8000 in taxes and are qualified o receive the $8000 tax credit the amount of taxes you owe will be $0.

Important information for the first time and repeat home buyer tax credits

• First-time home buyers can get a tax credit up to $8000 if purchasing a home on or after January 1, 2009 and on or before April 30, 2010.  If a sales contract is signed by April 30, 2010, a home purchase completed by June 30, 2010 still qualifies.
• Repeat home buyers can get a tax credit up to $6,500 if they have owned a home for 5 consecutive years out of the prior eight years.  It applies to homes sold after November 6, 2009 and on or before April 30, 2010.  If a sales contract is signed by April 30, 2010, a home purchase completed by June 30, 2010, still qualifies.
• There are income limits for both credits of $125,000 for individuals and $225,000 for married couples filing jointly for all sales occurring after November 6, 2009.
• The income limits are different for sales occurring after January 1, 2009 and on or before November 6, 2009.  They are $75,000 for individuals and $150,000 for married couples filing jointly.
• The home cannot be priced above $800,000 in order to be eligible for both tax credits.

How do I apply for the tax credit?

• Because of documentation required for the home buyer’s tax credit, you must file a paper return if you claim the credit on your 2009 tax return.
• The credit is claimed on IRS Form 5405.  Once you have completed Form 5405 and determined the tax credit amount, claim this amount on line 67 of the 1040 income tax form for 2009 returns.  It’s on line 69 of the 1040 income tax return for 2008.
• You must submit a copy of the HUD-1 settlement statement and IRS Form 5405 to claim either the first time home buyer tax credit or the repeat home buyer tax credit.
• The IRS also recommends for long-time residents/repeat buyers claiming the credit attaching some additional information:
• Form 1098, mortgage interest statement, property tax records or homeowner’s insurance records.  My recommendation in filing for the credit is to be as complete, organized and thorough as possible so there is no delay in receiving your credit.

As always, I’d like to remind you I’m not a tax professional.  Please consult with your tax advisor or professional to determine specifics about your situation and if you’re eligible to receive the credit.

Other Helpful resources:

• IRS Frequently asked questions
• IRS Filing Requirements
• Download Form 5405

If you’re able to find a trusted professional, you can develop a relationship with this person and work with them over many years to come.  This allows them to get to know you and your situation better which can only help insure your tax situation is in order.  For example, a CPA can help you take the appropriate deductions you qualify for and avoid missing any credits.  A CPA can also alert you to changes in tax law that may affect you.

So, how do you got about finding a CPA to become your trusted tax advisor and service provider?

What to look for in a CPA

Certainly, these characteristics are somewhat subjective, but I would feel strongly about not entering into a professional relationship with someone who doesn’t posses them.

Integrity

The person must have a solid track record of ethical and morally sound business decisions.  How do you determine this?  The best way is to contact three references.  If there are no references, or the CPA won’t provide them, choose to go somewhere else.

Organized

Organizational skills are important qualities for a CPA.  If you walk into the office, or look at the CPA’s desk and its stacked high of papers and everything seems out of order, you may want to be cautious.  If a CPA is unorganized in managing their office, or work, you can bet they’ll be unorganized in managing your return.  Again, paying attention to the office and contacting references will help surface any issues here.

Ability to explain complex tax laws in an easy to understand language

I work in software and several people in our department are software developers.  They are the most technical of software professionals.  They are required to explain complex software development issues to management and sometimes customers.  CPA’s are technical in the nature of their work as well.  It is their job to make sure you understand your return and the tax strategy they are recommending.

Advisory skills

You definitely don’t want to find a CPA who only files your return for you.  You can get that with much cheaper services, or even do the return yourself.  Rather, you want a professional who is going to sit down and look into your situation and provide sound advice.  Furthermore, you want a professional who is going to help you strategize on your taxes, especially, if you’re working with them for business taxes.

Steps for finding a CPA

1. Determine your needs: first, determine why you’re seeking a CPA.  Is it for a personal return, or for a business?  Are you concerned you’re having too much withheld from your paycheck each month?  List out all of your needs so that you have this handy when you begin your search.
2. Conduct a search: the process can go pretty quick if you start close to home with friends, relatives and co-workers.  I think a really good idea is to contact people you know at your church to see if anyone in the church is a CPA.  You can also check out Dave Ramsey’s Endorsed Local Providers.
3. Set meetings: In my personal opinion, I don’t think it’s wise to meet with less than three people.  I typically follow the rule of three whenever I’m getting estimates for anything, especially, when it’s forming a business relationship.  However, depending on where the recommendation comes from, you may choose to meet with only two people.  Don’t ever meet with less than two.
4. Collect information: Before your first meeting, you’ll have wanted to do some homework by collecting the last two years of tax returns and supporting documentation.  You may also want to take copies of your latest pay stubs and bank statements for the meeting. Unless you make a decision to work with that particular CPA, don’t leave the documents with them.
5. Ask questions: Learn as much as you can in the meeting.  You can expect to meet for about 30 minutes, so find out the CPA’s background, how they would advise or work with you, how often they would recommend meeting with you and their fees.
6. Get references: Finally, make sure you get at least 3 references you can contact.  Ask the references about the above characteristics (integrity, organized, advisory skills, etc.).

What do you think about these essential characteristics and steps in finding a CPA?

Reference: Finding the Right CPA, Business Week

Why?  I’m not a tax professional!  Primarily, I was afraid I was going to make a mistake somewhere along the way, get audited and have to pay a penalty.  I suppose the other reason was the convenience in taking my paperwork to a professional and trusting they would take care of everything for me.  All I had to do was collect my paperwork, decide what day I would visit the tax professional and bingo, my taxes were done!

But a few years ago I made the decision to do my own taxes.  Honestly, it was sort of on a whim when I decided to sign up for the online version of Turbo Tax.  I found the system so easy to use, with it prompting me for information and asking questions.  I haven’t turned back for the last few years.

So, should you prepare your own taxes?  How do you decide?  Asking yourself 3 simple questions may help you determine whether or not this is the right approach for you.

Do you have the time?

Getting organized and preparing your own taxes does take some time.  You need to collect all of the tax documents required for filing and then block off some time to enter the information into a software program.  Once you’ve done this a few times you’ll know how to organize your information and have everything you need at your finger tips, but it will require a time investment either way.

Do you want to pay?

Still leaning towards using a tax professional?  With any professional service you’re going to pay.  The price range is wide with tax preparation.  In the past, I’ve paid around $100 for a simple return at H&R Block, but some returns can get quite complicated and you’ll definitely pay for the expertise. Note: your tax preparation fees may be eligible for deduction the next time you file if you itemize your deductions.

Do you have a simple return?

An important question is to ask yourself if you have a simple return.  How do you know?  Basically, a simple return may be seen as someone who is taking the standard deduction, doesn’t itemize and their income is from one employer and interest from just a few places.  But, this is very simple.  I think a simple return could also be someone who itemizes their deductions, but the other criteria may still hold true.  Ultimately, the decision is yours, but it might not hurt to dive into a software program to find out how straight forward the filing is for you.

Final advice

With that being said, if you’re making the move to doing your own taxes this year for the first time you might consider having them double checked by a CPA or from a company such as H&R Block.  You can find a Dave Ramsey endorse tax professional in your area.

This may be a good idea if you’re feeling any anxiety at all over your tax preparation and also find that you owe or expect to receive a significant refund.  Turbo Tax, in particular, does a lot in the way to help you avoid making mistakes.  However, remember the responsibility to file accurately is still yours.

How do you feel about preparing your own taxes this year?

With less than one week left in the year it’s important you don’t lose any of your balance.  I recently logged onto my account online to check the balance.  Fortunately, we’re not in a situation to have to do any last minute spending, but its okay if you do need to empty your account because there are some options.

2 Things to do before you spend the FSA balance

First, check with your employer as certain plans may offer a grace period for up to 2 ½ months (according the IRS) after the end of the plan year.  If there is a grace period any expenses within the period can be paid using the balance in the plan.

Second, make sure you’ve submitted all of your expenses for reimbursement.  I recommend checking the IRS eligible expenses list and determine if you’ve incurred any medical expenses on the list that have yet to be claimed.  If so, make sure you still have the receipts and promptly submit your claims.

Eligible expense ideas

Here are a few last minute ideas if you determine you still need to use up your balance.  Please double check the eligible medical expense list on the IRS website for more details and determine what is right for your situation.

Transportation expenses

Transportation expenses of a parent who must go with a child who needs medical care.  I thought this one may be an interesting option to explore.  If you’re like our family there have been a lot of trips taking our children to the doctor this year for various check-ups and when they’ve been sick.  The IRS guidelines are specific, so make sure your situation applies.

Bandages or other over the counter medical supplies

I think this is typically the most popular idea for burning an FSA balance.  Making a trip to a Sam’s club or Super Wal-Mart may be good places to stock up on such medical supplies.

Fees you pay to a Chiropractor for medical care

I think it’s typically easy to make an appointment if you do receive care from a Chiropractor.  Although, the co-pay may be about the only thing you can deduct here.  Also, seeing your dentist is another idea that fits in this category if you’re due for a check-up.

Contact lenses and the materials required for using them are eligible

This is another option to consider if you haven’t seen an eye doctor yet this year.  Eyeglasses are also an expense that would fall into this area.  I know that I could get an appointment fairly easy with a local doctor, if needed, and probably place an order before the end of the year.

Place an order for routine prescriptions

Finally, if you use routine prescriptions and are almost out of stock, it may be a good time to place an order.

Keep in mind, according to the IRS you cannot receive distributions from your FSA for the following expenses:

• Amounts paid for health insurance premiums.
• Amounts paid for long-term care coverage or expenses.
• Amounts that are covered under another health plan.

Do you have any other ideas for emptying your healthcare FSA?