Frugal Fridays: Tax Season Begins

Welcome to Frugal Fridays where we share money saving tips, discuss living frugally and generally talk about personal finance issues.  I'm a terrible procrastinator, so I haven't started my taxes yet at all, but I know that some people are already started (or even finished) so I figured I better not delay any longer before writing a tax help diary.  If it turns out that I learn anything surprising and helpful when I actually do my own taxes, I may come back to this topic later.  

It's time to trot out my standard disclaimer:
I am not a financial professional.  I'm just a consumer who tries to be educated.  Take anything I say with a grain of salt.

Assemble Your Paperwork
Even if you are not ready to spend the time actually filling out the forms, now is the time you need to assemble all the paperwork you will need.  You should have all received all the forms and notices you need by now.  If you are missing anything, now is the time to find that out and track it down well before April.  Here's what I wrote last year on this topic:

The first thing you need to do is assemble all the paperwork you need.  In addition to your W-2 from your employer, you may also have 1099's from anyone who gave you money over the year (e.g., banks, brokerage houses, and state income tax refunds), statements showing mortgage or student loan interest payments you made, letters or receipts showing charitable donations you made, receipts showing tax deductible payments you made for car or boat registrations, etc.  It's a good bet that most things that came in envelopes that said "Do not discard: Important Tax Document" on the outside are going to be useful when filing your return.

When Should You File?
The general rule of thumb is if you expect to get money back from the government, you should file as soon as possible.  If you are going to have to pay, wait as long as possible to file your return (April 10 should be a good date).  There are some caveats to this advice however.  If you owe a significant amount on your taxes, you may have to pay penalties for late payments.  In that case, it's probably wise to file and pay as soon as possible to minimize those penalties.  In any case, you should fill out your forms now, so that you know for certain what your situation is, and then you can either file them right away or wait, whichever works better for you.

"Economic Stimulus" Checks
There is good news and bad news about this economic stimulus program:  The good news is your household may be eligible for an extra rebate check up to $600 per taxpayer plus $300 per child.  The bad news is that the checks aren't going to be issued till May and you may not get yours until July.  The good news is that you may be eligible for the rebate even if you don't owe any taxes for 2007.  The bad news is that figuring out whether you are eligible and exactly how much you will receive is pretty complicated (minimum income requirements, income caps, children, military status, and other factors all play a part).  The good news is that you don't have to do the calculation, the government will do it for you.  The bad news is that you have to file a 2007 tax return to get this check (even if you are a senior citizen or active duty military who don't normally file).  The good news is that this is actually a rebate on your 2008 taxes that you get in 2007 and if it turns out that based on your 2008 return you were eligible for more, you will get a further rebate next year (but you won't have to pay any back if you got a higher rebate than your 2008 return computes).

For further details, here is the IRS explanation of the plan and here's an article from CNN-Money.

Don't Believe Everything You Read
Because some of the changes to the tax code came very late in the year, after forms and instructions were printed, some of the printed information out there is actually incorrect.  I'd strongly urge using a software package to do your taxes and definitely update your software with the latest version just before you file to make sure that you are using the most accurate information.  You can also download updated forms and instructions from the IRS website and your state sites.

Special Note for Californians:  The California Franchise Tax Board made a typo in the instructions on form 540 (state tax return) that could cost individual tax payers as much as $1000 each.  The information is correct in the associated booklet, and they have issued corrected forms to post offices and libraries, but you should be careful if you fill your forms in by hand and use the ones that are sent to you in the mail.  If you want more information, here's an article that explains it all.

Free Tax Help
There are all sorts of resources out there for people who are having difficulty filling out their forms.  The IRS has a list of FAQs and a toll free number to call if your question isn't listed there.  There are volunteers that are available to help low income taxpayers prepare their returns.  There are also special programs to help senior citizens and military personnel.  The contact information for all of these programs can be found on the IRS website.  Although they aren't free, tax software packages come with embedded tax help and further resources you can access on-line or over the phone.

Tax Software
Now that you are convinced you should use tax software, which one to buy is your next dilemma.  The two big competitors for tax software are TurboTax and TaxCut.  I've pretty much always used TurboTax, and I'm happy with it, but I know people who use and like TaxCut and I think that functionally they are pretty much the same.  They each have different levels of products.  Here's a chart showing the features that come with each version so you can better determine which package is best for you.  I found a blogger who did a side-by-side comparison of the versions that reside on your own computer this year and he found only minor differences.  

Note that with both of these companies you can either buy a version that resides on your own PC or you can use the version that resides on their servers.  I would encourage you to use the local version for two reasons. Firstly, I'm a bit paranoid about data security sometimes and I don't like the idea of my tax return on someone else's (potentially vulnerable) system and, secondly, I know of one friend who had real difficulty going back to edit an older return that she did not have a local copy of.  She ended up having to retype in much of her information from her hardcopy since she couldn't access her on-line data years later.  

If your forms are long and/or complicated, I would also strongly recommend e-filing, even if it means paying an extra fee.  You don't need the hassle of mailing a big package to the IRS and hoping that it doesn't get lost or misdirected.  If your AGI is less than $54,000, you can use the IRS Free File link to find a tax preparation software you can use for free and file your return for free as well.  This includes your state return, for some states as well.

Further Resources
If you want to read even more, here are some good resources I've found:

• IRS Tax Tips:  The IRS has a page full of all new tips for 2008.
• For more general advice on what's new for this year, check out this guide.

Frugal Tip of the Week:  According to this list of seasonal sales, March is the time when home air conditioners, winter sports equipment (skis, etc.) and frozen food go on sale.  This list of seasonal sales adds that garden supplies, storm windows, luggage and spring clothing also goes on sale traditionally in March.