It’s tax time again. And while most women would rank doing their taxes right up there with a root canal, becoming more knowledgeable about the process can make it more bearable—and less expensive.
If it seems impossible to keep up with all of the latest tax laws and changes, that’s because it very nearly is. “Tax laws change every year, and many of the changes are to the limits or amounts set by the original laws,” said Julie Streid, accounting manager at Kuppler and Associates. “For businesswomen during 2005, standard mileage rates have increased to 40.5 cents per mile through August 31 and to 48.5 cents from September 1 through December 31. Standard deductions and exemption amounts also have increased for 2005.”
She said another law that changed in 2005 pertains to the definition of a qualifying child. “Taxpayers receive benefits from children in various ways, including dependency exemption, child tax credit, earned income credit, dependent care credit, and head of household filing status.”
In 2005, a child is a qualifying child of the taxpayer if the child has:
• The same principal abode as the taxpayer for more than half of the taxable year.
• A specific relationship (son/daughter, stepson/stepdaughter, brother/sister, stepbrother/stepsister, descendent from any of these) to the taxpayer.
• Not reached a specific age (in most cases, under 19 or under 24 for a full-time student).
• Not provided more than one-half of her own support (does not pertain to EIC).
“This new definition eliminates the gross income and support tests and replaced them with the residency test,” Streid said.
Letting a professional prepare your taxes may seem like a luxury, but that may be because many women don’t realize how far they’ve come. “For most of us, when we enter the work force, we have very simple wants and needs,” she said. “We’re single and have basic tax returns to file that reflect our income and our expenses. As we continue through life, we start acquiring items that complicate our tax returns. How do we report stock sales? How do we record student loans? What do we need to report for a home purchase or sale? With a new baby, you question what you can claim for childcare expenses and other tax credits. A tax professional can help guide you through some of this unfamiliar territory to help you take advantage of many of the tax issues you may face.”
If a woman chooses to do her own taxes, Streid advised that she should be aware of which filing status would best suit her needs. “Women who’ve been married need to be aware of several filing categories. If you’re divorced by the last day of 2005, you’re considered unmarried for the entire year of 2005. This will put you in a higher tax bracket. If you’re considered a head of household, your tax bracket will be much lower than that of a single person.”
If your spouse died during 2005, she said you’re considered married for the entire year of 2005. “And if you don’t remarry in the next two years, you may be able to use the joint tax return rate for 2006 and 2007. This would allow you to use the highest standard deduction for each of those years. Researching what your options are will provide you with the information you may need to take advantage of your situation.”
One of the biggest risks of doing your own taxes is the risk of error, and Streid said speed causes some basic mistakes. “Most people want their refund as fast as possible. According to the Internal Revenue Service, the most common errors found on tax returns are in calculations or incorrect Social Security numbers. These errors will increase your chance of hearing from the IRS and delaying your refund.”
She said another mistake is not itemizing your deductions. “Many people don’t take the time to keep track of all of their eligible deductions and then have to use the standard deduction. It may take more time to keep track of these deductions, but if it allows you to itemize your deductions, you’ll definitely benefit in the long run.”
Knowing what paperwork is okay to toss and what must be kept can be confusing, regardless of who does your taxes. “Generally speaking, you should keep any and all documents that may have an impact on your federal tax return,” Streid said. “Any bills, credit card statements, invoices, mileage logs, bank statements with cancelled checks, and receipts to support deductions or credits that you claim on your return should be kept. If you hire a professional, the records you keep will help the preparer accurately complete your return.”
When in doubt, she said you should always save questionable papers that may support your income or expenses. “As a rule of thumb, most documentation needs to be saved for seven years. If you were to be audited by the Internal Revenue Service, they can go back six years in certain situations and ask for your financial information.”
Streid said the IRS is the best resource if you opt out of professional help. “The Internal Revenue Service has a web site that’s beneficial for people who want to do their own taxes. You can access the web site at www.irs.gov. You may also call the IRS at their toll free number: (800) 829-1040.” TPW