Monday, January 31, 2011

Questions for the Tax Lady: January 31st, 2011

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question: Roni, is it worth it to hire someone to prepare my return? I usually file on my own, but I bought a house in 2010 and since I'm probably going to itemize I was thinking about getting professional help. Do you have any advice on finding a good tax person?

Answer: The tax system was designed so that everyone can prepare and file their tax returns, all by themselves. The reality is our tax system has grown so complex that the vast majority of taxpayers either hire a tax professional, or use guided tax software to prepare their tax returns. The IRS estimates that fewer than 20% of taxpayers actually do their taxes by themselves. In fact, the commissioner of the IRS, Doug Shulman, uses a tax professional to prepare his taxes.

I would absolutely recommend you use a tax professional to ensure you prepare your taxes properly, and to make sure you claim every single deduction and credit you have coming. This is especially important when something in your life changes, like buying a new home.

The best advice I have for finding a good tax professional:

  • Get recommendations! Don’t just blindly pick someone out of the phone book. Ask your friends, coworkers, business associates who they use, and whether they would recommend them.
  • Cheapest/Most Expensive are not always the best. Bargain hunting can be a bad idea when it comes to taxes. On the other hand, just because someone charges you a lot, does not mean they are the best. Focus less on how much they charge, and more on their expertise and experience.
  • Find someone who is available year round. Remember, tax issues spring up all year long, not just during tax season. This is why having a tax professional who is available in July is absolutely crucial.
  • Your tax professional should have a lot of questions for you. They need to know about every aspect of your life: how many kids you have, how old they are, are they in daycare, are they in college, where you keep your money, if you’ve done any home repairs this year…. The list goes on and on. If your preparer does not have dozens of questions for you, they might not be getting the right information to help get you the maximum tax savings.
  • Don’t Rush! Interview a few tax professionals before you hire one. Give yourself plenty of time to find the right tax professional, one who will take the time to answer your questions, and who you feel comfortable with. This person will know a lot about you, at the end of the day, so it’s absolutely necessary that you feel good about the person who holds the keys to your tax return.
Question: My husband and I just had a baby, and are already thinking about his education. What are the tax benefits of starting a college saving account for my new son?

Answer: First of all, Congratulations! Is there anything more incredible than holding a brand new baby? I can’t think of one. Second of all, good for you! With tuitions rising sky high, now is absolutely the time to start saving for Junior’s college. The good news is, if you put your money in a tax-friendly college savings account, you’ll be more than prepared by the time the tuition bills roll in.

There are a handful of different kinds of college savings vehicles (e.g., 529b plans, Coverdell Savings, etc), each one has slightly different rules, but for the most part, they function similarly. You contribute your after-tax dollars to the account. Any earnings from the account are tax-free, so long as the funds are spent on qualified school expenses, such as tuition, housing, school fees, etc.

This is a better deal than just socking the money into a standard savings account. In a savings account, or a mutual fund, you would be on the hook for taxes on the gains. Over 18 years, and potentially thousands in gains, this can add up to a hefty tax bill.

Your best bet is to speak with your financial advisor to see which college savings vehicle is the best option for you, your family and your kid.

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