My goal here isn't to give you everything you need to file your own taxes, that would be absurd to try and do in an Instructable. And do not construe this as advice- I take no responsibility for anyone getting into trouble by getting in over their heads with a little information, basically like all the people who say in their Instructables if you cut your finger off it's not my fault... well you get the idea. What I am trying to do here is to give you enough information that you will be able to ask the right questions when you see your tax accountant so that they can save you the most money on your taxes. Unlike most of my colleagues I'm a big fan of educating my clients because I feel that the people who know more about how taxes affect their own situations are more likely to ask smart questions when I see them allowing me to save them money.
So you might be asking who is this crazy woman and why should I listen to her? I've been a tax specialist for the last six years and I figured I would share some of my expertise with the Instructables crowd because I've so been enjoying the projects I've been making on this site and the great ideas I've discovered, so this is my chance to give back. I'm an Enrolled Agent- meaning that I am enrolled to practice tax law in all 50 states. I can represent clients before the IRS in essentially the same manner as an attorney in addition to the tax preparation and advising activities that I do. I got into this line of work through a round about way. I got really into drag racing and I had seven cars on the streets of SF and I needed to find somewhere to keep them, so I got into owning investment real estate. Then I started having some real tough tax questions about the real estate that nobody could answer for me, so I took a tax class just so I could learn enough to talk to my accountant and research laws for my own curiosity, but did so well the company I took it with begged me to work for them, and it turned out I enjoyed doing it for work. I spent the next five years working for other companies preparing returns for high net worth individuals and small businesses, and then last year I started my own firm so I could focus on the types of tax work I really enjoy doing.
I specialize in very complex tax issues, it is why I got into the business in the first place and really is what interests me. Most potential clients that approach me are far too simple for what I care to work with and I wind up referring them to colleagues or telling them to DIY. I enjoy solving problems- multiple years of unpaid taxes that need to be filed so a person can remove the overwhelming stress of the government breathing down their neck, business entity formation and sales, real estate investment and entertainment industry issues are always fun. Basically I like doing the work that few others in my field enjoy, and that is really all I want to work with if I have my way. But I hope you benefit from the information in this Instructable, and if you run across unusual issues either in your own life or through a friend, feel free to send them my way.
One word of advice about working with an accountant: don't just hand your information over to someone and then trust them on blind faith that it is prepared correctly, and never sign a tax return if you don't understand what it says inside. There are a lot of scam artists out there that will get you big returns by putting a bunch of bogus numbers in your tax return, everything seems great until sooner or later the IRS stumbles across that dishonest firms and audits all their clients- that means you. Suddenly you will find out that it is you- not your accountant- that is on the line for the money owed to the government. I would assume that most of the people out there preparing returns are honest, but if someone doesn't seem on the up and up, or is rushing you through signing, go elsewhere. Lying on a tax return just isn't worth the stress and worry that comes along with it- being honest and working within the legitimate loopholes for saving money on taxes always works out for the best for the preparer and the client in the long run.
I will end this intro page with my favorite quote about taxes:
Over and over again courts have said that there is nothing sinister in arranging one's affairs to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands.
- Judge Learned Hand (1872-1961)
Step 1: How Complicated Are You?
If you have kids then things get a whole lot more complicated. Depending on how much you earn there are many credits that can help out parents and some will actually give you more money back as a refund than you paid in. Yes it is possible to get a tax refund even if you paid zero taxes in under certain circumstances. Most accountants are fully capable in getting big refunds back using these credits and the franchised firms are built around doing this kind of work. The rules for these credits are complicated and you might be well off to hire someone to prepare your return if you have children, just ask about fees first because most preparers charge per form and can wind up become unconscionably expensive.
If you are an independent contractor (meaning you get a form 1099 at the end of the year from your employer instead of a W-2) your life is a lot more complicated and you really should find a good accountant because they will be worth their fees for you. Independent contractors are essentially business owners and therefore have many deductions they can take to offset their tax burden. However the flipside of that boon is that you are responsible for your own Social Security and Medicare taxes that normally your employer pays half of. This is known as the dreaded self-employment tax, and it is a flat tax on your net earnings of approximately 13.5%. Because this is based on net earnings you can beat it down by your expenses, but you probably will owe money still- if this is your situation see step 4 where I go into business deductions in detail. Here are a bunch of calculators that can help you figure out your income and SE taxes: Tax Calculators
Then we get into the more complicated issues- if you own rental real estate, dabble in day trading, get royalties, have a farm, earn enough to get into Alternative Minimum Tax territory, make money off your instructables.... you get the idea. Then you need a lot more specific info and should find yourself a good tax accountant because they will more than make up for what they charge you in legitimate tax savings and audit risk management.