How to Do Your Own Taxes?

[Spartan_Warrior]

I've been using Turbo Tax since I started filing. That's how my parents always did it and my taxes were simple enough for me to use the "free" (~$30) option; it was easy, fast, and I could stomach the fee. Now that I have investments in individual taxable accounts, Turbo Tax refuses to do my return unless I opt for the "pro" version or some such (~$70 as advertised, probably closer to $100 once they tack on their "filing fees" or whatever) and that's a bit more than I can stomach.

I essentially fill out pointless government forms for a living. I can't imagine doing your own taxes would be any more difficult. Still, any recommended tips or resources for a first-timer other than the obvious (pages and pages of bureacrospeak on IRS.gov)?

[jennypenny]

IIRC, if you use the online version, you only have to pay for TT Pro when it's time to file. If you just use it as a guide and fill out the forms yourself and mail them, all it costs is a stamp or two.

[jacob]

The documents on IRS.gov are actually extremely clear and well-written.

The first thing to do is to google for "irs f1040.pdf" (the form) and "irs i1040.pdf" (the instructions). Make sure you get the right year (2013).

Then start reading the instructions from page 1 (don't worry, most of that document is tables!). Go through the instructions line by line filling out the form until you reach the end. If you need to fill out other forms, google them using the same format.

For more complicated stuff like covered call options and retirement fund rollovers, the IRS has "publications" e.g. "irs p590.pdf".

The only documention where IRS is not a shining example of technical writing (I really mean it. I am thoroughly impressed with their writers!) is when it comes to newly introduced forms due to recent legislation (for example, dealing with HSAs a couple of years ago was a mess) or really really obscure tax problems (offshore umbrella organizations, whatever) in which there are no clear rulings on the legality of it.

Doing your own taxes is like solving a 9th grade "word-problem" in math. The crucial part is of course in being able to ace such a 9th grade problem. If you can follow instructions to the letter e.g. multiply the amount on line 11 by 1.05 and write the result on line 12. Now add line 11 and 12 and put it on line 13 and line 23 of forum 8880... then you can do this.

The whole deal is predicated on you being able to execute an algorithm, that is, a specific set of instructions that have to be followed in order.

Where most people screw up is in trying to do it in the wrong order (e.g. I'm just gonna do my capital gains first); take short cuts (this line doesn't look important or I can't find this number, so I'm just gonna skip it); or simply by being tremendously clueless about what they're calculating, e.g. trying to fill out schedule D without knowing what "capital gains" means.

State tax is about the same deal. AFTER you've done the fed return, do the state version. The state tax forms usually just require copying over numbers from specific lines on your 1040 and making some adjustments where federal law and state law don't match up.

[fuyu]

If you open a bank account with state farm, you'll only have to pay $20 for premier turbotax online and you get one free federal efile and five state efile. That's what I'm doing this year.

[Riggerjack]

i started with TT, but got cheap when taxes got more complex. i wanted to know the basis for the math, so as to optimize my behavior in the future, rather than just signing off on the past. go to IRS.gov for the forms.

All TT does is ask the form lines in question form. i.e. "what is the number in box 2 of your w-2?" instead of filling out the line on your 1040 asking for your income from box 2 on all your w-2's. then you have to do the basic math yourself. nothing that requires anything more than a basic calculator, or scratch paper, and reading tables. once you've done it once or twice, it's faster than TT.

[The Old Man]

IRS Publication 17 "Your Federal Income Tax".

Start with this publication plus the 1040 form and instructions. They provide a good introduction on the federal tax system and preparing your own tax return.

I have always done my own taxes and never used software. I always used pen, paper, and calculator; although, now I use electronic forms. Doing it by hand is a good way of learning the tax system and it can pay dividends later when you learn to tax optimize your decision making.

If you are looking for tax strategies you won't find it at the IRS web site. However, whatever you decide to implement you will want to first review the relevant IRS publications and forms.

[Scott 2]

The hourly rate for doing them yourself, vs. just giving turbo tax their $100, is really low. An instance of cheap vs. frugal, IMO.

[jacob]

The amount of unclaimed money per filer is $460 from doing their own taxes, mostly, I presume, using software.

Having spent a few hours each year (more like a couple of dozen hours the first year) doing my taxes with pencil and calculator has saved thousands of dollars annually from understanding how the tax system works.

Knowing what is taxed, where it's taxed, and how it's taxed by seeing how the "algorithm/process" fills in the tax return lines has allowed me to optimize my finances wrt to taxes as well. Taxes are no longer something that happens after the fact. It's something I plan for.

If I relied on software to save a few hours or a tax-pro to save me $460 ... well, let's just say, I haven't found any other kind of activity where I can make $2500 an hour with a pencil and a calculator.

Added: The closer to an ERE lifestyle/arrangement you get and the more flexibility you have, the easier and more powerful this optimization gets. For example, I'm married (distribute earnings between two people) and have taxable, 401k, IRA, and SEP-IRA accounts. I have interest income, treasury income, qualified dividend income, normal dividend income, wage income, and self-employed income. We have some income that can be scaled by hourly effort as well. This means that whatever money gets spent is produced in a way that pays the least taxes as possible (typically qualifed dividends) and the money that gets earned under high taxes (typically self-employed and W2) gets tax deferred. If our income changes from high to low or vice versa due to jobs, we can rearrange the moneyflows again.

[riparian]

Taxact.com

[justjohn]

I used TaxAct software last year and was happy.

I used to do my own calculations, switched to TurboTax online several years ago when I started a small business. Got sick of Turbotax costing more every year (about $100 now). TaxAct is $20 (maybe $25 if you miss the discount offers).

They have an online version, but I used the downloadable Windows software. Don't think there is a limit to how many people's taxes you can do with one copy.

[Spartan_Warrior]

@Jacob: Thanks. That knowledge wrt taxation rules for different income types, etc, is on my to-learn list (before I have a lot of such income to worry about), so if doing my own taxes is the best way to learn that (makes sense), I guess I'll dive into it myself once I'm sure I have everything.

I think it's also true that I can get a rough estimate by using Turbo Tax up until the end and just not paying for them to submit it. So that helps. I seem to remember a few years back they actually let me preview the filled out forms and everything--just with a "PREVIEW" watermark or something. I tried to find that last year and couldn't. Maybe they got wise to that.

[Chad]

The cheapest way to get the software (TurboTax, H&R Block Tax Cut, etc.) is to make your estimated payment on April 15th (without the software) and then buy the software in August or September on Amazon. It will be about $15, as they are just trying to get rid of it.

[GandK]

We use TT online. Our family and income situation is complex and we both feel like TT online is a great value for us.

[JohnnyH]

Usually with much anger, then with much drinking, then with many plans to pay less next year.

Go buy the TT with investments and small business from a box store... Then pass it around your entire office. As of last year it had no serials or keys, since they make money from e-filing. You can then print your return and file fed and state for free. But you have to wait a few weeks for your return (95% of people: Nooooooo!!) and you risk a data entry error by the people manually entering your data.

I do not understand how doing it by hand would save over the tax software Especially for people who claim the standard deductible. The calculations surely must be correct... However, every year the various products come up with different answers... If taxes didn't disgust me so much, I'd probably try Jacob's method.

[jacob]

@JohnnyH - If you do it by hand, you will, for example, viscerally feel the difference between qualified dividend taxes and normal dividend taxes, when you observe that one is multiplied by 0.0 and the other by 0.25, to be added to your tax bill. This might prompt you to ensure that your dividends henceforth are qualified. With software, it will just ask you for the amounts on your 1099. It won't say: "Hey, if you invested differently, you wouldn't have to pay income taxes on half of your dividends!"

[fuyu]

Is knowing the different tax rates for different types of income the major benefit of doing taxes by hand? I’m asking because I have paper filed my taxes before and it wouldn't be difficult to paper file by taxes this year, but I didn't notice any valuable knowledge gained from preparing it by hand instead of using tax software. Is there something I’m missing?

[jacob]

Yes, that and where the cutoffs are and what kind of deductions and credits are available and when/how they trigger.

[fuyu]

Thank you. I was starting to wonder if there was something important and obvious that I overlooked.

[henrik]

[Scott 2]

My salary dwarfs all other income sources and expenses. I can't even make a good argument for itemizing. Maybe my finances are too simple

Were I more diversified in my income, or a lower earner with more time, I might have a different perspective on the value of doing taxes myself vs. using Turbo Tax. I dunno though. Blaming the software is good for marital harmony. Having a centralized electronic history of the tax forms is also nice.

I have planned a tax strategy. I agree if someone has not, they are likely missing out.