Tax software can help

Your Money

March 25, 2007|By Humberto Cruz | Humberto Cruz,Tibune Media Services

Before I realized it, I was done filling out our 2006 income tax return.

Rather than tackle the whole thing at once, I did it bit by bit, entering the information as I received it (for example, how much my wife, Georgina, and I made in dividends from our mutual funds and how much of it qualified for a preferred tax rate).

By using tax-preparation software, I could work on any part of the return I chose without getting confused. The program makes all the computations and adjusts any previous entries based on new information.

This ability to work on your return, stop and come back to it has been an attractive feature of tax-preparation software for years. I had rarely used it, preferring to gather all our tax documents and do everything at once from beginning to end. This year, I decided to try the stop-and-come-back approach.

I found I didn't get tired or stressed and still had an overall picture of our tax situation.

We won't actually file our return until close to this year's April 17 deadline, however, in case we receive a corrected 1099 or other tax form that would require us to amend the return. Because of the complexity of figuring out which dividends qualify for preferred rates, many brokerage and mutual fund firms have made errors they have had to correct in the 1099 forms they send to taxpayers. Waiting to file can be a good idea, many financial planners say.

This same complexity is another argument for hiring a professional or using tax-preparation software, particularly this year when the paper forms do not reflect the latest changes in our ever-changing tax laws.

"This may be the last straw for some of the more than 20 million Americans who still file their returns manually," said David Bergstein, an analyst with the online tax-preparation program CCH Complete Tax.

For do-it-yourself tax filers, software options are plentiful. For ease of use and helpful features, I continue to prefer market leader TurboTax (www.turbotax.com), which this year offers three products beyond the Basic program (Deluxe, Premier, and Home & Business).

All three include a deduction maximizer. Premier and Home & Business allow users to find online the tax basis of securities they've sold, a number that can be difficult to obtain in stock splits and spinoffs. Home & Business, the version Georgina and I use as freelance writers, is designed for filers of Schedule C and customizes the questionnaire based on your line of work.

I can also recommend other programs, including TaxCut (www.taxcut.com), TaxACT (www.taxact.com) and CCH Complete Tax (www.completetax.com).

If you insist on doing your return by hand, make sure you know the rules, or it may cost you. The reason: After the Internal Revenue Service printed this year's paper forms, Congress retroactively extended some tax deductions that had expired, including popular deductions for sales taxes and for certain teachers' out-of-pocket expenses.

As if the tax instructions weren't confusing enough, on the printed forms "you'll have to take these deductions on lines that say they are for other deductions," said Jeff Pretsfelder, senior tax analyst at RIA, part of Thomson Tax & Accounting.

For example, to claim the deduction for sales taxes, (you can deduct either sales taxes or state income taxes, not both) you need to enter the letters ST on Line 5 of Schedule A.

To claim the teacher's classroom expense deduction, you go to Line 23 of the 1040 form, even though the line says it is for the "Archer MSA deduction" (MSA stands for medical savings accounts). To show you are claiming an education and not a medical expense, you write the letter "E" on this line. What if you are claiming both the classroom expenses and the Archer deduction? Then you have to write the letter "B" (for both) on Line 23 and attach a statement explaining both deductions.

If you claim yet another deduction for higher education tuition, you must use Line 35 of Form 1040 although it says it is for "domestic production activities," and write the letter "T" for tuition. Again, if you are claiming both the tuition and domestic production deductions, you write "B" on the line and attach a statement.

For all these explanations and more, you can go to the IRS Web site (www.irs.gov). Or you can simply give up and use tax-preparation software.

yourmoney@tribune.com

Humberto Cruz writes for Tribune Media Services.

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