The deadline to file tax returns is less than a month away, but procrastinators take comfort - here are some tips for a less stressful tax season.
First, find out if you qualify for free tax preparation or filing. More than half of Minnesota households are eligible.
The Minnesota Department of Revenue has a list of more than a hundred free tax clinics for senior citizens, people with disabilities, individuals earning $35,000 or less individually, and families earning $45,000 or less. The clinics are held in libraries, schools, churches, community centers, and other locations throughout the state.
Or, if you earned $30,000 or less or your family earned $50,000 or less, you can have your taxes prepared for free by AccountAbility Minnesota, a nonprofit tax preparation and financial services organization.
The group operates 13 walk-in tax clinics in the Twin Cities. IRS-certified volunteers prepare both state and federal returns. Also, unlike a lot of online tax filing sites, AccountAbility can prepare and file state property tax refunds.
"We really see ourselves as a resource for people who don't feel comfortable doing their own taxes or who just don't know if they're going to fully maximize," said Tracy Fischman, the group's executive director.
If you aren't fluent in English, you can request tax preparation in your native language. AccountAbility has clinics with Spanish, Somali, and Oromo-speaking tax preparers. Some clinics also have tax preparers who speak Hmong, Russian, Mandarin, and other languages.
The nonprofit also offers free tax preparation for self-employed people whose household income is $50,000 or less. And while you're there, you can open a free savings account, get a low-cost prepaid debit card, obtain a credit report, and set up a free meeting with a financial planner.
AccountAbility's website also includes information about other free tax clinics in Alexandria, Brainerd, Duluth, Elbow Lake, Little Falls, Long Prairie, Mankato, Marshall, Moorhead, Mora, and St. Cloud.
If you'd rather complete your taxes online, check out the IRS Free File program. If your household earned $58,000 or less, you can file your federal tax return for free online.
The IRS Free File website links you to free versions of federal tax preparation sites. However, you'll probably have to pay extra to file your state tax returns through the same site.
Of course, you can always head to your local library to pick up your free tax forms and fill them out by hand.
If you file your own taxes, here are a few common - and often costly - mistakes to avoid.
Failing to file for federal tax credits
Tax preparers said many people miss out on thousands of dollars in federal tax credits. Some people don't file taxes at all, preparers said, because they don't realize they could get a credit even if they didn't make enough money to owe a lot of taxes. Others fail to fill out the right paperwork or don't claim the correct number of dependents.
"It's a pretty big issue because there's some very generous tax credits that go with dependents," said Scott Beers, the owner of Lottsa Tax and Accounting Services in Minneapolis. "So who can claim the child and under what circumstances is a pretty big deal."
Some federal tax credits include:
The Earned Income Tax Credit provides up to $5,666 to low and moderate income workers and families.
The credit "is considered to be one of the nation's largest anti-poverty tools," Fischman, of AccountAbility said.
To find out if you're eligible, check out the IRS' Earned Income Tax Credit website. The site also has free tools that help you calculate your credit amount.
The Child Tax Credit provides a credit of up to $1,000 per dependent child. The IRS site has more information on the credit here. The American Opportunity Tax Credit provides a credit for parents and students to pay for college expenses. More information on the credit, the forms, and even an audio podcast explaining the credit is available on the IRS site here.
Failing to file for state tax credits and refunds
Some state tax credits include:
The Minnesota Working Family Credit provides an additional credit for households who are eligible for the federal Earned Income Tax Credit. Check out this page on the Minnesota Department of Revenue's website to learn more.
The Minnesota K-12 Education Credit provides a tax credit for 75 percent of eligible education expenses up to $1,000 per child, depending on your income. The Minnesota Department of Revenue has more information about the credit here.
The Minnesota Property Tax Refund, also known as the Renter's Rebate, provides up to $1,520 in credit for renters and up to $2,370 for homeowners, depending on income. More information on the refund is available here.
Failing to take deductions
It's common for taxpayers to miss deductions or to claim the deduction incorrectly, said tax preparer Alyssa Fox.
Fox prepares about 1,000 tax returns a year for her company Fox Tax in northeast Minneapolis. She specializes in tax preparation for artists.
"A lot of times, especially in the freelance world, I think people under-deduct things because they don't know what they can deduct," Fox said. Some common missed deductions include business travel per diems, mileage, and equipment depreciation, she said.
Rental property owners, particularly duplex owners, often fail to deduct depreciation, Fox said. Others miss deductions by neglecting to list out all non-cash donations.
Fox recalled a client who donated 39 bags of clothes and household goods to charity. The client planned to take a $500 deduction, but Fox convinced her to itemize her donations using Its Deductible, a free online TurboTax program.
Fox said her client's donations added up to more than $2,000 and she saved several hundred dollars on her tax return.
"If you take the time to sit down and list it out, it really adds up quickly," she said.
Failing to correctly report self-employment income
Certified financial planner Scott Beers said he's seeing more clients with self-employment income as a result of the economic downturn. "A lot of people didn't have work and they still needed income," he said. "They cobbled something together."
For example, he said, "They did work for a neighbor or they pulled out some skills they hadn't used for a number of years, and started doing some writing or doing some graphic design or doing some auto repair, whatever it took to be able to generate some income."
The problem, he said, is that the newly self-employed don't realize they need to pay taxes on that income - and they don't understand which deductions they can take to reduce their tax liability.
Claiming a hobby as a business
Beers, the financial planner, said the IRS is on the lookout for taxpayers who incorrectly claim hobbies as businesses.
"You see a lot of people trying to claim what are really genuinely hobbies as if they're businesses, especially if they spend more on the activity than they make," he said. "And the IRS takes a fairly dim view of that."
Generally speaking, the IRS makes a distinction between activities that people engage in for profit and those they engage in for pleasure. For example, if you go fishing every weekend for fun, but decide to sell two fish to a friend after a particularly successful day, you have a hobby, not a business.
To learn more, read an IRS article called, "Is Your Hobby a For-Profit Endeavor?" here.
Beers said some of the most common mistakes are often the most basic. He's found many taxpayers make arithmetic mistakes calculating their return or using IRS worksheets.
"The tax law's gotten so complicated now that a lot of calculations happen off of the forms themselves. They're on worksheets," Beers said. "If the person doesn't find or use those worksheets, they're pretty much a goner. They're not going to get it right."
The lesson? If you're going to prepare your taxes by hand, find the correct IRS worksheets, always use a calculator, and double (or even triple) check your work.
And finally...don't forget to open your return
Once you've completed your tax return, breathe a sigh of relief, but if you get mail from the IRS, open it.
It seems like obvious advice, but Beers said he's seen many people get into complicated tax problems because they didn't respond to letters from the IRS.
"They're just kind of afraid of it, and so they set it aside," he said. "And sometimes what are relatively innocuous or routine inquiries fester and balloon into something."
Oftentimes, Beers said, the issue could have been resolved quickly and without cost.