A few weeks ago, I tried out one of the Free File links on the IRS' website.  My girlfriend needed to do her taxes, and I forwarded to her the e-mail I got from the IRS (they send out several a week this time of year, many of them chock-full of great tips).

We were able to find a choice for which she qualified (many have income or filing status criteria), created an online account, and completed her federal income tax return in about twenty five minutes.  I could have done it quicker using the proprietary software in the office, but that's because I was unfamiliar with this site, and very familiar with the software I used daily.

The end product/service was an e-filed return and a pdf of her federal return.  From that she was able to e-file her state return on the Colorado Department of Revenue's website.

At the time I was impressed with ease of preparing and filing a free federal return.  My knowledge of tax terms and tax law enabled me to quickly find the relevant sections of the website.  I don't know how many people would feel comfortable doing that.  Sure, there are many intelligent people in a wide array of careers who could do what I did with the same ease.  But I know that the type of client I have prefers not to risk doing it wrong, and comes to me for peace of mind as much as anything else.

All things considered, I would recommend you try a Free File option first, and see how comfortable you are with the results.  You can always stop and go to a pro before you cross the point of no return.

In the interest of full disclosure, I feel compelled to reveal that as of this week, I am no longer an employee of any tax preparation service.  What I am the remainder of this tax season, is a freelance income tax consultant.  Due to my non-compete agreement, I don't expect to be very busy just yet.

EITC Awareness Day

The IRS wants you to get all the credits to which you are entitled, and one of the biggest ones is the Earned Income Tax Credit (EITC).  Because it's so big, it's also one of the credits most subject to fraud attempts. So I guess their goal in "awareness" is for you the taxpayer to understand what the credit is, whether you qualify, and how you get it.

From the IRS:

As the Internal Revenue Service starts processing returns today, it joins partners nationwide in launching the Earned Income Tax Credit Awareness Day outreach campaign to ensure that millions of low-and moderate-income workers get the credit they deserve and get it right.

Local officials and community organizations across the country are holding news conferences and outreach events highlighting the benefits of this key work incentive for individuals and families who earned $51,567 or less last year. An estimated four out of five eligible workers and families get the credit, but millions miss it annually either because they don’t claim it when filing or don’t file a tax return at all.

“One-third of the population eligible for EITC changes each year as their personal circumstances change,” said IRS Commissioner John Koskinen. “We want workers who may qualify for EITC for the first time to have all the information they need to get the EITC and get it right.”

The EITC varies depending on income, family size and filing status. The IRS has upgraded the interactive EITC Assistant, at www.irs.gov/eitc, to better help taxpayers and tax preparers. People can answer a few questions about income, family size and filing status, among other things. The EITC Assistant will help determine eligibility and will figure an estimated EITC refund. You can even get a printout explaining why you do or do not qualify. Last year, over 27 million eligible workers and families received more than $63 billion total in EITC, with an average EITC amount of $2,300.

Workers, self-employed people and farmers who earned $51,567 or less last year could receive larger refunds if they qualify for the EITC. That could mean up to $487 in EITC for people without children, and a maximum credit of up to $6,044 for those with three or more qualifying children. Unlike most deductions and credits, the EITC is refundable. In other words, those eligible may get a refund from the IRS even if they owe no tax. 

Get the Credit: How to Claim the EITC

To get the EITC, workers must file a tax return, even if they are not required to file, and specifically claim the credit. Free tax help is available. Those eligible for the EITC have free options:

• Free File on IRS.gov Free brand-name tax software walks people through a question and answer format to help them prepare their returns and claim every credit and deduction for which they are eligible.
• Free File using Free File Fillable Forms. This option, designed for taxpayers comfortable preparing their own returns, allows people to file electronically for free using online versions of IRS paper forms.
• Free tax preparation sites EITC-eligible workers can seek free tax preparation at thousands of Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) sites. To locate the nearest site, taxpayers can search www.IRS.gov or call the IRS at 800-906-9887.

The IRS reminds taxpayers that even though most refunds are issued in less than 21 days, many factors can affect how long it takes to issue a particular refund. Some returns require additional review, causing it to take longer to process any related refunds. Taxpayers can track the status of their refund with the “Where’s My Refund?” tool available on IRS.gov.

Get It Right: Avoid Errors

Taxpayers are responsible for the accuracy of their tax return regardless of who prepares it. The rules for EITC are complicated. The IRS urges taxpayers to seek help if they are unsure of their eligibility.

Some common EITC errors are:

• Claiming a child who does not meet the relationship, age or residency tests
• Filing as "single" or "head of household" when married
• Over or under reporting of income and or expenses to qualify for or maximize EITC
• Missing Social Security numbers or Social Security Number and last name mismatches for both taxpayers and the children

More than half of EITC claims are prepared by tax professionals and people should choose trustworthy assistance. To help ensure that only those eligible get the credit and that everyone who is eligible gets the right amount, the IRS requires paid preparers to file Form 8867, Paid Preparer's Earned Income Credit Checklist, with any federal tax return claiming the EITC.

The IRS continues to look for ways to reduce these errors. Taxpayers should reply promptly to any letter from the IRS requesting additional information about EITC. If taxpayers need assistance or have questions, they should call the number included in the IRS letter.

Beware of Scams

EITC provides a financial boost for millions of hard-working Americans. However, a deliberate error can have lasting impact on future eligibility to claim EITC. Beware of scams that claim to increase the EITC refund. Scams that create fictitious qualifying children or inflate income levels to get the maximum EITC could leave taxpayers with a penalty. If an EITC claim was reduced or denied after tax year 1996 for any reason other than a mathematical or clerical error, taxpayers must file Form 8862, Information To Claim Earned Income Credit After Disallowance, with their next return to claim the credit.

More information on EITC and detailed eligibility rules are available atwww.irs.gov/eitc. IRS partners should also visit EITC Central at www.eitc.irs.govfor helpful resources.

In 2014, Various Tax Benefits Increase Due to Inflation Adjustments

The IRS makes annual inflation adjustments to many income tax figures, like the standard deduction and personal exemption.  And yet they don't make similar adjustments to other figures, like the AMT income threshold.  I'm sure it's all the fault of Congress, which shows little common sense when passing many of their laws.

From the IRS:

 For tax year 2014, the Internal Revenue Service announced today annual inflation adjustments for more than 40 tax provisions, including the tax rate schedules, and other tax changes. Revenue Procedure 2013-35provides details about these annual adjustments.

The tax items for tax year 2014 of greatest interest to most taxpayers include the following dollar amounts.

• The tax rate of 39.6 percent affects singles whose income exceeds $406,750 ($457,600 for married taxpayers filing a joint return), up from $400,000 and $450,000, respectively. The other marginal rates – 10, 15, 25, 28, 33 and 35 percent – and the related income tax thresholds are described in the revenue procedure.
• The standard deduction rises to $6,200 for singles and married persons filing separate returns and $12,400 for married couples filing jointly, up from $6,100 and $12,200, respectively, for tax year 2013. The standard deduction for heads of household rises to $9,100, up from $8,950.
• The limitation for itemized deductions claimed on tax year 2014 returns of individuals begins with incomes of $254,200 or more ($305,050 for married couples filing jointly).
• The personal exemption rises to $3,950, up from the 2013 exemption of $3,900. However, the exemption is subject to a phase-out that begins with adjusted gross incomes of $254,200 ($305,050 for married couples filing jointly). It phases out completely at $376,700 ($427,550 for married couples filing jointly.)
• The Alternative Minimum Tax exemption amount for tax year 2014 is $52,800 ($82,100, for married couples filing jointly). The 2013 exemption amount was $51,900 ($80,800 for married couples filing jointly).
• The maximum Earned Income Credit amount is $6,143 for taxpayers filing jointly who have 3 or more qualifying children, up from a total of $6,044 for tax year 2013. The revenue procedure has a table providing maximum credit amounts for other categories, income thresholds and phaseouts.
• Estates of decedents who die during 2014 have a basic exclusion amount of $5,340,000, up from a total of $5,250,000 for estates of decedents who died in 2013.
• The annual exclusion for gifts remains at $14,000 for 2014.
• The annual dollar limit on employee contributions to employer-sponsored healthcare flexible spending arrangements (FSA) remains unchanged at $2,500.
• The foreign earned income exclusion rises to $99,200 for tax year 2014, up from $97,600, for 2013.
• The small employer health insurance credit provides that the maximum credit is phased out based on the employer’s number of full-time equivalent employees in excess of 10 and the employer’s average annual wages in excess of $25,400 for tax year 2014, up from $25,000 for 2013.

Details on these inflation adjustments and others not listed in this release can be found in Revenue Procedure 2013-35, which will be published in Internal Revenue Bulletin 2013-47 on Nov. 18, 2013.