While the franchised tax prep chains do have their own prep prep training curriculum, they do not always adhere to the "do not pass, do not pay" policy which is supposed to eliminate substandard prepareers from their roster. Here are ten questions along with their answers that you can use to make sure that the person you are having prepare your taxes knows what they are doing. Use 1 or more of them and if they can not answer these simplistic questions, you will be better off going with someone who can.
1. If it's cheaper to file the 1040A can I file with that form and deduct my mortgage interest?
Answer: It's usually cheaper to file with the 1040A because the options on discounts are limited to student tuition and loan interest. Generally the more forms involved means more discounts for you but the cost of preparation will be higher. And no, you can not use the 1040A and take the mortgage interest deduction.
2. I have a W-2 from the previous tax year I did not get until after I filed last year, can I use it for this year?
Answer: No, the proper way to handle this error is to refile for the prior year with the additional W2 and not include it on this year's return.
3. My spouse has an outstanding student loan and they will take my part of the refund to pay his loan, should I file separate?
Answer: Not necessarily, there is a form called the Injured Spouse form that will allow you to appeal to the IRS to keep your portion of the tax refund. Filing separate causes you to lose your Earned Income Credit and other tax credits as well. The form you need is # 8379 and will allow you to file jointly, you will not always be able to file electronically, it must be provided in, this may change for tax year 2009.
4. What is the name of the form I will need to file if I own a small business that is a sole proprietorship?
Answer: A regular 1040 with a Schedule C will work just fine for any small business, there may be additional forms to file for Automobile expenses, etc. If your business is a partnership you will need a Form 1065, if it's an S-Corp, you will need an 1120S and if it's a C-Corp, an 1120.
5. I just got a divorce at the beginning of this year (2009) can I file single for 2008?
Answer: No. You must use the status you were in as of December 31st of the tax year you are filing. There needs to be one more civil moment between the two of you before you part ways permanently so that you can sign that final tax return as a married couple.
6. My 8 year old cousin lived with me all year; can I use him for Earned Income Credit?
Answer: That depends. If you have full legal custody of your cousin and have adopted him as your child, yes. If not, then no, the dependents you use for EIC have to be your children or adopted children. Recently, this has become a problem for the IRS because it seems that groups of people have gotten into the habit of dependent sharing. Only two dependents are needed for the big payoff in Earned Income Credit, so in many communities it is not unnatural to have families claiming kids that are not the minds often juggling the kids between those who would benefit most from having the extra discounts. Any perceived fraud in this area can get all parties involved disqualified from collecting EIC for up to ten years.
7. I live in my mother's house with my children can I still claim Head of Household?
Answer: If there is someone else in the household, paying bills, rent, mortgage, groceries, etc, then the answer is no. Head of Household is a design reserved for a single parent, or someone caring for older parents who do not have an income to help with the expenses. This is where a lot of fraud comes in as well, because there are those married or cohabitating couples who have four children and each will claim HOH status to get the maximum benefit and the maximum Earned Income Credit amounts. You can not be both married AND Head of Household (ask any husband that one).
8. My girlfriend does not work and stays home to take care of the kids can I claim her as a dependent?
Answer: No. Even if you pay all rent, bills, etc and provide her with a car, phone and clothing, there is no legal way to claim her as a dependent if she is not your wife. Unfortunately, engagement rings are not deductible either; just think of it as an investment in the future. You can however claim the kids, if they are yours and no one else can.
9. I have to wear a suit to work; can I deduct the expense of dry cleaning, purchases of suits, etc.?
Answer: To be able to deduct work clothing, that clothing must be a uniform of some sort that would not normally be worn anywhere but work. Suits would not qualify and neither would dresses, blouses, etc. Overalls worn for mechanic work or medical related clothing would.
10. Is itemizing my payments really a benefit to me?
Answer: That depends. Everyone is entitled to the standard deduction of whatever it happens to be that year. Unless you own a home and pay mortgage interest, most of the time the rest of your discounts will not get you over that standard deduction hump. If the candidate is telling you to itemize and you are a renter, remember that they get paid more in preparation a 1040 with a bunch of schedules than they do with a 1040A or 1040EZ with few if any discounts. If you add all your itemized deductions without a mortgage interest payment and they equal just at what your standard deduction would be, save the money on the prep and go with a 1040A. This answer would change if you had children or were expecting EIC or additional refundable tax credits.