Saturday, March 1, 2008

Tax Prep Software is Not a Substitute for Knowledge

Here's an email from Eliza. Apologies to Eliza I cleaned it up a little to help my readers understand the situation better.

Hi there,

I am an
environmental educator, doing many odd jobs throughout the year so that I can spend my summers doing environmental programming in the woods.

I graduated from college in '06, and so had very little income in that year (around $6000), and received refunds on all my taxes.

In 2007, however, I worked in a variety of capacities throughout the year, and ended up earning about $16,000 in wage income plus the tax refunds from the year before, plus about $3,400 in investment interest.

Of the $16,000 in wage income, about $6,500 of it was as an independent contractor, and I've received two 1099-MISC forms to account for it.

June says: Remember, "wage" is not synonymous with earnings. You earned $16,000. $6,500 was self-employment income. The balance, $9,500 was wage or W2 income.

On Turbo Tax, it asked me to set up a "business entity" and taxed me twice for that income, telling me that I would owe $1500 in federal taxes. When, out of frustration, I deleted the "business entity" line on the Turbo Tax worksheet, my tax liability dropped to an $86 refund.
June says: Turbo Tax, like any other tool , is just that. It's a tool. No tool works if you don't have the knowledge. Photoshop doesn't give someone the talent and skill of an artist. Family Lawyer doesn't give someone the education of an attorney.

What gives? I thought single people making $16,000 were not supposed to have heavy tax burdens? I mean, I almost qualify for the EITC!
June says: [Earned Income Tax Credit. That's money the government gives you if you have a low income.] Do I really need to pay that much tax? It's half of what I managed to save all year! 0

June says: If you read my website column Taxes: Which ones and how much do I pay? you'll see that you pay approximately 15% of your net self-employed income as SE tax. Assuming no expenses deducted from your $6,500 income that's $975 tax. Add income tax to that.

I didn't document my auto expenses, etc., well enough to specifically deduct them, but I can guesstimate.
June says: In my book, Self-employed Tax Solutions, there's an explanation of which expenses may be estimated.

I guess I'll be really careful about that in the future, and I hope your free deduction worksheet will help. This is really the first time I've filed full taxes on my own, but I do have some help from my parents' local accounting firm, as they've handled that investment income up until now.

June says: And, of course you know what I say over and over again about tax pros: Get one who understands the indie tax situation.

I hope there's a short answer to this long question! Thank you so much.

--Eliza from Northampton, MA

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