A few weeks ago, someone pulled out a gun and shot four people in a Detroit tax preparer’s office over a late income tax refund. Though such outrageous reactions are rare, thankfully, there is a surprisingly emotional division among people on the issue of whether it is best to aim (no pun intended) for a tax refund or not:

• The “Yes” camp believe it is best to shoot for a refund
• The “No” camp don’t even think about it

Which camp do you think is bigger? The answer might surprise you. In 2011 (the latest available — I know, the IRS isn’t too fast when it comes to updating their stats),  a full 78 percent of all individual tax returns received a refund. Clearly the “yes camp” is the greater. The average refund? $2, 872.

The “no camp” seems to make up for their lack of number with venom. There’s no shortage of self-proclaimed experts who wag their self-righteous fingers at the nearly 80 percent of individual taxpayers who got refunds. When you comb the Internet for opinions, there are far more “No camp” posts and articles, many of which are surprisingly venomous and insulting. The word stupid (and worse) appears more often than you would expect in an otherwise rational kind of debate.

Okay, so to which camp do you belong — the one with numbers or the one with self-righteous venom? More importantly, why? Let’s take a look at the arguments for both camps:

“No” Camp

The naysayers proclaim refunds a bad idea because:

1. You forego precious interest on your money by forking it over before it’s necessary.
2. In addition, inflation kills you — you give Uncle Sam precious money, but it’s worth much less when you get the refund.
3. You never know when an emergency will strike. When it does, you can’t get that overpayment back from Uncle Sam. It’s much better to have the money sitting in an emergency fund which you can replenish before April 15.
4. It shows you’re too lazy or incompetent to do proper tax planning (no warm-and-fuzzy crowd, this).

They add more reasons, which amount to simply rehashing the list. Funny, but true. This post lists Reason #4 and Reason #5 as the same thing, only with different (shrill) verbiage to justify it.

“Yes” Camp

They jump for joy at their annual refund bonanza because:

1. The amount of interest you can earn in a savings account is trivial. Assuming the average refund of $2, 872 is earned evenly throughout the year, how much would that cost you in terms of lost interest? We reviewed online banks a while ago and found Ally Bank to have the highest online (i.e., national) interest rates on savings accounts, which at the time of writing was 0.87 percent per year. If that rate remained the same throughout the year, the total loss of interest would be … $12.49! The guilt-ladling experts proclaim that a folly so great you’ll never recover.
2. The IRS will slap you with penalties way, way higher than $12.49 if you sail too close to the wind and end up needing to pay in more than 10 percent of your tax liability. Again, going to the averages, the average tax bill for 2011 was $9, 377. If, trying to save $12 in interest, you underestimate your tax by even a dollar, the IRS will slap you with a $938 fine. A dollar a month is cheap insurance against a nasty surprise.
3. The tax code is complicated, and only gets more complicated each year. For example, next year you need to add extensive paperwork simply to avoid the new health care fine/tax. That’s just the latest in a long string of added burdens put on ordinary taxpayers. Therefore, it has become next to impossible for an ordinary person to estimate their tax liability accurately a year in advance. If you want to do the kind of tax planning those experts insist you should, you are going to have to hire an expert. Can you do that for less than $12.49?
4. What inflation? In the ’70s, this was a valid argument, but inflation running of less than 1.5 percent per year now has pretty much wiped out the strength of this argument. In fact, the reverse may be true: By waiting to buy that HD TV with my refund, I actually saved a couple hundred dollars one year. (Inflation doesn’t apply to everything evenly.)
5. Human nature: Getting a $1, 000 refund beats having to pay $1, 000 after Christmas shopping season any day. Why be a sourpuss for a buck a month?
6. More human nature: We tend to prefer lump sums to regular payments. (More than 90 percent of lottery winners pick the lump sum.) Getting a single refund check for $2, 400 just feels better on many levels than $200 per month. And, given the small cost of a buck a month, why not?
7. Everyone loves a mystery. The tax code has become so complicated, and our lives unpredictable enough, that planning your taxes accurately has become next to impossible. So, you suspect you’re getting a refund, but you don’t know how big. Now you have the anticipation of waiting to see how big. For the same $12, you have another cheap thrill.
8. If you know you have a refund coming but you don’t know how big, you have a terrific incentive to file early and beat the rush. Admit it: It feels really good when you get something done ahead of time. So now you have a triple shot of joy: you’re done early, you know you’re getting money (even if it’s your own) AND you’ve got the cheap thrill of guessing how much. All for just a buck a month.

Can you tell? I’m firmly in the “yes” camp. Those who know me know it’s not often I side with the majority — there are too many times people simply follow the loudest voice out there, right or not. In this case, though, the logic is so overwhelmingly in favor of shooting for a refund, it’s easy to see why most people do it.

Are you still in the same camp?

Which do you think is better: receiving a $2, 000 refund or having to pay Uncle Sam $2, 000 right after the holiday shopping season? Especially if the price tag for that simple joy is a buck a month, while the penalty for guessing wrong can approach a thousand dollars … on top of what you have to pay in taxes alone?

Let the hysterical guilt-mongers shrill all they want. Shooting for a refund is a no-brainer in my book. Ordinary people are sometimes smarter than their critics. This would be one of those times.

Come on, what else can you do for $12 that adds that many smiles to your life? What do you do? What do you think you should do? (Not always the same thing, is it?) 🙂

Tax season is in full swing. Thanks to tax preparation software, a lot of the common mistakes (i.e., missing social security numbers) are now automatically detected. Still, they are only capable of checking for math accuracy and missing fields. They can’t optimize a tax return to get the maximum amount possible or compensate for our misunderstanding of the complicated tax code. I have been using tax software and/or tax professionals ever since I started filing in 2003. In these ten years, I have learned that no matter what software or tax professional I use, the onus is on me to know what is best for me and what mistakes to avoid. Here is a list of dos and don’ts based on the mistakes that I have personally made or have come across in recent years. Use this as a checklist to make sure you avoid them too.

• Don’t assume you can’t itemize: When I started filing taxes as a student, I spent a total of 10 minutes filing my taxes. I didn’t know anything about itemized deductions. I just assumed it is for people who have a lot of expenses like a mortgage or kids. When I started working, I continued with my belief that the standard deduction is the best for a single-filer without a home. When I got my first job, I decided to use one of the “professionals” at a big tax preparation chain. After a few nightmarish meetings with so many mistakes that I could spot, I decided to spend a weekend doing my taxes by hand. That is probably the best thing I did for my finances. It was an eye-opening experience to actually read all the IRS publications to see what I qualify for and don’t. The professional never asked if I ever donated to charity; she just assumed I don’t. That weekend I understood there is much more to itemized deductions than just a mortgage. Just because you are single, don’t assume you can’t itemize. Read up on the itemized-deduction publication and start collecting the relevant supporting documents throughout the year. You might be surprised to see a lot of small things adding up to a total of more than the standard deduction.
• Don’t assume a deduction is not worth the effort: This mistake almost cost me over $500 last year. I knew the medical deduction had a floor of 7.5 percent. (This year it is 10 percent.) I mentally calculated 7.5 percent of our income (our gross income) and assumed our expenses wouldn’t cross that limit. In a desperate moment I decided to collect all the medical receipts and calculate the amount just to make sure. I earned over $500 in those few hours of effort. First, it is 7.5 percent of our AGI, not gross income; second, all the doctor co-payments, prescription drugs, eyeglasses, parking and travel costs added up to an amount I didn’t think we had spent. So never assume you can’t take a deduction. Always make sure.
• Don’t choose a tax preparer based on his/her promises to get the maximum refund: I know a certain tax preparer in the area where I used to live who claims regular groceries and a whole range of regular living expenses as deductions for his clients. (Yes, I have reported him to the IRS, but nothing seems to have happened and he is still in business.) His business is booming because he promises the maximum return and charges a percentage of the return as his fee. It is an audit waiting to happen for the clients.
• Don’t overestimate the value of your donations: Keep the receipts and use a standard guide for the value of your donations.
• Don’t forget to claim all the deductions for which you are eligible: You don’t have to fear an audit to claim the deductions for which you are legally entitled. Many audits are in the form of a mail requesting supporting documentation; so if you have your paperwork in order and fulfill the eligibility criteria, the fear of an audit shouldn’t prevent you from taking a deduction.
• Don’t wait too long to file your taxes: If you wait too long, you might be in a hurry to file before the deadline and forget to claim all your deductions. If you file with an accountant, he might not have time for a thorough review. Do your tax preparation throughout the year by organizing your receipts, and start your return as soon as the new software hits the market with the latest changes.
• Check auto-import numbers: Most major tax preparation software now have a feature to auto-import your W2 and/or investment tax forms. It is a very handy feature, but it is not always perfect — especially if you have a complicated W2 or 1099 forms. Check to make sure the numbers are in the right place and you are not double-paying your taxes.
• Check different filing status to see which will be best for your situation: If you had a major life change in the year like getting married or divorced, do the taxes using different filing status. One status might be better than another. For example, if you became a single parent, it might be beneficial to file as head of household instead of single.
• Keep all your supporting documents in order: We should be taking every single deduction if eligible, but that doesn’t mean the IRS can’t question the deduction. Make sure to collect all the supporting documents and file them. It might be best to scan them and store them in cloud storage to avoid losing the documentation.
• Report all your income, even if you didn’t receive the documentation: I had one of my contractors ask that I not issue her a 1099 so that she doesn’t have to pay taxes on it. It does not work like that. If you received income, you should report it no matter what documentation you receive. Make sure you keep the receipts for all the expenses you incurred for the job so that you don’t have to overpay taxes.
• Check all your tax forms and income reports for errors: With ever-changing tax laws, sometimes companies make errors too. Make sure the numbers you receive in the tax forms tally with what you have on record.
• Start your tax planning for next year right now: Many tax deductions will work only if you take advantage of it in the calendar year. By the time you are ready to file your taxes, it will be too late.

Have you made any mistakes in your taxes that cost you money? How do you make sure you have the maximum return that you can legally get? Do you use software, an accountant, or do it by hand?

This post comes from Victoria Araj from the Quicken Loans Zing! blog.

It’s tax season, and that means it’s time to sort through your shoebox of receipts, those envelopes of stock statements and that drawer of paperwork that hasn’t been touched in 12 months.

Depending on your income, assets, marital status and a host of other life factors, making sure you have all of the necessary documents needed to file for your specific situation can seem daunting.

Here’s a quick checklist of items you may need to gather before meeting with your tax professional.

INCOME

• Your W-2 form from your employer, or if you changed jobs, you’ll need one from each employer.

• If you receive income from interest, dividends, self-employment, pensions or payments from the government, you will need to have a 1099 form.

• If you own a business or are in the farming industry, you’ll have to provide records of your income and business expenses.

• If you’re a beneficiary of a trust or an estate, or if you receive income because you’re a stockholder in an S Corporation or a member of a business partnership, a Schedule K-1 may be required.

ASSETS

• Any sale of real estate, such as for your primary residence, second home or investment property, will require documentation.

• If you own a home, bring the property tax bill and mortgage statement to your appointment. Mortgage interest on first and second homes is generally deductible for taxpayers who itemize their deductions. If you have a home equity loan and want to deduct the interest, you may need additional documentation aside from Form 1098.

• If you relocated because of your job, you should bring documentation that shows expenses for your job-related move that were not covered by your company or organization.

• If you are reporting sales of stock, you’ll need to bring a year-end statement that shows the original cost of the stock and information about the sale.

PERSONAL

• If you made contributions to a Health Savings Account or Medical Savings Account, or need to report distributions made from them, you’ll need these forms. Certain medical expenses may be deductible if they exceed a specific percentage of your adjusted gross income. Check with your tax professional regarding the paperwork necessary to obtain these deductions.

• If you made charitable contributions, you should collect your receipts showing those donations. If a single contribution exceeds $250, the charitable organization should/will provide you with a statement you can use to file.

• If you have kids in daycare, bring documentation that shows the cost as well as the name, address and ID of the provider.

• If you were divorced within the last year or filed for divorce, your tax preparer will let you know the forms needed based on how you will file your taxes. If you have children and are the noncustodial parent and want to claim a dependent, you’ll need Form 8332.

While many Americans dread tax season (at least prior to any refunds), it’s always smart to have a good idea of the documents necessary to make your filing efficient and painless. A wealth of resources can be found by visiting www.IRS.gov.

If you’re in doubt, simply contact your tax professional who can help you get a handle on what you should assemble for your appointment.

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