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3Qs: Many happy returns

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On Tax Day, many Americans find themselves hunched over their laptop or scrambling to their local post office to file on time. With this year’s April 18 deadline looming, Timothy Gagnon, assistant academic specialist in accounting at Northeastern University’s College of Business Administration, explains several recent tax-code changes, and offers some tips on how to avoid the last-minute rush next year.

What are some significant tax-code changes for tax year 2010 that filers should be aware of?

One is that, for quite a few years, the amount of itemized deductions and personal exemptions you can take has been phased out the higher your income rises. But those limits are gone for 2010. Another change affects parents who are divorced or separated since 2008; now a Form 8332 must be signed by the non-custodial parent to get the dependency exemption for the child.

Also, people should be aware that children 19 or younger or full-time college students under 24 may be subject to the “kiddie tax.” These children are not taxed on their investment income up to $950, and they are taxed at a lower rate on the next $950—up to $1,900 total. But after that, the income is taxed at the parents’ higher rate.

What are some easy ways to avoid last-minute filing next year?

To avoid that last-minute flurry, if you sold some stock, find out what your basis—what you paid for the stock when you bought it, and the amount of any dividend automatically reinvested—was at that time so you’re not scrambling for that figure at the eleventh hour, like many people do.
Being organized is important. If you make charitable contributions, keep documentation in a folder. If you have rental property, keep one checkbook for those properties. If you run your own little business, have a separate checking account and credit card for that business so you don’t have to separate personal and business transactions later.

What are the biggest advantages and drawbacks to filing taxes online, compared to traditional paper filing?

The biggest advantage to filing online is the speed. Within three to five days, they could be cutting your refund checks. If you have direct deposit, you get your money even quicker. The disadvantage is that, since the process is so fast, an error could cause your return to bounce and have to be amended on paper. That can take a while. Also, certain things can’t be filed online, such as the first-time homebuyer credit.
The advantage of paper filing is you may put more thought into it. When you file electronically, it’s so easy just to shoot your return off; you might not give it that last extra review. And with paper filing, you can easily make a physical copy of your taxes, which may not always happen with online filing.

Even if you have a digital copy, where’s your backup system? With paper copies, you stick them in the closet, and they stay there. With electronic files, there’s always the chance you may lose them or your hard drive may die.