It´s that time of year again. April 15 is less than three months away, and life experience has taught you that procrastination does not delay the inevitable. Indeed, one way or another your taxes must be prepared. Here are five ways to lessen the dread:
Good things happen to organized people. When it comes to your tax return, your organization might just save you some money and get tax advance loan for you. When you give your tax preparer a shoe box containing everything from a copy of your W-2 to can of W-40, the accountant will need to spend a bunch of time just putting things in order. This leaves less time for your hired gun to proactively think about ways for you to save on your taxes. Of course, the same thing goes for handing over your information (even if in neat, labeled envelopes) at 8PM on April 14.
Accountants are known as organized (and, more than occasionally, anal), people for a reason. Give them all your tax information in a timely, organized manner and they ought to be able to save you some money. Some preparers, like Total Candor Tax Prep, will actually give you a discount on your tax prep fee if you get your information in early. That´s in addition to taxes you might save since the preparer has time to "see the forest for the trees."
Can you do it yourself?
Although some tax returns are absurdly complex, most are not. If the only tax documents you receive each year are a W-2 from your employer and a 1099-INT from your bank, you´ve got a very simple tax return. In such a straightforward situation, there isn´t much a professional tax preparer is going to be able to do to reduce your taxes. Your numbers are what your numbers are.
But you can still give yourself a chance to save some money around tax time by preparing your taxes yourself. Seriously, your day job is probably harder. There are even free versions of tax software available. If you have an easy tax return, you might not have to pay a preparer or a software company. Plus, if your adjusted gross income is less than $54,000, you should be able to e-file for free too. Triple freedom! Using your favorite search engine, search for "free tax software." Or look at the free web-based version of Turbo Tax, Tax Act, or even the IRS web site itself.
A big tax refund might be a big no-no
Do you receive a sizable income tax refund each year? Do you call it a "savings plan?" Do you wind up spending the "savings" on something you´ve wanted all year long? Do you use the funds to pay off existing debt? Stop the madness!
Let´s be clear: when the government sends you an income tax refund, that is not the government giving you money. That´s the government giving you back your money. (The average income tax refund in 2006 was about $2,300.) It´s money you lent them all year long. If you had the money all year long, you could have spent it during the year. Or, even better, you could have saved it and have been earning interest.
When the IRS gives you a refund, they don´t pay you interest. An income tax refund is an interest-free loan to the government. Don´t be so generous. If you receive another large income tax refund this year, consider refilling form W4 to adjust your withholding.
Lower your 2007 taxes
Although it´s already 2008, you can still make decisions that lower your 2007 taxes. For example, many people can make a tax-deductible contribution to their Individual Retirement Account. By doing so prior to April 15, you can indicate that the contribution is for the 2007 tax year and deduct the contribution. It´s even possible (and perfectly legal) to deduct the contribution on your tax return before you actually make the contribution! Doing so and filing early enough might allow you to use part of your income tax refund money to make that 2007 IRA contribution.
Don´t anticipate your refund. Wait for it.
Some tax preparation firms make refund anticipation loans available to individuals who are due an income tax refund. With such a loan, you can get your money almost immediately instead of waiting 4-6 weeks to get a paper check or about 10 days to get your money via direct deposit when filing electronically.
But the loan is almost always a terrible deal. The rates and fees that are charged to you for getting your money immediately are very expensive. In fact, these loans are often more profitable for the tax preparation firm that sells them then the actual tax return preparation itself. Be prepared to provide your direct deposit information to your preparer. Get the full refund you are owed in a couple of weeks instead of turning over a sizable chunk of it over to someone else just to get it a little quicker.
Taxes are not the driving force of your financial situation, but they are an important consideration. Based on observations made while preparing your tax return, the person preparing your taxes should also shed insight on ways you can improve your financial situation.
Does that sound like your tax preparer? If not, contact Total Candor Tax Prep for your tax return. Remember, our biggest early-bird specials end February 15, 2008.
Michael B. Rubin, CPA, CFP, MBA is the author of Beyond Paycheck to Paycheck: A Conversation About Income, Wealth, and the Steps in Between [http://www.paycheckbook.com]
Michael is also the founder of Total Candor, a financial planning education company, which may be best explained by what it doesn't do: sell financial products. Rather, Michael and Total Candor simply provide the unbiased financial education you wish you had already received.
As a true expert gifted in simplifying money matters, Michael has appeared in various media, including Fox News Chicago, radio stations across the country, and national media such as latimes.com,The Wall Street Journal, SmartMoney.com, Financial Advisor Magazine, and Investment News.