The weather is warm. The dogwood, cherry, Magnolia, and Azaleas are all in bloom here. And I’m headed out for a Spring Break girls’ beach getaway with my daughter. But along with the warm rain and a stunning display of flowers, April always brings with it a note of dread: Taxes. Ugh.
I was once the sort of tax filer who waited till the very last minute, whipped through the forms as quickly as possible, and raced to the post office to get it in the mail by midnight. Back when taxes were taken out of my paycheck, I never paid taxes on tax day. I always got a refund. That refund took the sting out of tax day but it meant I was spending more on taxes than I needed to.
I have learned a lot since then.
Now I think about taxes all year long. I think about the tax implication of renting an office, buying a car, travel, donating to charity, and, even, buying books, gadgets, and computers (because those are work for me and tax deductable). I like to keep as much of my own money as possible. And one way of doing that is by not paying too much money in taxes. Sure, it’s more work at tax time but I take every allowable deduction. I don’t take crazy deductions I can’t defend if I get audited but I take what’s mine.
The first step â€“ for me â€“ in my long journey toward lifting my head out of the sand when it comes to taxes (a journey that’s still in progress) was doing my taxes with tax software. Tax software does pretty much the same interview process a tax accountant does but sitting alone with it, at home where my files were, allowed me the freedom, the time, and the impetus to dig up receipts, think about my answers, and decide that next year I would keep better track of how I spend my money in order to take advantage of the tax advantages available to me.
I’m more empowered about taxes than I once was but I’m hardly an expert. So, to take a bit of the dread out of April, I spoke to Jackie Perlman, a CPA, senior tax research analyst for H&R Block, and the tax committee chair for the Kansas City chapter of the Missouri Society of CPAs.
Her feeling about taxes is that knowledge is not only power but also money.
“One thing I see people do that bothers me,” she says. “Is make important financial decisions based on bad information about the tax laws.” People spend money on something â€“ an energy credit, for example â€“ because a neighbor told them there is a tax credit for it. “If you are going to make a big financial change,” she advises. “Make sure you know what the real law is first. At the very least go to IRS.gov and look at IRS publication 17 [link to a PDF file] and look at the first three pages and the ‘What’s New.'”
And, like me, Perlman recommends taking every deduction you can. “One question I am often asked,” says Perlman. “Is ‘How do I avoid an audit?’ But that is not the right question to ask. The right question is, ‘If I’m audited, how can I defend myself?’ Because the way to avoid an audit altogether is to avoid taking credits and deductions you are entitled to. If you don’t take them, there is not much to audit. But you are selling yourself short. And contrary to popular belief, the IRS wants you to take those deductions — when they are legal.”
Don’t shy away from deductions! But to take them, you need to itemize.
“Some of the prevailing wisdom,” says Perlman. “Is that if you don’t own a home and you don’t have a mortgage, itemizing is a waste of time. That happens to not be true. If your itemized deductions add up to more than the standard deductions, itemizing is what you want to do.” Your sales tax, real estate tax, property tax on your car, job search expenses, and many other deductions can add up to a great deal of money.
Perlman also strongly recommends electronic filing. I have heard people express security concerns about this but Perlman’s take is that snail mail is not more secure. “If you snail mail your return,” she says. “That envelope will be opened up by a clerk and your return will be keyed into a computer. So either way your data is stored in an IRS computer.”
But when you e-file it is much easier to correct mistakes. “For example,” says Perlman, “Let’s say you are doing your return and you accidentally transpose the social security number for one of your kids. If you mail it in, the IRS will ‘correct’ it by removing the child. You lose the exemption, the child tax credit, and any other child benefit you may have. That can take weeks â€“ if not months â€“ to straighten out and it will be a nightmare. If you e-filed that return, you get an alert in 24 to 48 hours with an opportunity to fix and resend it.”
It may seem like a hassle on tax day to gather receipts, add up deductions, look up tax code, and figure out how to e-file. But it was a lot of trouble earning your money, too. And any good tax program will walk you through it all, tell you what you need, remind you of deductions, alert you to current tax code that might apply, do the math, and handle the e-filing for you.
And, naturally (who loves you?) I’m giving away two copies of H&R Block’s TaxCut (the Federal e-file edition). All you have to do is answer this question in the comments: What sort of tax filer are you?