Taxes are scary.
That’s why many people have professionals prepare their tax returns. That’s why many just say: "Call me when it’s done".
But even if you prefer the ostrich approach to taxes, you’d still do well to follow this piece of advice: Ask questions.
Just a few of the right ones can save you money. At the very least, you’ll know why your refund was so much smaller (or your tax bill so much bigger) than you thought.
Why Did The Alternative Minimum Tax Cost Me So Much?
You’ve read about it many times, but it doesn’t quite hit home until the first time your tax bill swells by thousands of dollars. Given the IRS prediction that 34% of taxpayers will be subject to the AMT by 2010, you’re more likely than ever to join this rapidly growing club.
Since the AMT isn’t indexed for inflation, it kicks in for more people each year and essentially has the effect of taking many of your deductions and blowing them out the window. Congress has been talking for several years about dealing with this, but hasn’t as yet. Thus far, there's only been temporary, partial relief.
What can you do? Not much beyond a few highly counterintuitive measures: since the AMT "attacks" deductions like state income taxes and real estate taxes, you might consider delaying payment into the following calendar year if possible. The usual wisdom is to accelerate deductions and delay income, but if there’s going to be no (or little) tax benefit to those deductions, you may as well delay them. Besides, there’s always the chance that Congress will finally dampen the AMT burden, making your delayed deduction worth that much more. And how smart will you feel if that happens?
How Can I Save A Cool $30 - $60 Off My Taxes?
OK, 30 bucks isn’t much, but better in your pocket than Uncle Sam's, right? You can get a one-time refund of now-repealed excise taxes on long distance telephone service on your 2006 return. If you feel like digging out your phone bills and figuring out the tax you paid on long distance calls between March 1, 2003 and July 31, 2006, and filling out IRS form 8913, go ahead.
But most people will be lazy like me and take a precalculated refund based on the number of exemptions claimed on their 2006 return.
Why Am I Paying This Person So Much Money To Do My Taxes?
This may not be a popular point of view, so let me quickly say that I believe accountants are wonderful people who perform an absolutely necessary service and save people millions of dollars a year. I’m just saying it’s possible that it may not be necessary for you to be one of them.
Yes, I’m slightly prejudiced because I know how to do my own taxes. With this skill comes other rewards - a very deep and thorough understanding of one’s own financial situation.
Back in the days when I was a practicing tax preparer, a CNBC co-worker with a relatively high income asked me to do his taxes. He handed me one sheet of paper: a W-2. He had no investments, no savings accounts, nothing else to process. I believe the return took me 34 seconds to finish, only because I had to sharpen a pencil.
This is an extreme example, but it addresses a key point: you need not be intimidated by the fact that the process involves taxes and the IRS. If you’re reading this, you’re likely to have more than average financial savvy. And even if your situation is more complex than my gunshy co-worker, I’m betting you have more than enough smarts and experience to figure it out and save yourself a nice chunk of money.
Again, this is NOT a recommendation to dump your accountant. If you simply hate the idea of doing it, the expenditure is worth the psychological comfort.
What If I Want To Do It Myself, But Don’t Want To Work Too Hard At It?
As far as I’m concerned, one of the financial marvels of the modern world is tax software. The best selling programs are Intuit’s TurboTax and H&R Block’s TaxCut. TurboTax leads the market with an impressive 80% market share, according to market research firm NPD Group.