Attacking Your Tax Burden

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 You can get a one-time refund of now-repealed excise taxes on long distance telephone service on your 2006 return.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.


Without going into painstaking detail, these programs ask you questions about each aspect of your financial life through a simple interview process. They can handle electronic filing, and also offer optional services like having a professional check your return, or support in case of an audit.

They also do state returns, which is especially nice if you live in one state and work in another. This is an area in which software has vastly improved over the last decade. Or as Intuit co-founder Scott Cook once put it when I asked him about state tax software: "Yes, our state products used to really suck!" Yes, he actually said this. On camera.

Did I Make Any Big Ticket Purchases This Past Year?

Remember all those great old tax breaks that went to the Great Deduction Beyond in the sky?

I’m still waiting for them to bring back Income Averaging (remember schedule G, anyone?) but an old favorite has returned.

After many years in deduction limbo, sales taxes paid have returned to schedule A - in a more limited fashion. If you find you paid more sales taxes than state income taxes, you can take whichever deduction is higher. If you bought cars, boats, or simply went crazy at Macy’s, check those receipts!

Did Congress Figure Out This Crazy Estate Tax Thing Yet?

Well, not really.

Here’s what we do know: The estate tax deduction is currently at $2 million for 2007 and 2008, $3.5 million for 2009, and in 2010, the estate tax is scheduled to be repealed altogether.

But much of the smart money is betting that the repeal itself will be repealed. Which means, if you or someone you love is planning to live beyond 2010, estate planning is still essential.

One option for high net worth individuals is the trust - an instrument which essentially creates another living entity (in the eyes of the law) that is entitled to its own separate estate tax deduction, essentially doubling what the individual would otherwise be able to take.

For this, you absolutely need to consult a professional. You also need a crystal ball and a copy of the Daily Racing Form to figure out if this is a good idea or an exercise in futility, because there’s no way to predict what the tax law will be in, say, 2015.

Should I File Electronically?-

You mean you’re not already doing so? Some 67 million U.S. households did so last year, with that number expected to increase by 5%-10% this year.

Your accountant (or your tax software package) can do this for you, and it’s especially wonderful if you’re expecting a refund. The money magically appears in your bank account in short order, usually less than two weeks. It’s not quite as much fun if you owe, but it works just as efficiently.

In Conclusion

You may not share my opinion of tax returns as a fun activity, but like it or not, you need to get yours done. Whether you do it yourself, or have someone do it for you, look it over. If you’re wondering about anything, ask. There are no stupid questions, just larger refunds!