Tuesday, April 15, 2008

Tax Day

Accountants everywhere are sleeping in tomorrow and are taking their first two day weekend since January. I was reading a blog today and the author wrote that she was in mourning because her family was hit with a huge tax bill. I have to wonder how that happened as this is a blog about living simply, frugally, with very little money. That kind of lifestyle takes planning and organization. With a little of both, tax day should not bring any surprises.

(Granted, she did not say the bill was a surprise, just that it was huge, and it may have been unavoidable. Simply handing a chunk of money over to Uncle Sam can in itself be pretty depressing even if it was planned ahead.)

You can, of course, head to a tax professional to do your tax planning for next year. I, however, am a huge proponent of doing your taxes yourself. Even if you go to a tax professional for a few years first to learn the ropes, sit down afterwards and go over your forms with the corresponding IRS publication. Read. Learn. Decipher. Ask questions if you do not understand. You understand your situation better than anyone. Most taxes are not complicated -- self-employment would be one situation where I would seek professional advice for the first year. After that, I would do it myself.

I have no clue what accountants charge, but I am sure they are not cheap. Yes, it make take some time to sift through the IRS info, but think of all the years of tax prep fees you are saving yourself. And if you get frustrated with all the loops and tables and figures of our tax code -- vote for a politician proposing a simpler system. Seriously, again, ask for help. I have yet to find anything that has been answered on the IRS website or publications.

I am also leary of tax prep software. I did ours on some free software after we had Ella -- and the software told me we could not claim her as a dependent. Uh, OK? I shut it down and did it by hand. Software makes recommendations based on the information you input. If you put in incorrect information, the software provides incorrect information. I re-did Ella's birth information about 5 times before I gave up and moved on.

If you pull out the last few years of tax returns you should be able to figure out how much tax you will owe next year. Look at how much you have paid in the last 3 years or so. You can take in to account major life changes that affect taxes (marriage, babies, buying/selling a home, moving, a pay raise, etc) and adjust from there. I am embarrassed that we received a significant tax return this year (I forgot a major deduction when I did the tax planning last year). I adjusted our withholding and we now have $100 MORE A MONTH in our paycheck. The government does not pay interest on any extra money it takes out of your paycheck. If you are worried that you might underestimate your tax liability for next year, take the money and put it in a money market account. At the end of the year if you owe, you have the cash to pay. If not, you just made interest on money that otherwise would have been sitting in the U.S. Treasury doing absolutely nothing for you.

The IRS has a withholding calculator on its website that I find useful. Just be careful -- the number it pumps out is dependent on the information you provide.
I also check our withholding once a quarter to make sure we are on track and will not end up with a huge bill next April.

And if you have the maximum amount withheld and still owe money, I would suggest you vote for a Republican in November! (tee hee)

4 Thoughts From Others:

The Campbell Family said...

Christopher got all into lowering withholdings to give less money to the government over the year. Unfortunately, he went a little too far and is currently at the old post office sending off our check. Oops. Better luck next year!

Camille said...

LOL! Well, I guess that is OK if the check isn't TOO big! I have it set so we'll owe $60 next year. We'll see how close I get!

ErinOrtlund said...

I'm an advocate of doing your own taxes too, especially if they aren't too complicated.

US expats have to do TWO sets of taxes. The IRS expects US citizens to file every year, no matter where they're living. The way we do our US taxes is pretty tricky, with the special foreign forms. I struck a deal with my tax lawyer that he would do our taxes this year, and I would pay him a bit extra so he could "train" me how to do them myself once his busy season is over.

Camille said...

I think that's great, Erin! There isn't too much change in the forms from year to year so I'm sure it is worth the investment. And once you get used to the IRS lingo, looking things up on your own will be a cinch -- or at least close to a cinch.

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