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| The Basics | What your 1040 can teach you
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Tax time is a happy time -- really! -- because you can turn last year's regrets into next year's victories. Here's how.
By MP Dunleavey
I love tax time! OK, not really. I dread the approach of April 15 like every other American. But lately its dawned on me that the 105 days of the official tax season are, in fact, full of financial opportunity.
What the heck am I talking about, you ask?
Im talking about the preparation of the very return so many of us would rather avoid. These forms are not merely a tedious, migraine-inducing documentation of your finances.
Theyre a chance to look back on the previous tax year, to face ones financial self -- the thrill of deductions! the agony of underwithholding! -- and learn from it all. True, Monday-morning quarterbacking wont change the game, but financial hindsight can help you plan for a better, smarter tax year in 2005 and, one hopes, 2006.
No pain, no gain
In order for this exercise in financial enlightenment to pay off in the coming year, you have to stop the blame game, as those New Age folks like to say.
Wish youd been more organized, less lazy, consulted a professional, been born with Turbo Tax installed in your brain? Join the club. The idea isnt to use your tax regrets as a form of self-torture, but to make New Tax Years resolutions not to make those same mistakes again.
Its hard to see the bright side when youre banging your head on the calculator. I know. In researching this article -- which was inspired by the mistakes I knew Id made -- I discovered a few new ones.
Where the insights are
Of course, some people find that simply reviewing their financial statements from the past year yields some useful insights. My mother (who refused to give her real name) said its always eye-opening to get that end-of-year American Express statement, which not only tallies up 12 months of her charges, but categorizes them.
Did she really spend that much during the holidays? Yes, she did. Lesson: This would be a good time of year to start setting aside money for the holidays, Mom.
And Robert Levin, editor-in-chief of The New York Enterprise Report, an online publication aimed at small businesses, says tax time is a boon for small-biz owners. If youre not creating quarterly financial reports -- and a lot of smaller businesses dont, he says, going over your Schedule C may be the only time you look at your financial results.
Levin, a former accountant, recommends looking at the totals in each category -- travel, meals, office expenses -- and dividing them by 12. Youll get a monthly picture of what youre spending -- and are you spending enough?
The 4 biggest tax traps
But for many of us, doing the fiscal review can uncover a multitude of sins. In retrospect, most peoples tax foibles fall into four categories:
- The Big Oops
- So Who Knew?
- Ambushed by the AMT
- It Takes a Professional to Really Screw Things Up
Russell, 37, a Web developer, (like most interviewed for their hard-won tax wisdom, he preferred not to use his full name), says he learned a valuable lesson when he had to pay tax on the IRA he cashed out.
Hed inherited the IRA when his mother passed away, and for various reasons having to do with the emotions at the time and the complexity of the rollover options available to him, he just decided cash would be easier.
The way it was explained, it seemed more trouble than it was worth to roll it over, he said to me, wiping away tears of regret. I thought I would avoid dealing with all that insanity -- but writing that tax check was insanity.
And on page 93,575 . . .
The tax code is so complex, its hard to keep track of everything you dont know, were supposed to know, or forgot you knew.
- Uncle Sam's discount health insurance: My husband and I decided not to pay what seemed like an unaffordable $600 a month for the health insurance coverage we needed, but neither of us realized then that those premiums are deductible. This advantage isnt available to most people, but were both self-employed. Not that it matters now -- sob! -- but it will help us grin and bear the cost of better health insurance for 2005.
- Rediscovered receipts: Lisa, 45, executive director of a not-for-profit organization, says she was going through her papers when she found receipts for some improvements shed made to her rental property. Finding them jogged an important tax center in her brain: Id totally forgotten that I could deduct those expenses! she said.
- Doing well by doing good: Caroline, 42, a journalist, said that ever since she discovered one year that her non-cash contributions to charity -- furniture, clothes and other items -- count as full deductions, shes become a more generous giver. So this year, for instance, I gave many more clothes away to a local charity, she says.
An easier way to make sure you're not overlooking any tax-trimming opportunities is to use MSN Money's Deduction Finder.
Ambushed by the AMT
Then there are the not-so-pleasant revelations. Jeffrey Golden, a senior financial planner with Circle Advisers in New York, says that this year thousands of people are being ambushed by the alternative universe tax. I mean, the alternative minimum tax (AMT) -- which can make you feel like youre living in an alternative universe, where none of the normal deductions apply.
In fact, after getting off the phone with him, I realized that I may be one of those people.
The AMT was designed to make sure that wealthy people, who have access to all kinds of income shelters and tax loopholes, still pay their share. But it was never indexed for inflation, Golden says.
That means that people who typically claim deductions on the larger side (if youre a free-lancer, a small-business owner, a homeowner or if you live where there are hefty state and local taxes) -- those items you assumed would reduce your taxes could unwittingly propel you into that alternative AMT universe. And youll wind up paying more.
Golden recommends checking with your accountant. Because if youre hit by the AMT for 2005, there are things you can do to avoid it for 2006 (Read Jeff Schnepper's "5 ways to beat the AMT" for more.)
Be careful whom you hire
Seth Birnhak, CEO of Inwindow/Outdoor, an advertising company in New York (who didnt mind using his full name), seems to be working out some karma on the accounting side. In hindsight, he says, hes learned to be extremely careful about whom he hires to do his taxes.
- Check references. One guy I hired was later convicted of filing a fraudulent return, he says.
- Make copies. Another guy lost all my 1099s and bank statements -- and Id given him the originals.
- Get an estimate -- and make it stick. One guy I hired gave me an estimate of about $350 to do my taxes, Birnhak says. When the bill came, it was $1,000. But when I protested he reduced it to $600.
The light at the end of your tax tunnel
And for some, tax time is a time of pride. Mickie Quinn, manager of educational services for ThinkQuest, which provides technology to elementary schools, said that in 2003 she and her husband spent a big chunk of the year juggling free-lance gigs.
But even though neither one had a full-time job for most of 2003, and we earned about half of what we had in previous years, Quinn says, we managed to survive. It was impressive.
In fact, whereas most of us may read those bank statements and realize all the ways we overspent, Quinn says it was eye-opening to realize that they could and did get by on less. Although she and her husband both now have full-time jobs, theyre sticking to their frugal ways -- and saving more money.
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