|
|
|
|
| The Basics | Readers love refunds -- but they're wrong
|
An MSN Money survey finds (among other things) that the prospect of a fat check each spring blinds otherwise careful consumers into wasting thousands of dollars.
By Jeff Schnepper
I see a lot of tax returns every year, and I am always interested in the mistakes taxpayers make.
Not long ago, MSN Money surveyed its readers about their taxes, and, sure enough, they did the same sorts of things I see many of my clients do -- and hope they don't do on their 2005 taxes.
- They let the government keep too much of their money during the year.
- They fritter away their refunds.
- A few potentially set themselves up for real trouble.
Lets have a look at what this survey, which generated 6,800 responses, tells us about our taxes and how we can better manage and plan our tax payments.
We leave a lot of cash on the table for the IRS
Im not kidding.
Sixty percent of the respondents in 2003 said they expected a refund on their taxes. And 53% said they expected more than $1,000. That was a large amount of money, and, with all due respect, I'll bet many readers are still leaving a huge amount of money floating interest-free in the Treasury vaults.
Ive got an idea. I hereby offer to allow anybody reading this to send me money. Send me as much as you want. And I promise, on my word as MSN Money's Tax Expert, that Ill send it back to you every April 15, without interest.
Sound as silly to you as it does to me? My offer is actually better than the deal you have now. At least Im not using your tax money to pay for my postage.
Remember: It was always your money.
Aim for the safe harbors
So what should you do? Aim for the "safe harbors." Pay only the minimum amount you have to pay during the year to avoid any interest and penalties. Theres no interest or penalty if any of the following apply when you file your return on April 15:- You owe less than $1,000.
- Youve paid in at least 90% of your 2005 liability.
- Youve paid in at least 100% of your prior years total tax. On your 2004 return, that was Line 62. Go check it as you start working on your 2005 taxes.
If your Adjusted Gross Income (AGI, line 36 on your 2004 1040 form) was more than $150,000, then you need to pay in 110% of your total tax, rather than only 100%. So, if my 2004 AGI was $160,000 and my total tax was $10,000, Id need to pay 110% of that, or $11,000, during 2005. If I do that, theres no interest or penalty to pay, regardless of how much I owe on April 15, 2006.
Related news and commentary on MSN Money
You can meet these safe harbors in two ways:
Adequate withholding from your salary. Heres an interesting trick. The IRS says withholding is paid equally during the year, regardless of when the payments come in. So you can always make up an early year shortfall with end-of-the-year withholdings. I have clients who have nothing withheld the first 10 months of the year. They make up for that by withholding everything in November and December. They plan ahead and save for the short months. And dont worry. Under the Internal Revenue Code, your employer must accede to your request to change your withholding allowances.
Estimated payments made on time and enough to meet the IRS rules. You can download estimated tax form Form 1040ES from the IRS. If you make big bucks in 2005 and expect to owe big next April, put the expected excess in a money-market account. At least youll be getting the interest!
The emotional tug of a refund
Lets stay real. Theres no question that this strategy -- paying only what you owe and no more -- is financially optimal from a rational point of view. But humans arent always 100% rational. It feels good to get that big refund check in the mail. Besides, youd probably fritter away the extra money you take home each week and have nothing to show for it at the end.
Actually, many of the respondents to the survey admitted they dont use their refunds wisely. Many of them said they piddled refunds away on nothing. While 48.4% of the responses planned to invest or save their refunds, often those plans never get past the planning stage. (Ive planned to go skydiving for decades now.)
We dont lie on our taxes -- or dont admit we lie
The survey MSN Money did reinforced the advantages of keeping your mouth shut. Some people just open their mouths to change feet.
Only 8.5% of survey respondents admitted to lying on their tax returns. But perhaps some of the others were lying when they responded. For some reason, lots of people are hesitant to admit tax fraud.
Most of those confessing were in the upper income brackets. Thats also where most of the responses came from. (Remember, the MSN Money survey is not scientific.) That doesnt prove that the rich are proportionally more likely to lie and cheat. On the other hand, it doesnt help their case, either.
Heres what they admitted they did:
- They made up deductions, 29.5%.
- They deducted personal expenses as business expenses, 24.1%.
- They underreported income, 23.7%.
A few more creative types made up fictional children or other dependents. And a few admitted they hid assets outside the country.
Why cheat? Why not, if the odds of getting caught are almost nil? (Thats a rhetorical question, not an invitation to commit tax fraud.)
Indeed, most respondents didn't believe they would get audited. In fact, about 38% thought they had a 1-in-100,000 chance of being audited. They believe their odds are that good.
Actual statistics put the number closer to 1-in-174 tax returns, based on 2002 audits. That means some of us are headed for unhappy surprises.
In recent years, the IRS has shifted the agencys emphasis from customer service to compliance. Enforcement is going to be the main focus of his administration. You have been warned.
What caused the shift was a 2002 study by an IRS Oversight Board which reported 17% of Americans believe its acceptable to cheat on their taxes. That was up from only 11% in 1999.
Revenge is a big factor in tax-tattling
If youre going to cheat, dont talk about it, especially to people who might hold a grudge against you. While only 1.7% of respondents admitted to tattling on a tax cheat, their No. 1 reason was revenge (37.1%). Patriotic duty and fairness were also major responses.
Its my opinion that the low number of those tattling may have more to do with opportunity than inclination.
I found it interesting that the possibility of a reward, up to 10% of the amount collected, was not a major factor.
Heres how I feel about cheating on your taxes: Dont.
But if you do, shut up about it. I dont want to know you. When you dont pay, you steal money out of my pocket to make up the difference. When you dont pay, its unpatriotic and unfair. Besides, I was never that crazy about you anyway . . . and Ive already filed Form 211 to collect my reward.
|
|
|
|
