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| The Basics | Is hiring a tax pro key to marital bliss?
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Doing taxes is stressful, MSN Money readers tell us -- so stressful that 90% of couples delegate the job to one partner or to a tax preparer. Plus: Most readers still prefer fat refunds to earning interest.
By Jeff Schnepper
How does tax season -- the annual rite of doing our income taxes -- affect your relationships with others?
Perhaps more than you suspect.
More than 2,200 readers filled out an MSN Money survey on income taxes, and love and taxes don't always get along.
True, more than 58% of our respondents said tax-filing season has no impact whatsoever on their relationships with spouses or significant others. But, almost 17% replied, "What doesn't kill us makes us stronger," suggesting a significant degree of stress. Another 25% reported headaches, disagreements, penny-pinching and budget-tightening. That's 42% of the respondents who suffered negative experiences during tax-filing season.
During tax time, the reply to "Are we having fun yet?" is clearly NO.
Balancing different money styles is tough
Personally, after 30 years of marriage, tax time in the Schnepper household is a disaster in waiting. My wife, Barbara, and I don't exactly see eye to eye on financial recordkeeping. We started with a joint checking account but that lasted only a month. I balance and reconcile to the penny. She, on the other hand, rounds numbers and likes to give the bank some extra money to play with.
So, there's a bit of stress during tax time. Not that I'm concerned with an audit. My wife has substantiation for all the numbers she gives me. What I worry about are the deductible receipts I find in her glove compartment or under her car visor that were never reported.
The stress that comes from different money-management styles may explain why less than 10% of couples do their taxes together. The other 90% of the returns are done by one party or a hired professional. I suspect that delegating the task cuts down on the divorce rate. When I get too stressed or uptight, Barbara reminds me that she doesn't really believe in divorce. On the other hand, had she killed me 20 years ago, she'd be a free woman today.
The real reason we file early
Most of our respondents said they file early -- before April 1. Less than 10% wait for the last minute, which our survey defined as between April 1 and April 15. Another 6% said they file for extensions.
Much of this promptness is probably due to an eagerness for refunds. Nearly 66% of respondents expect refunds on their 2004 returns. And more than 52% of those expecting refunds said they believe they'll get more than $1,000 back.
I'm a nag on this point, but a big refund is really a sign of poor tax planning. A $1,000 refund means that you're giving the Internal Revenue Service a $1,000 interest-free loan during the year. The bigger the refund, the more interest you lose by letting the IRS hold your money. (Yes, interest rates are low, but we're talking principle here.)
In 2004, the IRS processed more than 131.7 million tax returns and issued more than $215.7 billion in individual tax refunds. That averages out to about $1,640 per return. That's a lot of interest-free money.
It's better to plan for safe harbors
Good planning shoots for the safe harbors. That's the minimum amount needed to avoid any interest or penalties, regardless of what you owe on April 15. Any excess should go into your pocket during the year. Enjoy it now if it's your money to keep. Put the excess in a money market account to provide the liquidity for any tax due on April 15. That way you get any interest on those dollars.
Safe harbors for 2004 include owing less than $1,000, having 90% of your 2004 tax or 100% of your 2003 total tax (line 60 of your 2003 1040) already paid by April 15. If your 2003 adjusted gross income was more than $150,000, however, then the 100% becomes 110%. See Form 2210 at the IRS Web site for details.
Even if you're due a refund, an extension may be prudent. For example, the automatic four-month extension to file also extends the period when a self-employed individual can make a contribution to a Keogh or similar retirement plan. (But you can't make an IRA contribution after April 15.)
This strategy works even if you have an amount due. But, by April 15, you should pay any net balance to avoid interest and penalties.
Yes, there are psychological rewards to a big refund
Almost 43% of our respondents say they plan to save or invest their refund. But 35.2%, up from 26.7% in a survey MSN Money took last year, plan to use the money to pay down debt. That may say something about the current structure of our credit card/home equity-financed society.
Not surprisingly, almost 33% of the respondents were confused by tax-law changes. In fact, when asked which 2004 tax changes most affected their return this year, almost 34% of the respondents had "no idea." That should hardly surprise. Since 1986, more than 87 new tax laws have been enacted. I'm a tax pro with two law degrees and I'm still confused.
So, here's what we know -- at least about MSN Money readers who took our survey. Most are overpaying their taxes during the year. Then, they file early to get their money back. But that's money that could have been used earlier to minimize their debt.
That is NOT good from a financial point of view. But, for some people with a Christmas Club mentality, perhaps psychologically powerful. For those individuals, I once again make the offer I made last year: If you want a chunk of money sent to you on April 15, without interest, send me the money during the year. I promise to send it back to you, and, unlike the IRS, I'll never threaten you with an audit.
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