Saturday, February 23, 2008

2007 Federal Income Tax Prep


If ever there was a subject that people (or maybe just Americans) love to hate, taxes has to be it. However, in the last few years, as I have looked at the Federal income tax more closely, not only do I see and appreciate their usefulness, but I have actually found the tax system to be quite beneficial to me.

(I also think that the Federal income tax is part of a conspiracy that includes the Federal Reserve, to be clear, and that it equates to robbery of the citizenry. However, in the current environment, I look at them for what a Federal tax could accomplish, if it were implemented in line with the founding principles laid out of the US Constitution. I know it sounds contradictory, so maybe I'll tackle that in another post. Continuing on...)

Now, I hate the process of doing taxes. Its just too complex. However, if you're willing to take some time, there is really no justification for most people paying any Federal income tax in a given year, simply on the basis of the current tax law and average income levels. You just have to do your research and spend some time planning. (It does take effort.) For me, that takes the form of reading the tax columns that run in the WSJ every so often, even taking notes on interesting or potentially useful tips. It also helps that my accountant (aka my mother) has been doing taxes for others for years. I can quite easily bounce things off her, or ask her to research a particular topic for me. Now that she's working for a non-profit tax preparation group as well, she's exposed to even more tax information which is powerfully useful. If I can find a way to start using the official software that the non-profit she is working for uses (and is endorsed by the IRS, according to her), that might even give me more of a leg up. I try to understand the tax laws to a reasonable degree, so that I can figure out how to use them to my advantage.

Finally, the best thing I ever did to get comfortable with my taxes is sitting down, with a pencil and tax forms, and doing my taxes for tax year 2003 or 2004. I may have done it manually both years, but I can't recall exactly. However, having to read the stupid booklet that comes with the 1040 was very insightful. Since I did that, I think I've paid taxes 2 years in the last 4 or 5. Every year I get better at finding ways to get my money back. My biggest concern now is not turning it over in the first place! However, I recommend that everyone do their taxes by hand - no computer, no software, no websites - at least once. Read the book(s). Use a pencil to do a draft then once all the numbers look sane, pull out a second set of forms and do the real version in ink. Even with my moderately complex return in 2003 (or 2004), it only took about 45 minutes to do the whole thing. Even 2 hours of time is worth it. Doing the process by hand makes you much more familiar with the intricacies and all the little ways the IRS helps you avoid paying the US government. I was amazed at how many ways there were to reclaim my money and you will be too! With every iteration, you learn new, powerful ways to minimize paying that you hadn't considered.

For tax year 2007, I sat with my mother and went through my American Express year end statement, identifying every REI related un-reimbursed expense, every charitable contribution, everything that is potentially deductible, and boy is there is a lot. Combined with maxing out the 401(k) every year, which gets my adjusted gross income (AGI) down to the levels where I can contribute to a Roth IRA, these expenses are pretty much going to guarantee a decent refund. Even better, in some twisted way, is that I don't have the return completed for my real estate partnership yet, and with the losses we took last year, that should increase my refund even more! Woo hoo! (Uhh, umm, yeah.)

Anyway, I feel good to have started that process, so I can get it over with before April arrives. And I thank American Express for their beautiful web site and online functionality. Along with the reduced complexity of my investments in 2007, and a new accountant doing the books for the partnership, this should be a much smoother process with a happier ending. Go go un-reimbursed deductions!

Until next time...

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