Understanding Your Tax Return
Remember in school when the least popular subject was Math? Well, the grown up equal to that is money, more specifically taxes. Our country has a problem with financial literacy, which means they don’t have a shot at understanding their tax return, without a good amount of effort. Even worse, some see it as an ATM machine. I’m here to tell you that your refund is not free money. In non-professional terms, your tax return is nothing more than a formula that decides if you’ve paid enough taxes yet this year. Without making this a “How To” on tax preparation, this is my attempt to debunk common misconceptions and easily understandable concepts most shy away from.
Your Tax Return is not an ATM
Right around March or April, a common mindset begins to take hold. People start planning how they are going to spend their tax refund.
First, they are depending on a figure of money they aren’t sure they are getting. As noted before, most people don’t understand the tax return formula, so how could they know they are getting a refund? It’s quite possible that a small detail in their life or employment can tip the scales into having them owe some money at the end of the year. I wish that scene upon no accountant.
Second, they are giving an interest free loan to the government. Any refund you may be getting is just money that’s being taken from your paycheck each week and held on your behalf. With the rise of fraudulent filings, it’s very possible that refunds may be delayed. It’s much more financially savvy to speak to your accountant or payroll department and make sure you’re not waiting for your money in April.
Why do they get a bigger refund? We do the same thing!
Accountant’s ears begin to smoke when this question is asked. While it may be true that you’re both waitresses with 2 kids, a house, and husband in law enforcement, it doesn’t mean your tax situation is the same. For instance, you may have filled out your W-4 forms differently (this is the form that elects how much money is withheld from your paycheck). The ages of your kids, whether they go to daycare or college can make a difference. The deal you got on your house, as well as many other slight employment issues can influence a tax situation greatly. Comparing yourself to another individual isn’t a good idea, we are all on our own journey.
Why you should pay a tax professional
Every year, I run into the guy or girl who wants to do their own tax return. That is fine, if you’re going to take a course and go through each line with a fine tooth comb. In reality, most of these individuals are buying turbo tax and answering multiple choice questions until it automatically populates your return. The results of this exercise is simply to input numbers onto the form, it doesn’t give you the benefit of the trained eye review. It’s true, you shouldn’t pay anyone to do that. What you should pay them for is to take aggressive positions. A good tax professional can draw from years of historical experience dealing with clients and the IRS. This is not a suggestion to lie or embellish your numbers, I’m simply stating that there are grey areas where one can be aggressive.
Are you liable for mistakes or misstatements?
Well, as normally the case in taxation, it depends. As a general rule, you are liable for any information given to your accountant and he or she is liable for how they are used. For example, if you tell your accountant that you had an extra 10K of business expenses that doesn’t exist, that is on you. That being said, if you told him or her you had 20K of business expenses and upon your review they embellished to 30K, that is on them. For that reason, take a copy of what you give and save all your emails. Personally, I prefer providing everything through email because it is permanent digital evidence of any information exchange.
Save money of tax preparation
Most accountants charge by the time they spend doing your return. It would be wise for you to be somewhat knowledgeable on what to provide. In my years as a tax preparer, I remember shoe boxes (sometimes two or three) full of information irrelevant to the process. If you are one of these people, your accountant will spend more time preparing your return. Save your money!
You can’t deduct just anything
To follow up on the last point, most people just don’t know. It’s not their fault school doesn’t teach tax. Take a second and read this article for common overlooked tax deductions.
All in all, educate yourself on the basic process of your own tax situation and its basic process. It will only be a step toward further self-improvement. Not to mention the years you’ll add to your accountant’s life.