Friday, January 27, 2012

Taxes

After getting robbed (paying $240) by a nationally known tax preparation company to do taxes that I felt should be fairly easy to do since we only had two W-2's and a few 1099's, I decided things had to change. I started doing my taxes myself and the last few years, have bought tax preparation software which speeds up the process considerably. The first year took five or six hours to complete since I had to enter all the information in and then my inexperience to the software made me go through all sections regardless if I thought they applied or not. Flash forward to this year, my third year, and I spent all of about an hour. Painless and the $30 price is right.

Doing my own taxes means that I get to understand them in a way that perhaps most people don't. When you do your own taxes, you tend to pay attention to all the deductions, credits and such to see how you can save yourself paying more taxes than necessary. You also understand the tax system better and how if functions. I think it is impossible to understand it all but it is certainly easy enough to understand the taxes that do affect yourself. This has been a good process for me and one that I'm not likely to give up soon. The biggest reason is that I see many people around me essentially paying more money than they need too because they don't understand how it works and the tax preparation company they go to don't inform them. I thought I would mention perhaps one of the biggest ones I see among my peers that I'm around.

It seems as if the large majority of the people prefer to withhold enough money for taxes to ensure a refund every year, mostly it seems as if a forced piggy bank account that they can then go blow.  Not only do you lose the earning power of being able to invest that money yourself for a year, but if you have children, you are throwing away a lot of money. For instance, a coworker of mine who has one child and another on the way just told me that they like to arrange things so they have a refund every year. They were aware that the government gives a $1000 tax credit per child but because they didn't understand the way it works, they weren't collecting a cent of it because that credit is only good if you owe the government money. Say you owe the government $700 in taxes. The government would give you $700 tax credit and say you owe zero in taxes. They keep the remaining $300 of the credit. If you get a refund as this person likes to do, the government gives you a big goose egg worth of credit. So you want to owe the government if you have children and make less than $110,000 as a couple so you take advantage of that credit. Just don't go too far or if you owe more than $1000, the government will fine you.

Another observation of mine is that most people I talk to don't know how much they pay in taxes, not even as a percentage of their AGI or Adjusted Gross Income. This as come up a lot recently with people gasping at the Romney's and the Buffets of the world who pay less than 15% of the AGI in taxes. They don't realize that 80% of the taxpayers in this country pay less than that. When you go to a tax preparation firm, they just tell you how much MORE you own and very rarely say the whole amount. You have to look among the numbers on your form to find that out. Check it out, you might be surprised at the dollar amount. I know I am every year.

I think a lot of the government's excess spending would be solved by mandating that tax payers had to write the government a check for the full amount of their taxes once a year, not the difference between what the government took out of your paycheck and what the government says you still owe them. If people had to write out a check that large, I'm guessing they would quickly be more concerned about where it is going.

4 comments:

R. Sherman said...

The tax code, regulations, letter rulings from the Congress & IRS take up about 10 feet of shelf space in my office. The vast majority of them are designed to reward or punish a given group, as opposed to simply running the government. This makes the system extraordinarily complex which in turn, costs the economy money spent on accountants and lawyers which could be spent on something else. (For example, the cost of compliance and enforcement of the Estate Tax is more than the tax brings in.)

Better to eliminate deductions and a flat tax on everyone, so the whole thing takes about ten minutes.

Cheers.

sage said...

Of course, you're only talking about income taxes when your talking about the 15%, not social security or sales or property... In the self-employed category for taxes means that I have to put away an extra 15.3% for social security--that quarterly payment to the IRS is by far the largest check I write. Maybe you have a point about us all having to write that check out to the government. It also means that I don't get refunds (although sometimes my April's quarterly check is a little lower)

Another thing, when you can move income to a non-wage category (as in investments), you don't have to pay the social security tax and social security tax also caps out so that most high income earners only pay it on part of their income.

Vince said...

I suspect it's true that paying in a lump would condense the mind right enough. But most people don't operate with the level of discipline required to pay in that way. They find it far easier to pay on the drip.

On Randalls comment; I suspect if a cost-return analysis was performed on many borderline taxes you'd find similar. But a look at allowances would probably shock you. It wouldn't surprise me if there isn't provision for buggy-whip makers in Dowickytomtom, Penn or Mooselookmeguntic Maine dating from 1910

warren said...

I have to pay quarterly taxes and was astounded, as a small business owner, how high all of the taxes added together are. Each quarter, I do get to write a significant check to the gov't and it hurts my feelings every single time...