Making Taxes Easy

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I may be the only guy out there who almost enjoys doing taxes. (And no, I don't get paid for it. At least not directly.)

Don't get me wrong: No one likes to see hard-earned money get siphoned up by Uncle Sam. I surely understand that point of view. And I'm probably as guilty as anyone of dreaming about what I could do with that money if I could keep it.

As imperfect as our system is, though, the fact remains that it is the system that's in place. We (and the IRS) just have to deal with it. You pay attention, mitigate your tax bite wherever you can, fix mistakes, and move on. That's it. is, therefore, no surprise that tax planning is an important aspect of personal financial planning. Although you may think of tax planning as an activity to do between January, when tax forms arrive in the mail, and April 15, the filing deadline, tax planning is actually a year-round activity. ...The overriding objective of tax planning is very simple: to maximize the amount of money you keep by minimizing the amount of taxes you pay.

— from Personal Financial Planning, Ninth Edition

Every year since 1995, I've sat down with my PC and a copy of TaxCut by H&R Block software and prepared our returns. Softare like TaxCut and TurboTax (Intuit's offering) makes things pretty easy, really. Although, to be fair, our joint tax returns don't require all that much complexity. The most brain-straining part of it centers on handling the self-employment income that both my wife (jewelry-making and crafting at Beadkiss) and I (this, and other websites) earn on the side. But I learned to plan, estimate, and pay my taxes throughout the year (see below!), so I haven't yet encountered any Disasters of the IRS Kind.

Eagerly checking the mail

Actually, this year (2007), I'm even more anxious than usual to get my 1099s and W2s and stuff from 2006. Thanks to a reader's suggestion to my "Got My TaxCut On" article, early in 2006 I created a series of Excel spreadsheets for myself which mimic, line by line, the IRS' 1040 and other applicable forms, as well as our state's income-tax forms. I updated the numbers in these spreadsheets throughout the year. This way, I could monitor our tax position at any given time. And — more importantly — make withholding adjustments (and electronic tax payments; see below) as necessary.

Now that it's 2007, I'm super-anxious to see how my spreadsheets performed. Was I close? Far off? My goal was to have marginally overpaid our state taxes this year (for the first time ever), and to have underpaid our federal taxes (for the first time ever) by less than $500. If my numbers were on target, when it all washes out, we should owe a few hundred bucks total.

That position — to end up oweing a few hundred dollars in April, all taxes considered — is where I want to be each year.

Why would I want to owe? Because I'm not in the business of loaning my money to the government for free. But more on that below.

Can you make your taxes easier on you?

Making tax time a "no big deal" occasion is like everything else finance-related: It's all about tracking and planning. And when it has to do with money, as this does, I'm a freak: I enjoy making the numbers work. My kid-mind likes to think of it as doing a puzzle. A year-round, plug-in-the-last piece-before-April-15, money puzzle.

But what about you? What can you do to make tax preparation easier for yourself? Well, let's look at a few ideas.

Let software do the hard work.

I love computers. And I love what computers can do for your finances.

That said, I must again reiterate: I use, adore, and wholeheartedly endorse financial programs like Quicken. (And look here for some Quicken alternatives.) Because you categorize every transaction when you enter it — or should — it's an absolute snap to see where your income, expenses, and taxes stand at any given time. How much have you withheld for federal taxes so far this year? Or for state taxes? How much income did your spouse's consulting gig bring in last year? How much did you total in tax-deductible medical expenses? All these questions, and millions more, Quicken can answer for you with a few clicks.

A good financial program like Quicken or Money will do wonders for you and your money, and not just at tax time. Still, when it comes to taxes, I wouldn't dare file a return without the newest version of TaxCut or a similar program. I've heard good things about TurboTax also, though I've never used it. Plus there are free (as well as dirt-cheap) online options like TaxACT that are worth checking out, too.

Note too that the IRS offers its own eFiling section.

Find a record-keeping and filing system that works for you.

It doesn't have to be complicated, either. Each year, a couple of days after New Year's Day, I grab a fresh manila file folder, label it "Income Tax - Year 2xxx" and from that point on, anything that has any effect on my tax situation goes in that folder. Receipts, invoices, credit-card statements, 1099s — you name it. I keep the current year's folder in the same place on my desk, year in and year out, so I'll always know where it is.

At tax time, I go through and do little sorting of the documents that inhabit my file folder. Then when our returns are done, filed, and printed, I put copies in the folder, and file it in our cabinet. And that's it.

Plan for, and estimate, your taxes year-round.

If your household contains someone who's self-employed, then this step, in my opinion, is vital. Remember the spreadsheets I mentioned above — the ones I created at the suggestion of a reader? It wasn't hard to do at all, and I'm not an Excel genius by any stretch. But it was a fantastic idea.

Simply build a spreadsheet that mirrors your applicable tax forms, line by line. Let Excel or OpenOffice do the nasty math, and then all you have to do is update your income figures and such as they change throughout the year. Again: If you have any experience at all with Excel and spreadsheets, then this task is not nearly as difficult as it sounds.

When it's time to verify your spreadsheet's calculations, simply pull out last year's tax return and plug in the numbers from it. See if your spreadsheet's calculated figures match up. If they do, you're set, and ready to start planning for the current tax year — once you make changes to reflect the current year's tax laws (exemption amounts, tax rates / brackets, and whatever else Washington sees fit to change from year to year).

I'd make my spreadsheet available to the public, just as I've done with so many other Excel financial spreadsheets, but the constantly-changing tax codes, forms, brackets, and laws would make this a logistical nightmare.

I like a challenge just as much as the next guy, sure. But I also know when to run away.


Adjust your withholding.

Reason to believe that something's amiss with the tax money your employer is withholding? Are you seeing a thousand-dollar-plus refund each year? Are you afraid that the mutual fund shares you're about to sell to buy that new WakeRaper XI ski boat will generate taxes that could very well sink your finances in Lake Erie?

Well, you can file a new Form W-4 with your employer anytime, and change the amount they're withholding.

Check my blog article entitled "Changing Your Tax Withholding" for more details on this process, why you need to do it if you're always getting big refunds, and for great links to helpful web "Withholding Calculators" that'll crunch and spit out the W-4 numbers for you. (They're in the "Related Articles" section at the bottom of that post.)


Regular withholding falling short? Go EFTPS yourself.

Of course, where you work, the HR department (or whomever is in charge of handling employees' tax withholding) is always a well-oiled, precision-driven machine. Nothing gets by those guys, right? They crunch numbers and produce razor-sharp results that would make even the brightest NASA engineers jealous.

Of course.

If that isn't the case, you can still do as I do, and as lots of self-employed folks in the U.S. do: Make tax payments electronically, on your own, straight to the Feds themselves. Getting set up for this isn't tough. And you can do it even if your employer is withholding taxes for you already. Just head over to:

Electronic Federal Tax Payment System (EFTPS)

EFTPS is where you'll need to go to make payments for Estimated Taxes, if those apply to you. But you can also use it if you discover that, for some reason, your employer hasn't been withholding enough tax dollars to cover your liability.

With EFTPS, at least, there's no one else in the loop: It's just you and the U.S. Government. Which is good.

The way I look at it, the fewer people who have contact with my money, the better.

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