A Taxing Time

I live and work in Colorado and snow ski (not well).  Several years ago when we were in one of the ski outfitting stores getting the family fitted for skis, I turned to one of my kids and said, “Do you know what getting skis always makes me think of?”  Without waiting a nanosecond, she answered, “Taxes!”  She was right.  Sad, but true. 

 

So this time of year elicits different thoughts in different people.  For some, it’s like a second set of holidays.  They look forward to a juicy refund.  For others, it’s a nightmarish waiting game to know what “the damage” is.  For still others, it’s simply a time when they get all the right forms together and do what they need to to file and forget it.  No big deal!

 

While we can make wise financial decisions that may affect our tax situation, among other things, taxes are often a case of “It is what it is”.  Here are four concepts to bear in mind about taxes. 

 

         There’s a difference between tax avoidance and tax evasion.  Tax avoidance is taking advantage of completely legitimate tax savings that you’re entitled to.  There’s absolutely nothing wrong with that and you harm no one but yourself by paying more than your share of the national and state tax burden.  Tax evasion is cheating.  It’s taking deductions or credits that you shouldn’t or hiding income.  So unless you have a passion for wearing an orange jump suit in a very small living space, don’t be a tax evader.  Let’s not forget that what put Al Capone behind bars wasn’t murder, it was tax evasion.  So the government has no sense of humor about it.

         A little bit of organization throughout the year can save you from a purgatory of finding documents at the beginning of the year.  Start a few folders where you drop receipts that you’ll need.  If you use a computer program for your finances, make categories for some of the tax deductible items like checks to charity, out of pocket medical expenses, health insurance, child care, property taxes, and other things specific to your situation.  Keep a book in your car for mileage you can deduct.  Then you’re looking at one evening of organizing your file, printing your deduction report, and looking over last year’s return for anything you might have missed, instead of more paper cuts and frustration than anyone should endure. 

         Don’t let the tax tail wag the overall finance dog.  I’ve seen self employed people spend ridiculous amounts on items neither they nor their business need because “it’s deductible”.  Also, I’ve seen people hold on to investments that were terrible and not appropriate for them because they didn’t want to pay tax on capital gains if the investments were sold.  There are lots of tax strategies that can be pursued with very little effort.  Meeting your financial goals without paying more than you should is great.  But a primary financial goal shouldn’t be to avoid taxes. 

         Big refunds are not a good thing.  Would you like to invest during the year in something that pays you no interest and gets you back your money – without interest! – at a time the investment company determines?  That’s what you’re doing when you overpay your taxes and get the money back when you file a return.  Tax planning probably involves working with a financial professional to try to get to a zero sum game – not owing something you don’t expect and not getting your money back without interest – but if you’re getting a big refund every year, it’s worth the money to pay a professional to help you plan your withholdings. 

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