5 tax myths (part 2)
Thursday, June 7th, 2012
Last time, we talked about tax myths regarding investments such as your house, business assets, and financial instruments. The mantra, “Don’t let the tax tail wag the dog,” applies to many decisions. Tax impact should be a consideration, but not the most important factor in a decision involving your money.
Here are a couple more myths regarding tax preparation and planning. These myths suggest that you shift your focus to achieve the most favorable outcome regarding your tax bill; that is, keeping more of your money instead of paying more taxes.
- The bigger the tax refund, the better.
Many of us enjoy receiving a big check after our tax returns are done, but let’s look at what that really means. Most of us pay our taxes throughout the year through withholding or estimated tax payments. We base those payments on how much we expect the tax bill to be. After the year is over, we calculate how much tax we actually owe by preparing our tax returns. If we guessed wrong on the tax paid in, then we either owe more tax, or we get a refund.
If you get a refund after your tax return is done, that represents an interest-free loan you have given to the government. You could have used that money yourself when you earned it over the year. The key number on the tax return is not the refund, but the tax amount. (On Form 1040, it’s line 61.) The tax preparer who gives you the biggest refund may be playing fast and loose with the tax laws. Even if you use a tax preparer, you still sign the return and you are responsible for its accuracy.
Your goal should be to use the tax laws to legitimately minimize the tax due on the return. When you receive income, pay no more than necessary to cover the tax due so you neither write nor receive a big check at tax time. Your tax adviser can help you calculate an appropriate amount.
- Just get tax software and you’ll be fine.
Like any other software, tax software is only as good as the person using it. “Garbage in, garbage out,” as computer developers say. Relying on the software is not a defense for misreporting your taxes, according to the IRS and Tax Court. Even Secretary of the Treasury Tim Geithner did his tax return wrong with consumer tax software. A CPA can ensure that your tax return is accurate while optimizing your tax load and advising you of audit risks. He or she also can help you look ahead and devise a plan for achieving your business and financial goals that includes minimizing the tax impact.
Planning ahead to meet your goals is vital, and tax planning should be part of the overall strategy. This is complex stuff, and a visit with a CPA will help make sure you’re not overlooking something that may have a significant impact on your plan.