Pay Now


Lessons Learned from Tax Season

You (and we) made it through another tax season. Whether you experienced the pain of writing a big check to the IRS on April 15, or had the joy of getting an unexpected tax refund, there are lessons to be learned in the process of filing your taxes. Here are some of those lessons to keep in mind.

  • Generally, from a purely economic standpoint, refunds are bad. Not that you can get a great return on your money having it sit in the bank, but you are guaranteeing yourself zero return when you loan your own money to the IRS all year via withholding. Instead, think about your debt and applying the extra tax withholding to that. Let’s say you have a car loan at 6% interest, and you got a $4,800 tax refund this year. You cost yourself $144 in interest this year by letting the IRS sit on your money instead of paying an extra $400/month on your car loan.
  • That said, there is understandably a psychological aspect to the refund thing. Be honest with yourself, would you really pay the extra $400/month on your debt? Or would it be gone with nothing to show for it? The idea of forced savings via withholding is a good strategy to allow for big-ticket purchases if you don’t have the discipline to save (or pay down debt) otherwise. Just remember, though, that it is your money in the first place, not some gift from Uncle Sam to waste.
  • Whichever route you choose to go with setting your withholding to try to break even, or to get a big refund, your Form W-4 is the key to getting there. Check out this handy withholding calculator that will give you the best guidance on how to fill out your W-4 so that your employer can withhold the amount of money that you want withheld:
  • Were you surprised by how long it took to get your tax return done, or how much it cost? These are things that drive up our fees because they require extra time and attention on our part:
  1. Disorganized records – If you just shove all your tax records into a file without any sort of order, we either have to organize it ourselves or jump around in our software to enter it all. Unfortunately, we see too many clients sending in a file that will look like this: property tax bill, W-2, charitable receipt, mortgage statement, interest income, charitable receipt, etc.
  2. Lack of summaries/totals – For things like charitable contributions, medical expenses, and business & rental expenses, we don’t need to see every scrap of paper. You need to keep every scrap in case the IRS comes asking, but you can keep your tax prep fees down by putting together a spreadsheet summarizing these items, and then just sending us the receipts/invoices on things you may have a question about.
  3. The complexity of your investments – If your broker is getting you into “exotic” investments like hedge funds, publicly-traded partnerships, or options; or is “actively managing” your account to the point where you might wonder if he is churning your account, this is costing you in tax preparation as well as the broker’s own fees. The exotic investments often result in the issuance of a Schedule K-1 to you, which has more complex reporting than just owning mutual funds or stocks. And all that buying and selling of stocks needs to be reported on your tax return, even though you didn’t take any money out of the brokerage account. Just be sure that you’re getting enough of a return on your investment to account for your broker’s fees and the extra you have to pay your accountant to handle the tax reporting.
  • If you received estimated tax payment coupons for next year, they are just that… estimates. Generally, these are based on your prior year income in order to safe harbor you from underpaid estimate penalties for the current year. But your income might increase or decrease significantly, causing you to be underpaid or overpaid when you file your next tax returns. Even if the estimates are based on a tax projection for the current year, it is very difficult to project in March or April what your income will be for the whole year if you own a business and/or have lots of investments. The best time to talk about your taxes is before a major event or transaction happens when we can plan for it, not April 1stof the following year when all we can do is damage control.

Thank you for your business and/or referrals this past tax season. We look forward to continuing to work with you in a mutually beneficial way throughout the upcoming year.