Taxes are intimidating. When tax time rolls around,
stress levels increase and people get hyped. No one knows what to do and they are definitely not prepared. Well, that’s not true. Some people out there actually have a clue, but the majority do not. The more prepared we are at the end of the year, the lower the tax bill.
Why should the average Sally Sue have a basic understanding of income taxes?
- Most economic transactions have an income tax effect. The most common example is the purchase of a home. Mortgage interest will be deductible on the itemized deductions worksheet. Another example is withdrawing money from a 401-k retirement account. The tax burden in doing so could be steep. Both of these items, for the most part, happen in life prior to discussing it with your tax adviser. Therefor, you should have a clue whats best for you. Then, at the end of the year your tax preparer can draft your forms for you easy peasy, because you will be in tune with your transactions for the year and come prepared to your appointment. Back to the 401K example, if you take money out you will receive an annual tax form with the information. Don’t forget to take it to your appointment. Along with your W2 and mortgage interest statement.
2. The income tax law influences personal decisions of individuals. Pretty self-explanatory.
3. A knowledge of the income tax law enables taxpayers to make decisions that can reduce other costs. By having a clue one can enter into various transactions that can minimize income tax burden. Likewise, one can avoid a transaction or defer until a time more beneficial in the future.
4. Protects against an audit. The IRS isn’t always right and sometimes you will have to state your case or your interpretation of things to justify items on your return if they question you. It doesn’t mean your wrong it just means you have to be able to explain your rightful position.
5. YOU know your financial affairs better than anyone. Tax planning and forecasting starts with you, not your accountant, although, you should have a conversation with them for sure and keep them included. It’s important that you are both on the same page. Use the tax system to your advantage…