On Friday, I stopped by the office of my friend, Mr. Accountant. Another friend, Mr. Lawyer, was there, and the three of us fell into conversation. “How’s the web site going,” asked Mr. Accountant.
“Good,” I said. “But I’m stuck on something. Maybe you can help. On Monday, I’m supposed to share my best piece of tax advice. I don’t have a best piece of tax advice. I don’t know much about taxes at all. Do either of you have a best piece of tax advice?”
“One thing I see a lot,” said Mr. Lawyer, “is people who don’t understand how taxes work. They don’t know how they’re figured, so they have way too much or way too little withheld from their paychecks. They don’t understand the process. My best piece of advice is to take a little time to determine your tax situation at the beginning of the year so that you can get your withholding right. Then there won’t be any surprises at the end of the year.”
“Yeah, that’s good,” said Mr. Accountant. “People get upset when their tax liability is greater than they were expecting. They feel like the government has done something sneaky and is tricking them out of their money.”
“But that’s not the case,” said Mr. Lawyer.
“Not at all,” said Mr. Accountant. “Most of the information is there at the beginning of the year, and you can find all sorts of on-line calculators to explore your situation. The IRS has a great web site.”
“Yeah,” I said. “It seems that whenever I go looking for some piece of tax information, I always end up at the source — the IRS.”
“Here’s my best piece of tax advice,” said Mr. Accountant. “You have to pay. The government is going to get what the government is due. Don’t ever try to cheat on your taxes. It’s not worth the risk. People get upset about taxes, but getting upset doesn’t do any good. The best thing to do is get over it. Pay your taxes and move on. ‘Render unto Caesar’ and all that…”
“That’s not to say that you shouldn’t maximize what the government is going to give you,” said Mr. Lawyer.
“Right,” said Mr. Accountant. “You should claim everything that you’re entitled to. But people complain too much. Taxes aren’t bad. They mean you’ve had a good year.”
“I’ve never thought of it like that,” I said. “But I guess it makes sense.”
“Yeah,” said Mr. Accountant. “When I meet with clients, it’s not the rich who complain. They’re grateful to have made money during the year. It’s usually the middle-class who complain. The person who was expecting a $2,000 refund but only gets $500 is the most upset. He’s livid. And he’s getting $500 back! But the guy who was expecting to owe $75,000 and only has to pay $50,000 is ecstatic. And he’s paying $50,000 to the government.”
Mr. Lawyer laughed. “I can see that. That’s a problem I’d like to have. When you owe that much in taxes, it means you’ve earned a lot of money.”
“Exactly,” said Mr. Accountant. “Like you said, it’s important to have a basic understanding of the tax laws, and to prepare based on your situation.”
So the top tax advice from my two most important personal finance advisors is: don’t cheat, and plan now for your tax situation next year. I’d add that you should watch out for common red-flags that lead to IRS audits:
- Incomplete or sloppy returns
- Suspicious income (too high, too low, drastic changes)
- Using round numbers
- Too many itemized deductions
- Participating in tax scams
What about you? Do you have a piece of tax advice you can share with Get Rich Slowly readers?
This post is part of the MBN group writing project for March.
GRS is committed to helping our readers save and achieve their financial goals. Savings interest rates may be low, but that is all the more reason to shop for the best rate. Find the highest savings interest rates and CD rates from Synchrony Bank, Ally Bank, GE Capital Bank, and more.