This is a guest post from Tara Young.
This winter marks my fourth season as a volunteer tax preparer under the Volunteer Income Tax Assistance Program, which provides free tax preparation services for lower income and elderly taxpayers. The experience has been quite rewarding, and I’ve learned more about U.S. personal income taxes than I ever imagined existed — or wanted to know.
After completing several hundred returns, the following recurring themes resonate with me in my journey towards financial independence:
Know yourself
Conventional Wisdom says that a large tax refund is a free loan to Uncle Sam and therefore bad news for the individual taxpayer. This logic doesn’t compute for every individual.
Many taxpayers I help have a difficult time saving and are often tempted to spend any extra money they have on hand. In many instances, clients lament their inability to build an emergency fund, delay purchases for luxuries, or say no to friends and relatives who need a bail-out. For them, excess withholding is a forced savings vehicle that enables them to declare various purchases out of range and short-circuit loan requests.
There are interest-bearing savings choices out there, but it’s more important to know your own situation and adapt your approach to saving accordingly.
Organization pays
Shoddy or incomplete record-keeping can mean missed opportunities. Each season, many clients miss out on deductions or credits because they don’t have the proper documentation at hand.
Some folks are aware of the documents they need; they just forget or don’t want to go to the trouble of keeping orderly records. Other clients have no idea the deductions/credits exist and scramble to collect the appropriate records before the filing deadline.
For example, how many times have we ended up paying full price on an item for which we have a coupon or discount code that we cannot locate? “Play good defense,” as Thomas Stanley and William Danko say in The Millionaire Next Door, so that you can keep more of your hard-earned money.
Invest in yourself
Invest in your education, your physical and mental health, and that of your family as well. The hardest stories I’ve heard revolve around folks who cut short their education or took poor care of their bodies and now struggle to make ends meet in dead-end jobs or government disability benefits.
As the primary breadwinner for my family, I’m familiar with the pressure to provide and put others first. However, one cannot provide for others if she cannot provide for herself. The US Census Bureau has reports on the correlation between educational attainment and income. [J.D.'s note: I've written before about the value of a college education.]
Quality trumps quantity
This is especially true for often-used or mission-critical equipment. The organization I volunteer with completed more than 4000 tax returns last year. Since we are required to provide a hard copy of the return to each taxpayer, and the average return runs 10 pages, we print about 40,000 sheets of paper in 3-1/2 months.
Churning 40,000 pages through two bargain-bin printers was not pretty. Forty-odd tax preparers lost time and productivity clearing paper jams, reprinting eaten pages, and coaxing print jobs to completion like something out of The Little Engine That Could. This year, we’re getting spiffy new laser printers that are more suited to the workload. The upfront costs are higher, but the cost of ownership will be lower allowing us to better serve our clients.
I started this volunteer journey knowing I’d learn a lot about taxes. I’ve learned a lot about myself and human nature as well. I’m looking forward to a good tax season.
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Great post. These four skills are definitely great to have.
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Just wanted to say “Thanks” to Tara for helping people in a very real & useful way.
Also, we’re a fam where a refund is a “forced savings plan.” Will help us buy a new (to us) vehicle this year so we don’t have to take out a loan!
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I always have a laugh when I hear someone speaking or read an article about filing taxes in the US! It is just so complicated there!
In Estonia – where I live – filing taxes goes like this:
You log into your account with the government.
They have all your tax information pre-filled.
You go through everything – if you spot a mistake you can fix it (but there never are any).
5 minutes later you are done – click “File taxes”.
If you are entitled to get some money back it will be transferred to your bank account the following day.
That’s taxes! I just love doing them!
I can’t imagine spending so many hours on filing my taxes like people in the US do – it must be a nightmare! We would probably have a riot if it took so much time
The thing is – I think that such a system could probably be implemented in the US as well, but you are so used to filing your taxes the way you have always done that no one really imagines that filing taxes can be easy.
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Tara,
Kudos to you for volunteering your time to help others, especially when you’re the primary breadwinner for your family.
Could you please share with us how you find the time to volunteer. Any tips on work/life balance?
And what motivated you to pick VITA from all of the many worthwhile programs?
Thanks!
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I do our taxes every year and my husband asks why do we get so much in our refund. I have to tell him that the problem is with congress and their frequent and annoying changes to the tax code. I used to make an estimate of where we were with taxes each July and adjust our withholding then, so that we wouldn’t have to pay anything. But with Congress changing things so often it is impossible to estimate. One personal finance writer that I follow basically said the same thing. I’m 54 and I did my taxes myself, by hand, since I was 18. The whole tax process has gotten so cumbersome, plus I had a mistake in them one year that required conversations with the IRS, that a few years ago I switched to Turbotax. At least they make the process relatively painless.
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Great post. This was also my first year signing up to be a VITA volunteer.
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This is a great post.
I know that I’ve also learned more life skills by “being in the trenches” at work than I ever did in school.
I’ve seen very wealthy people whose lives simply don’t work and I’ve seen very successful people who have little money.
The most important thing I’ve learned from my work is that its not always about money.
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The argument that large refunds were bad because you could have earned interest on the money was much more compelling when interest was higher!
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Financial Jesus – I am Norwegian and our tax system is similar to what you described in Estonia. Of course, we still have to double-check the information, so staying organized and knowing where your payslips are etc is necessary, but it is a lot easier than filing in the US.
I lived and worked in the US for a couple of years so I’ve seen both sides of it. The manual process there does take a lot more time and is much more error prone than having all the information pre-filled out. My (American) husband said he thought part of the reason Americans have such a complicated system is a low comfort level with feeling that the government already had all this information about you (although of course they do, or they will once they receive the information from employers, banks etc).
If the US were to automate and simplify its system now though, just think of all the people who would be out of work, from H&R Block to the IRS! And right now might not be a good time to set up something that would increase unemployment
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Since I’ve begun reading PF blogs and doing more research of my own, my thoughts on savings and taxes are significantly different than they have been in the past. I was formerly one of those who used a large tax return as a savings plan but no more. This year, I’ve lowered my with holdings and that money will go into a (relatively) high-yield online savings account whereby *I* get to earn the interest. If I come up needing to pay extra come tax time next year, I’ll already have it stashed away. Yay for educating myself!
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Great information. Volunteering your time is the cheapest way to get an education. I appreciate people like you who are willing to give of themselves to help others.
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You’re absolutely right about knowing your situation and what credits and tax breaks apply to your personal situation. A few years ago I knew very little about taxes and credits and what I was eligible to recieve. I was at the mercy of a tax preparer who may or may not be aware of my personal situation and therefore missed an opportunity to recieve a rather large credit. Luckily I found out about this error and was able to claim it as I was still eligible this year to do so.
Tax professionals are good at what they do, but they don’t know everything. It is best to spend some time researching your personal situation and going in with knowledge so that you can get what is rightfully your’s.
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It’s hard to predict how much I’ll owe each year because I work two jobs that are both paid hourly (including my full-time job) and they both have variable hours. When I also work as an independent contractor on the side, it gets even tougher to predict. I much prefer to get a refund than to towe each year so I err on the side of caution.
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Thanks to all of those who volunteer their time to help others by completing tax returns for free.
I’m an instructor with the local AARP Tax-Aide program, and I’m very encouraged to see all of the new students eager to learn about tax law and help others who might otherwise fail to file because they cannot afford professional preparation.
On the forced savings issue, perhaps a probable solution would be to have employers automatically enroll employees in direct deposit of money directly from a paycheck into a high-yield savings account, much like tax withholdings that are sent to the Federal government.
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Nice article, and again – kudos for giving. I agree completely with the comments on the “tax loan”. It doesn’t make sense to give the government the money for free when you’re paying 18% on it with a credit card. But if you know that you’ll just buy more with the money, it’s better to wait and pay down with your tax return.
This is the cost of emotion – if you didn’t have that reaction, you could save money. But it’s better to know yourself and pay the spread on interest rates here than not know and lose the money altogether!
And an interesting side-note: nobody here compares 0% from the gov’t to paying 18%+ on credit cards. Is that because nobody here carries credit card debt? Tax preparers – you can’t assume that’s reality for your clients!
Another big reason the tax system is the way it is in the US is the confusion. You can’t reduce your taxes if you don’t understand them, right? This allows them to collect a lot of money they actually shouldn’t get. If you look at tax structures for LLCs, Corps, and Sole Proprietors, you’ll see this too – tax breaks go to the informed. Call it the “ignorance is bliss” tax?
As to keeping our tax system to save jobs – think of how we could spend that money if we weren’t paying the tax preparer, and the US wasn’t spending billions on tax collection. Maybe we’d have enough extra cashflow to stave off a few foreclosures, and the gov’t could lower taxes that would leave more money in the hands of us… I’m a fan of Economics In One Lesson – and he’s got a section on how ‘tax to create jobs’ is a fallacy, and we’d be better off with more money in our pockets and less gov’t spending for the sake of spending/jobs.
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@ Kathryn #10
I was curious to see how much interest people are really losing by not earning the “high interest” (currently 1.85% with ING) in an online savings account on their tax refund.
Let’s say a person had a very large refund — $10,000. To make things simple, assume your refund builds up evenly from January through December, so you have a $5,000 hypothetical refund on July 1st and the full $10,000 by the end of the year. Then assume further that you get yourself organized and file in early February and receive your refund by the end of February.
Unless my math is wrong, at 1.85% you missed out on earning $92.50 during the year, plus $30.83 for January-February of the year you received the refund. This adds up to a rather underwhelming $123.33 — and that’s only if you have a $10,000 refund!
Obviously if you have credit card or high interest debt your “return” on paying that off with the money the government is not holding would greatly exceed 1.85%. But for me, unless I could earn a higher interest rate on my refund, I get more value from doing something smart with the tax refund “windfall” than from the very modest amount of interest I could earn.
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VITA sounds like a great program. Do you need to contact the IRS or private organizations to find out more about volunteering?
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I’m very much a “tax refunds are good” kind of guy. Well, good for some people. I, too, used to use them as a sort of forced savings program. The thing is, if I’d had the money in my paycheck, I wouldn’t have saved it — I would have spent it. On dumb stuff. Like comic books.
As with all things, it’s important to do what works for you. If overwithholding will help you save money, then do it. If you can save without this trick, then do it. I used to love a huge tax refund, and I can still remember why. Nowadays, however, I’m one of those who tries not to have one…
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“Other clients have no idea the deductions/credits exist and scramble to collect the appropriate records before the filing deadline.”
Tara, that would be me. Is there any place I can go that lists the deductions that are OK to take on the federal and state returns? I always used the short form (being poor), but now that I have a house, I need to use the long form this year. In fact, I need to amend last year’s return. I’ve googled, and not had any luck finding such a list; even (or especially) the government sites aren’t very clear to me. I’m reluctant to go to H&R Block; my ex used to work for them, and he was wretched at doing the taxes; I took over doing them. I don’t want to pay a seasonal amateur for doing a worse job than I do!
If anyone can point me in the right direction, I’d appreciate it.
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I hate big tax refunds, but I’m a CPA and try to estimate my taxes ahead of time and change my withholdings to account for that.
For those of you that think of it as forced savings – why not take your refund, divide it by 24 or 26 (number of pay periods you have a year) and have that amount directly deposited into a savings account? It will be much harder to spend the money and you’ll also have the benefit of interest income and an additional “emergency savings” fund.
Kudos to the author for doing VITA – I did it in college and it was a great experience.
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La BellaDonna #19 – just look at Form 1040, Schedule A and that will give you an idea of what deductions are available. Also, Form 1040 page 1 will show you deductions before AGI – things like IRA contributions, student loan interest, etc.
As far as preparation goes, sometimes CPAs aren’t that much more expensive than H&R Block-types. Check around your friends and family and they might be able to recommend someone.
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@ Storch Money #16: I think it’s more than just about the potential interest you miss out on. It’s also about having access to your money when you need it. In your hypothetical situation, if October rolls around and you suddenly find yourself needing money for a hospital bill or car repair or such, the government isn’t going to give you an advance on your tax refund. If you had proper withholding throughout the year, you’d have access to that money instead of resorting to credit cards or other means of borrowing.
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@ Courtney # 22
That’s a legitimate point and one I was not considering. I would fully agree that if a person has credit card debt (as discussed above) or has an insufficient emergency fund, the priority needs to be solving those issues using monthly cash flow, ideally without withholding anything extra.
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That is pretty interesting. I had no idea there were such volunteer organizations. I had looked into going through the H&R Block free tax course (basically their way of recruiting worthy applicants to their staff) just for the informational aspect of it. Great information.
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I also wanted to brag about Estonian tax system and the usefulness of e-government concept but Financial Jesus beat me to it. I don’t think it’s a technical or psychological thing. U.S. has a very complicated tax system compared to Estonia. It’s hundreds times bigger and a lot older. Changes just take time, even if they are inevitable.
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LaBella Donna – I too am a VITA volunteer. Read IRS publication 17. It’s long and boring and has more information than you’ll need, but it will have the answers you’re looking for, too. It’s available online from irs.gov, go to the forms and publications section. After you’ve familiarized yourself with your options, do your taxes on TurboTax or other software that will walk you through all the possibilities. My way won’t give you quick answers but you will learn more and I believe any knowledge is valuable stuff.
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@Inki, not only do they fill out the form for you (getting better for each year), but the Norwegian gov. also pay interest on what ever returns your are entitled to.
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@Andy – good point, and it’s actually a decent rate too, somewhere between 3.6% and 4.5% depending on when they hand you back the money.
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Thanks to you all for reading and commenting on my post.
Helen asked about work/life balance and finding the time to volunteer.
I started working with the VITA program before having kids. I felt a bit adrift and disconnected from the world outside of my cubicle. I skate along that introvert/extrovert line and I wanted a volunteer opportunity that allowed me a bit of instant gratification.
Oddly enough, doing people’s taxes fit the bill. A bit of chit-chat, some typing, a bit of arithmetic and off (most) folks go with a smile.
I’m able to do this because I have a supportive family and put very strict limits on how much time I can devote to taxes. Since the work is limited to tax season, my family is more accepting of the mad rush for a few weeks a year.
I discovered VITA through an umbrella organization that matches volunteers with non-profits looking for low cost or no cost help. I live in a large metro area but I think this type of umbrella org. can be found in most large and mid-sized cities.
Organizations that provide financial literacy training or banking services to ‘underbanked’ areas may also host a VITA site.
Publication 17 is a good comprehensive reference. Volunteers use Publication 4012 as a reference when preparing returns. It’s a nice quick reference for the various filing statuses, exemptions, deductions and credits. Its only available online for a few months per year.
Good luck to everyone on their journey toward financial independence!
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