Tax Relief -- At Last!

You may not pay less this year, but you can make the process a lot less painful.

Money scares a lot of people. I lost track of how many times women -- and men -- stop me on the street. "Maria," they say, "love the haircut, and that's a great outfit, but please, please help me: What should I do with my money?" Often they're scared because they don't know how much money they really have, or where it goes. Their fear breeds apathy, and that apathy breeds inertia.

Add the pressure of having to do their taxes -- yes, it's that time again -- and a lot of people feel just plain buried. "The sense of not having control is the greatest human fear," says organizing and decision-making guru David Allen, author of Getting Things Done. "If you don't know what the very next thing to do is, it freaks you out. The hardest thing is to get past the stage where you don't do anything."

Well, I'm here to tell you there's nothing to worry about. Honestly. It's at least five weeks until April 15, and that's more than enough time to get your tax papers in order. It's also the perfect opportunity to get a plan so that all your Aprils from now on will be free of tax hassle and worry.

Many people forget that one of the basics to managing money is simply staying organized. The big surprise is that's not as complicated as you might think. I promise it won't take more than an afternoon -- maybe two -- and the payoff will be huge.

I know many people who keep their financial records using Quicken, TurboTax and other money-management software. These programs work like a souped-up checkbook: You enter your banking and credit card transactions, and the program produces running tallies of your spending. You can link these categories to specific lines on a tax form, automatically tracking deductibles like charitable spending, property taxes and so on. That can be a big plus at tax time.

I've tried them, but these electronic organizers aren't for me. I can always find a reason to avoid typing all those items into the computer. If you don't have the discipline to enter your data regularly, you won't reap the payoff at tax time. Plus, if your finances are relatively uncomplicated, I'm not sure whether it's worth it to spend the money on sophisticated software programs.

With my own records, I keep things as simple as possible. Just two big folders, one labeled "income," the other "expenses." Everything I could possibly need for my taxes or tracking my spending goes into one or the other: credit card receipts and statements, bills, unreimbursed medical expenses, pay stubs, empty checkbooks, tax forms, you name it. "Expenses" or "income." If this still sounds like a lot of work, it isn't. Just get two folders, check all the places you might squirrel away receipts or bills, and start sorting. You can even do it while you watch TV. (If you know you're missing information, call the company. You may pay a small fee, but you can usually get a copy of your statement.)

Now that you're thinking about your records and your money, let's talk about reducing your taxes. There's not much you can do in March to alter your income for 2005, with one big exception: Have you maxed out your contributions to your IRA? You have until April 15 to put money into those accounts and allocate it against last year's income. Thinking toward next year, here are some of my best tips:

• How about starting a small business? It can't just be a hobby that you never make money on; the IRS stipulates that it has to be profitable three years out of every five for you to deduct expenses. But trading on eBay, for example, is a perfectly legitimate business. If you travel to sell your wares, you can deduct travel and entertainment expenses. Investments in computers or copy machines are deductible too.
• The tax rules define a home office clearly, and those expenses are deductible. For a home office to be legitimate, it has to be in a separate room or space used exclusively for the business. Then you can calculate and deduct a share of the utility bills (aren't you glad you saved those statements?) and the cost of a phone, fax or modem line.
• Do you own your home and plan major improvements? If you take out a loan to pay for them, you can deduct the interest. The work must qualify as a "capital improvement" -- adding a fence, new heating or cooling systems, landscaping, a deck, or whatever will increase your home's value, prolong its life or adapt it to new uses. Regular repainting, repairs and patches don't count.
• Can you deduct for your family's education costs? In many states, contributions to "529" college savings plans count as deductions against state taxes. And don't forget to invest in yourself. Many adult courses can be deducted as well.

Over the years, I've come to actually enjoy tax time -- mostly because I know the better organized I am, the more chance I'll max out my refund. And as soon as it arrives, I put a portion into savings -- where I can't touch it.

I hope that my ideas will help make your April 15 a little less stressful.

If you have other questions about tax organizing -- or any other money matter -- write to me at moneytalks@rd.com.

From Reader's Digest - March 2005

 

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