Tax Time

As many of you know, I am a local CPA and preparing tax returns is a big part of my practice.

While I can understand that the average person really doesn't get the basics of tax law there are a few things that normal citizens should be able to master.

First, refunds of taxes are just that.... refunds. Your refund goes up or down based on the tax liability reported on the return and the amount you paid in during the year. The fact you normally get a $2,000 refund is no guarantee you'll get $2,000 next year. Especially if you do things like take out money from an IRA, go on unemployment, get divorced. I find myself spending an inordinate amount of time educating taxpayers for things people should really know coming out of high school let alone people with MBA's.

Second, you don't get a refund if you pay nothing in. I swear I spent 45 minutes this year trying to explain to a person who's only income was social security why she didn't get a refund for high medical expenses. Now, there are some credits which are refundable, EIC and, this year, the telephone tax refund. She was expecting a refund to the extent of her medical expenses.

Finally, deductions are just that, deductions, not credits. If you have $6,000 in mortgage interest expense it does not make a $6,000 change in your tax liability and, subsequently, refund. I'll preach till I'm blue in the face that paying increased taxes on non deductions is preferable to paying out the deduction.

When I first started in practice, I swear I had a client who would have paid out $10,000 if it would have saved him $750.00 in taxes. It wasn't until I told him I would give him a $10,000 invoice when he finally got my drift.

I'm a proponent of the fair tax. While people think that will put old Gordon out of business, I would offer that someone has to do all those sales tax returns in addition, I wouldn't have to spend my time providing the public with basic personal finance education on a pro bono basis.