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The tax man prepareth

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Posted: Sunday, December 17, 2006 12:00 pm | Updated: 3:17 pm, Wed Aug 15, 2012.

By Don Bolding

Killeen Daily Herald

Computing your federal taxes is really a paint-by-numbers proposition. You just do everything the instruction sheet for a particular form tells you to do, and step by step, it all feeds into blanks on the all-powerful 1040, and you know how much you owe Uncle Sam or vice versa.

It's as simple as the Internal Revenue Service can make it, working with the raw material they're given – the United States Tax Code. Some people tackle it themselves, and some flee to accountants or other paid preparers. But either way you go, there are things you can do before you start working the puzzle to keep all the money you're allowed.

The Texas Society of Certified Public Accountants annually tries to help by asking local members to talk to the media. This year in Killeen, that person was Michael Firth, CPA, certified financial planner and partner in the venerable Lott, Vernon & Co., P.C. of Killeen and Copperas Cove.

"First, know how much cash you're going to have on hand at tax time, whether you're self-employed or you work for someone else," he said. "Know who you owe and why, know how much money you have in escrow to pay property taxes, know all your sources of income and all the expenses you can determine."

He said one of the best ways to save on taxes – conventional wisdom by now – is to contribute the maximum possible to retirement accounts. Savers under 50 years old can deduct up to $15,000 contributed to a 401(k) plan, and those over 50 can deduct up to $20,000. Some plans allow more. You can deduct up to $4,000 contributed to an individual retirement account and from $10,000 to $12,000 deposited in a SIMPLE plan.

People without many deductions (and sloppy bookkeepers) are protected from facing their entire income taxes by the standard deduction, different amounts for different filing statuses. This year the most generous deduction, for the married-filing-joint status, is $10,300. If your deductions don't reach the magic number for your filing status, then the standard deduction kicks in to protect you. But it's always worth it to try to maximize deductions just in case they go over the mark.

Another way to maximize deductions is to make generous charitable contributions. If you can, Firth said, give stocks and other instruments that have appreciated during the year. That way, you can deduct their face value and you minimize the capital-gains tax you would pay if you owned them at the end of the year.

Some other ways:

n If you're self-employed or can otherwise control it, keep creditors from paying you until after the first of the year. You're taxed on money in your pocket, not accounts receivable.

n Pay all property taxes due before Dec. 31. In this and all cases, cash payments are considered completed at the time of transaction, payments by check are allowable on the day they're mailed, and credit card transactions are valid when the cardholder authorizes the charge.

n "Of course, if your debtors are astute, they'll be trying to pay you, so you pay as many of your creditors as possible, to lower your net income. Pay particular attention to deductible expenses, whether they're business or personal," Firth said. Lists of allowable deductions can be found in IRS Publication 17, which can be found at the Web site irs.gov.

n Pre-pay for business services and deductible personal expenses that won't be performed until next year if you're sure they'll be performed. Firth mentioned child care expenses in particular, but said the tactic is viable for almost any kind of deductible expense.

n Review investments and savings not specifically in retirement programs and sell off the ones that have lost value to take capital losses.

n Teachers should make sure they can document classroom expenses up to $250.

n Document all state and local sales tax paid. You could deduct state income tax if Texas had one, but we don't, so a couple of years ago Congress started allowing Texans and others with similar practices to deduct sales tax.

"I strongly recommend that taxpayers coordinate with relatives," Firth said. "If you have a relative or family with too little to itemize deductions, you can make them a gift of $2,000 to put into a tax-deferred plan. If the relative's employer matches the contribution by 50 percent, for example, that's another $1,000 deduction. If the relative makes little enough, he can qualify for a savings credit of possibly $1,000. The deferred income will amount to 15 percent, or $300. If you can consider all this pooled wealth, you can share it, and everybody is better off."

The TSCPA's identification of Firth and his firm as a one-time local spokesperson does not constitute an exclusive endorsement, and Firth said other CPAs in the area are thoroughly competent.

He also praised the proliferation of lower-cost commercial tax preparers but advised taxpayers with simple returns to select firms with CPAs or enrolled agents (IRS-licensed taxpayer representatives) either on-site or in central offices. They don't have to prepare returns themselves but will be called on to resolve any problems.

Finally, explore the TSCPA's feedthepig.org ("the pig" is a piggy bank) and irs.gov. Publication 17 is the foundational instruction book for individuals, but many other publications offer specific assistance.

Contact Don Bolding at dbolding@kdhnews.com

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