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Tackling Your Taxes

Posted on 19 August 2008

So you’ve graduated college and landed your dream job. You negotiated your target salary, garnered solid benefits, and now you’re gearing up to live the good life. Enter Uncle Sam.

In the midst of your good fortune comes the unavoidable obligation to pay income taxes. And for the first time, you likely will find yourself faced with the dizzying complexity of forms and regulations that lie beyond the safety zone of the 1040EZ form that had insulated you in the past.

Professional tax return preparation services are one viable option for the novice taxpayer. They can help determine which forms are necessary, which income is taxable, which deductions are allowed, and will fill out the return properly. These services can submit the return electronically to ensure that it gets in on time, avoiding costly penalties. And some will even advance any refund due on the spot, less a reasonable fee, of course.

But over-reliance on your tax professional is an easy trap to fall into. After all, who really enjoys putting in the time and effort to understand the laws, fill out the documents, collect receipts and submit the return? Why not just pay the $50 or $100 fee and get it over with?

The reason not to ignore your taxes 11 months a year and then complete them as easily as possible at tax time is simple: It’ll cost you money. The single, hardest part about filling out a return is determining (and documenting) your deductible expenses. Deductible expenses are the items that reduce your taxable income, and thus the amount of tax you pay, and increase your after-tax income. Your tax preparation professional may give you some advice for next year, but they can only claim the deductible expenses that you can document you have incurred today. The time and effort you put in now ends up directly on your bottom line next year. In other words, the more deductions you research, understand and document, the lower your taxes.

There are a variety of perfectly legitimate deductible expenses that many individuals fail to take advantage of. Each year tax professionals estimate that individuals overpay billions of dollars in taxes because they fail to claim all the deductions that they are eligible to take. The following are a few common, but often overlooked, deductible expenses (in no particular order):

  • Medical expenses. Must exceed 7.5% of adjusted gross income.
  • Home offices. Easier to claim for those who own their own business. Must use the space regularly and exclusively for business.
  • Job-hunting expenses. Printing and mailing resumes, phone bills, and travel expenses to interviews all can be deducted.
  • Moving expenses. Moving to start a new job, or change your job location? There are requirements about time and distance, but storage, shipping, gas, oil and moving of household goods can all be deductible.
  • Business car expenses. Use of a car for business purposes (not just your morning commute). Take care to use the right mileage allowance — it changes annually.
  • Charitable deductions
  • Tax-preparation fees
  • Professional dues
  • Subscriptions for professional journals

Some of these deductions fall under the category of miscellaneous expenses, and thus in aggregate must exceed 2% of adjusted gross income. But you’ll be surprised how easy it is to exceed this threshold. Documentation is the key; make sure to save those receipts. Most importantly, take the time to understand the rules; don’t just start claiming these deductions because we mentioned them.

There are specific requirements for all of the deductions mentioned above, and there are a number of others that you may be eligible for. The following are a few useful Web sites that will help you get started on your tax education.

It may seem like a lot of work, but the burden of completing tax returns is one you’ll have to deal with your whole career.

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