Filing Your Taxes: The Fun Stuff

Part Three – Other Fun Stuff

Prosecutor : You haven’t been paying your taxes.
Chico : Taxes. I have an uncle who lives in Taxes.
Prosecutor : No, Money. Dollars.
Chico : Dollars, Taxes. That’s where my uncle is a-from.

[The Marx Brothers; Duck Soup]

Estimated Taxes

On the off-chance that you have income from sources other than wages and salary, for which no income taxes are withheld, you might find that the IRS wants some of their potential tax money in advance of April 15. In that case, they will require you to calculate and pay “estimated taxes.” These are quarterly payments that have deadlines of their own. There are a couple of ways to calculate how much you owe. Until you start making money in the stock market or selling collectible ash trays, you probably won’t need to worry about estimated taxes.


Tax refunds are the Siren’s song of the IRS. It feels great to get a nice big fat check from the IRS. It’s Christmas in May. It’s cash found in the pocket of an old coat.  But as good as it feels, it’s a bad thing. The money you get from a refund was yours to begin with. But the IRS took it from you, held onto it and used it for their own purposes, neglected to pay you any interest on this de facto loan, and won’t give it back to you until and unless you demand it by filing your return. The IRS is currently holding onto $1.3 billion in unclaimed tax refunds from 2006 alone. That’s an interest-free loan that the feds use to fund your favorite boondoggle. The interest alone is more than any of us will make in our lifetime. You should be striving to break even – no refund, no tax due.

Refund Loans

There are a few ideas that entrepreneurs have come up with that are tempting at first blush, but are – at least in my opinion – really stupid. Refund loans are high on that list. Here we are talking about tax preparation firms who offer to lend you a portion of your anticipated tax refund. This has a few implications:

  1. You’re going to have to pay them to do your taxes first ($50-$150) – something you could do for free.
  1. You’re not going to get the full value of your refund because they are going to take the interest for the loan out of the refund.

III.                  If your refund is not as big as they said it was going to be, you could end up owing the tax preparer more than the value of the refund.

Last. If you consistently have a refund that is big enough to borrow against, then you should
have your Form W-4 adjusted to have less withheld in the first place (see Refunds above).

Paying Yourself More and the Government Less

You’ve heard it before; I’ll say it here too – to the extent that you can do so (and even if you can’t) you should be contributing to a 401(k) plan. Most employers offer them and when you are 73 (cuz that’s what the Social Security “Normal Retirement Age” will be by the time you get there) you’ll be able to go fishing instead of being a greeter at Wal-Mart.

The important thing about your contributions to a 401(k) Plan is that they are made with “pre-tax” money. (OK – truth is, you don’t actually make a contribution, your employer does. You sign a contract wherein you agree to take a cut in pay in exchange for the employer’s making a contribution.) Because your take-home pay is less, your taxable income is less and – voila – your taxes are lower. The tax man is like the grim reaper however. You won’t avoid those taxes forever, just until you withdraw money from your 401(k) at retirement. And Dad’s Dad always says, “Never pay taxes today that you can pay tomorrow.”  I won’t get into it here, but you should also look into IRAs and your employer’s Section 125 plan.


The IRS can do a lot of mean things if you don’t play by their rules. One of the things that they like to hold over your head to compel compliance is the dreaded audit – a review of prior filings in search of boo-boos. According to Eileen Bailey, the IRS will audit 1%-2% of all returns. But they are less likely to nab you at random and more likely to revisit you if you have done something that raises a red flag. These include, but aren’t limited to:

  • Inordinate deductions
  • Ongoing business losses
  • Blatantly bad math
  • Input values that don’t jibe with reported values
  • Year-to-year inconsistencies (e.g., each year you report a different number of kids)

When the IRS comes to call, they will likely have a specific issue that they want to follow-up on. If they specify, then that’s what you are responsible to review with them. So keep those receipts and bank statements handy (7 years is the amount of time you want to hold on to your records). Dad’s Dad has, on more than one occasion, proven the IRS wrong in their assertions. He has also come out of an audit with the IRS owing him money. But the IRS will never flag you if the error they found was in their favor. Hmmm. I wonder why that is?


There are few definitive correct answers. Even the Internal Revenue Code is subject to interpretation and judgment. And remember, even if you call the IRS with your question, you can get an incorrect answer. In a 2005 test of the system by the Treasury Inspector General, 35% of answers were incorrect.  And if the IRS gives you a bogus answer, you are still responsible.

So that’s taxes. Aren’t you glad you asked?



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Tax Saving Ideas

Advice from Fidelity Investments

Not necessarily Dad endorsed 🙂

If you’re doing your taxes and you don’t like the number you’ll be paying the government, here’s some tips on lowering your taxes for next year.

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Filing Your Taxes: The Paperwork

Part Two – Paperwork

Tax Forms

At their web site,, the IRS conveniently lists and provides 1,129 different forms for your enjoyment. They also provide 770 publications to help explain the forms. What could be simpler?

If your combination of income and expenses isn’t too complicated, than neither does your tax filing need to be. If all you did was earn a salary and a little bank interest, then you can probably file the 1040EZIncome Tax Return for Single and Joint Filers With No Dependents. That’s a relatively easy short form (2 pages) that handles basic income, the standard deduction (see below) and a convenient address to which you may send your check.

If you have anything other than completely straight forward income or deduction scenarios, then you will need to file the ever popular Form 1040.  It is not impossible to fill out the actual paper forms – just make sure you do the first draft in pencil. If you are using a software package, you are essentially completing the Form 1040. The software breaks down the process down into a Q&A format.

Depending on what types of income you have, you may have several addenda to the 1040 which you’ll have to complete. The most common are:

Schedule B – Interest and Ordinary Dividends

Schedule C – Profit and Loss from a Business

Schedule D – Capital Gains and Losses

Schedule E – Supplemental Income

Schedule F – Profit and Loss from Farming (I would not include that funny stuff growing under lights in the basement)

Schedule SE – Self Employment

If you are doing your taxes by hand (and I think everybody should do it at least once) then you may have to go to the post office, bank or IRS office to get some of these forms. You can also download them from the IRS site

Reporting Documentation

Rightly or wrongly, the Federal government does not trust you to be honest about how much you made and how much you spent.  So they have arranged for the people who pay you anything to report it to them independently. And those payers are required to give you a copy of what they reported to the government.

The types of things you might receive are generally income records.

  • W-2                  for wages and salary
  • 1099-Int            for interest paid to you
  • 1099-Div           for stock dividends paid to you
  • 1099-Misc.        for other stuff paid to you
  • 1099-R              for retirement distributions (OK, you’re not likely to get that one)

Only the W2s that you receive (you’ll get one from each employer you had during the year) come with a copy to attach to your return. The others you just hang on to for your records.

There is a whole alphabet soup of 1099 variations and loads of others as well, but these are the most common ones. If somebody sends you one of these and then has a change of heart, you might also get a “corrected” version. That’s your punishment for filing early. If you get a corrected form and you have already filed then you’ll need to file an amended return. Now there’s some fun.

For deductions, you have to keep track of your own paperwork. Funny how the IRS has requirements in place to report income, but nothing for helping you track deductions.  You should have some kind of record of:

  • Taxes you paid to entities other than the federal government (state income tax, local property and excise tax, etc.)
  • Contributions you made whether they be cash or goods (e.g., clothes to Salvation Army). You can also keep a log of travel expenses for the time you volunteer.
  • Work expenses that are not reimbursed by your employer. If you are required to buy a beanie with ears attached and to wear it to work but your boss refuses to pay for it and you don’t wear it anywhere else – you can deduct that.
  • How much you paid in college tuition for your kids (the school should send you a Form 1098-T)
  • How much interest you paid on your mortgage (the bank will send you a Form 1098).
  • The cost of preparing and sending your taxes last year. That’s right, if you shell out money this year for Turbo Tax or H&R Block, you can deduct it next year.

You do not have to provide copies of these things with your tax filing. But – if the IRS decides to question your deductions (can you say “Audit”?), then you need to be able to prove that the deductions you took are legitimate.

All that said, most people are better off just using the “Standard Deduction.” The IRS figures it’s worth their while to just concede that everybody is going to take some deductions. And rather than make you substantiate every $73 contribution to Uncle Skippy’s Old Timey Church of Perpetual Barbecue, they figure it’s just as easy to give you a flat rate deduction and call it a day.  That’s $5,700 for Single filers, $8,350 for Head of Household, $11,400 for Married filing Jointly, and $5,700 for Married filing separately ( If you can come up with more deductions than the Standard (like if you have a mortgage) you are welcome to go for it, but otherwise the Standard will do.

Are you still breathing?

In Part 3, we’ll talk about some other cool topics that will make you the life of your next party, like Estimated Taxes, Audits and State Income Tax

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Filing Your Taxes

Dad tries to simplify taxes for newbies to the tax game

ME:  Hey Dad, I’m filing taxes for the first time on my own.  The free federal turbotax form is pretty helpful, but I’m afraid I’m missing something.  Would you mind going over all the things/documents I’ll need.  Will the state forms be different?  I don’t want to get stuck in any traps and end up in jail like Al Capone.

DAD:  Sure, I can quickly explain taxes to you. Then in the next paragraph I will solve the riddle of the Sphinx, describe the correct way to perform brain surgery and give you the solution to world hunger. Or was that whirled Hungarians?

Part One – Income

As we here in New England like to say, taxes are wicked complicated. The more you make and the more you try to manage your money, the more complicated it gets.  Happily, we have the Internal Revenue Service (yes, it’s a service) to help us out.

Remember that tax evasion is a crime – but not tax avoidance. Al Capone was guilty of the former. You should actually try to be guilty of the latter.

It comes down to this, if you made money last year, you have to pay federal, state, and perhaps local income tax on what you made.  What you made comes is several forms:

  • Your salary or wages
  • Your winnings in Vegas
  • Gifts of a certain size
  • Expenses that were paid in your behalf
  • Interest you earned on savings and investments
  • Dividends you earned on stocks
  • Rent that was paid to you as a slumlord
  • Unemployment benefits (figure that one out)
  • Social Security benefits (another head scratcher)
  • The difference between what you paid for stuff and how much you sold it for (i.e., capital gains).

The Feds aren’t totally heartless though. There are a few categories of things for which they will either reduce your taxes (credits) or reduce the amount of your income on which you have to base your taxes (deductions). These are things like:

  • Mortgage interest you paid
  • Cost of having dependents (does not include pets or in-laws)
  • Charitable contributions you made (your reward for doing what the government won’t do)
  • The cost of looking for work
  • The cost of running a business
  • The cost of excessive medical bills
  • The cost of losing something valuable for which you didn’t have insurance (e.g., your prize race horse that lost its head because you won’t give the leading role in your next big war picture to Johnny Fontane.)

All you need to do to work out your income and expenses is fill out the right forms – easy peasy.

In Part Two, I’ll cover some of the forms you will need and some that should be showing up in your mailbox.


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Who is this Dad guy anyway?

An Introduction

So who is Dad anyway?

This Dad is just your average middle-aged white guy with a receding hairline, a wife, two kids, a dog and a mortgage (accelerating, beautiful, awe-inspiring, stubby and interminable, respectively).

And what makes him an authority on anything?

He has a bachelor’s degree in Business Communications, an MBA with a concentration in investment finance, 30 years in the financial services industry working in the specialty of employee benefits. He has clocked 50 some-odd years on the planet; 28 of those as a husband, 26 as a homeowner and 23 as a father.

He is also an amateur genealogist: 10,000+ individuals in the database with ancestors going back to the 1300s including royalty and half a dozen Mayflower passengers.

He is a huge Disney fan, a recumbent bicycle rider, a percussionist, a ukulele strummer, a model maker, a grammar nerd, a jazz lover, a church volunteer, a job seeker, a bad but enthusiastic photographer, a mediocre cook, a hack golfer, a brother, a registered independent, a Christian, a closet motorcycle rider and a wannabe actor.

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Local Banks vs. Big Banks

Dad tells it like he sees it

Since Dad hadn’t heard about my reference to the recent movement calling for people to move their money from large banks to small banks (see last post), I referred him to the follow article:

“Move your Money”

His reply:

To flee, or not to flee–that is the question:

Whether ’tis nobler in the mind to suffer

The slings and arrows of Big Banks’ fortune

Or to take arms against a sea of financiers

And by opposing end them.

The notion of moving your money to smaller banks is attractive. It feels like you’re “stickin’ it to the man,” taking control, helping out the little guy, rooting for the underdog. And as a social comment it might even be an effective one.  But me being me, I tend to look for the man behind the curtain.

The pessimist believes the glass is half empty.

The skeptic believes the glass is twice as big as it needs to be.

The cynic believes you’re only interested because you want to steal the glass.

I believe we must balance our social agenda with our own needs. In the “move your money” discussion that means looking at what such a move would do to me.

  1. Fewer branches at which to do business
  2. Fewer ATMs at which I pay no fee.
  3. Less likely to have effective online banking functions such as transfers and bill paying
  4. Fewer creative products like CDs with attractive rate structures
  5. More restrictive credit terms (they need to be more conservative).

It’s true that the little banks are insured by the FDIC just as the big banks are (although if you have $100,000 sitting in a savings account earning 1% we need to have a different talk). They are also just as tightly regulated. So don’t count on George Bailey saying “Oh you don’t have to sign anything. I know you; you’re good for it.”  And just like big banks, they are accountable to shareholders who expect a certain return on their investment.

Do you know how banks make their money? In George Bailey’s day it was by investing depositors’ money (beyond reserve requirements), mostly in the form of small loans. Today, the greatest source of revenue for banks is fees. So they are going to resell your mortgage just like the big banks do.*

*So says the Former Chairman of the board of local bank Westborough Saving Bank

And what of the trend of the last 15 years? If your little bank is successful, what will happen to it? It will be bought by a big bank. We started with Northeast Savings Bank. It got sold to Shawmut, which got sold to Bank of Boston which then sold off certain branches to Sovereign Bank. Also not all little local banks are as little or local as they seem – check their ownership. Sovereign was recently sold to Santander – a Spanish banking conglomerate which bills itself as “one of the five largest banks in the world by profit.” And so it goes.

None of this is to say that you should not move your money. The little bank is just as safe. And it is potentially a little friendlier if you take the time to build a relationship with the manager (she is less likely to be transferred to the El Segundo branch for doing a good job).

If moving your money out of the big bank and into the little bank gives you some satisfaction of a social statement, and you are willing to accept whatever changes in services that brings with it, then I say, go for it.

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Where Should I get a Certificate of Deposit?

You Never Get Something for Nothing

Me:  Turbotax is suggesting I take a standard deduction of $5,600, which would be nice … but if I ever get audited I won’t have the receipts or anything to back it up.

Dad:  If you take the standard deduction, you do not need any documentation.

Me:  Sweet!  New subject.  I was thinking of getting a certificate of deposit.  I guess getting one at Bank of America would be easiest cause that’s where all my accounts are… however … What is all this stuff about leaving big banks and going to smaller local banks?  Am I going to get the same rates everywhere?  Shouldn’t I help the little man?!?

Dad:  I haven’t seen “stuff” about moving to smaller banks.  My guess is that it is marketing backlash against the notion that big banks are all Wall Street crooks. Go where ever you get the best rates – and, no they won’t be the same everywhere. You might think you are helping the little man. But many of these little banks are owned by big banks. Rates are starting to move upward, so when you look at CD structures make sure you are not getting locked into a low rate – it should have some mechanism that allows you to elect a higher rate if it’s available.

Me:  Is the term “high yield” just a marketing trick that makes me think I’ll make lots of money?

Dad:  Pretty much. A rate is a rate. If they call it “High Yield” it might have a slightly higher rate than other CDs they offer, but be more restrictive in some way. You never get something for nothing.

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