Quick — what is the biggest single item in your monthly budget? If you’re like most people, your spontaneous answer is probably “housing costs.” But the truth is that the actual culprit is far more likely to be taxes. So says the Tax Foundation, a Washington-based outfit that keeps tabs on how much of your income is siphoned off by federal, state, and local governments. The latest available figures reveal that the average American spends more than twice as much for government as for food.
That disheartening statistic underscores just how costly a mistake it is to think of federal income taxes as simply a once-a-year affliction caused by the need to grapple with Form 1040. Instead, what you ought to do is crank taxes into your financial planning throughout the year. You might be pleasantly surprised to discover the scores of tax-saving opportunities that most individuals overlook each year. The savings can add up to thousands of dollars.
The first step for effective tax planning is to organize that ever-growing accumulation of records in your desk drawers, closets, and other storage spaces. Also, if you have been remiss, resolve now to reconstruct missing or incomplete records before they become hazy in your mind.
Haphazard records can cause you to needlessly lose money to taxes. The better the records you keep, the easier it is to search for opportunities, which is what tax planning is all about.
When it comes to sorting through financial papers, it is best to err on the side of caution in deciding which ones to save and which to toss out. To make the chore manageable — and to reduce the likelihood of mistakes — limit yourself to a single category of records at each sitting. For example, tackle all records dealing with investments one evening, insurance another, and so on. Incidentally, this do-it-yourself undertaking not only provides a clearer picture of your financial affairs, it also makes for less-cluttered storage spaces.
As part of the organizing task, treat yourself to a nice notebook or computer software program. That will make it easier to stick to your resolution and continue to keep careful and complete records throughout the year. Good record-keeping is the key to mapping out strategies that you can employ year after year to sidestep, decrease, or postpone the federal indenture — for instance, timing the receipt of income and the payment of deductible expenses to your best advantage.
Each month, set aside the time to bring your records up to date. A good time to do that is when you are reconciling your checkbooks and bank statements. Go through that accumulation of checks, receipts and whatever else might help you to uncover all your deductions and to determine the correct amounts of income items, such as gains and losses on mutual funds, individual shares, or other investments. Your record-keeping system should be well organized, but need not be elaborate. You might well be able to make do with those lined sheets that accountants use, on which you enter column headings that reflect your particular tax-deductible spending and income sources. Under the appropriate worksheet column heading, enter the details for each item. They could include the check number, date, payee, and other information that you think might be helpful later. JULIAN BLOCK