Guest Author - Guido Deboeck

Every year I save money on taxes…by taking a day off to fill tax forms, for me, my wife, our daughter… I save time by not running to an accountant or tax expert plus I save the fees those people charge. I figure my “tax-day-off” earns me $200 to $400 in savings not counting the time saved in driving and meeting with a tax expert.

The first time I took a “tax-day-off”, it was hard because I was unfamiliar with the tax code; I read the instructions, probably did not understand more than half, but nevertheless filled out the forms. Remember, no one knows the entire US tax system anyway. The next year was easier; third time around I had mastered enough of the basics that filling tax forms became routine. Now many years later, my “tax-day-off” is really not a chore anymore.

My annual “tax-day-off” starts by clearing the dinning room table and spreading my files and papers on it. From the start I try to create some order by making separate piles for bank reports (containing interest and dividend payments), tax reports (state, local-, property- and real estate taxes), charitable contributions etc.

Once all the papers are organized, I take a blank piece of paper and start extracting the numbers that are needed for the tax forms. For example, wages from the W-2 form; or, if you are retired, pension and what part of it is taxable. Then I collect from all bank reports the interest and dividends payments (making sure I keep qualified dividends separate from the total dividends). Next, I look at the report from my broker and collect the short-term and long-term capital gains/losses (if you happen to be a customer of Ameritrade you know that there is a gains & loss table you can download, which provides this information without any sweat). When all the relevant information has been collected I use a calculator to make subtotals of interest payments, dividends, charitable contributions etc.

The interest and dividend information can immediately be copied to Schedule B. If you are running a small business you prepare Schedule C at this point. If you have a brokerage account and made gains or losses, you fill out Schedule D. Note you can make a lot of savings by reporting your losses, because if the net of long-term and short term gains/losses is negative, you can take $3,000 off your income (or $1,500 if filing separately) and carry the rest of your losses over from year to year. Don’t neglect to use to capital loss carryover worksheet if either last year or this year you made losses exceeding your gains.

At this point I am about half through my day; it takes me on average about 3-4 hours to get all the inputs organized and ready for entry on the forms. After a generous lunch break, I start my walk through (what I like to call) “tax jungle land”; filling out tax forms is like a walk through the jungle…

Read first what has changed this year in the instruction booklet. You may have to collect some more information (for example, this year about your long distance charges or about energy efficiency improvements for which you can get a credit).

Once the instructions are clear you start from the top of the 1040 and work your way down line by line to the end of the first page. All the numbers you need come straight from your sheet you prepared except on line 12, where you copy your business income from Schedule C, and on line 13 where you copy the last line of Schedule D. Adding up the numbers on the first page of the 1040 gives you your AGI and permission to go for the more challening walk...

This is where the fun begins! You need to fill out schedule A to itemize deductions, which unfortunately 2/3’s of people don’t benefit from (meaning they neglect to itemize deductions…) and deduct the total of your deductions from your AGI. Next you deduct your exemptions (this year $3,300 times your number of exemptions). The net is your taxable income on line 43. No sweat so far!

The real fun in tax jungle land starts on line 44. A mistake many make is to grab the tax tables and lookup taxes based on the amount in line 43. Wrong move, you have to first work through the Qualified Dividends and Capital Gain Tax worksheet (this year page 38 in the instructions) before you can get the number you need to copy in line 43. This worksheet is a jewel of IRS logic. For example, line 9 reads: is the amount on line 7 equal or more than line 12, then skip 9 through 11, go to 12 and check “No”, else enter the amount from line 7! Get it?

Once you have figured what taxes you own, and you think you are through, Surprise! You can do it all over, compute your taxes once more to see if you own any alternative minimum taxes (AMT).

Another worksheet on AMT on page 39, provides you with a much bigger challenge to follow the road: line 12 reads: if the amount on line 8 is more than the amount on line 11, then skip lines 12 and 13, enter on line 14 the amount from line 10, and go to line 15, else subtract line 11 from line 8. This must have been written by some real geniuses who love spaghetti…

Let’s assume you made it to the end of the AMT worksheet and that you do not need to fill out form 6251, another pearl of IRS cooked spaghetti. You get back to the 1040 and continue down the line, entering foreign tax credit, if any, other credits, if any, and deducting all your credits from the tax you own. Remember, credits are better than deductions, the latter lower taxes, the former eliminate taxes! Finally you reach lines 73 or 75 on the 1040 and are ready to sign your tax form.

Before you finish your tax-day-off make sure you copy all your forms, and file all the papers you used to prepare them. The IRS does sometimes come back and asks questions (to see if you ate all your spaghetti…), which if everything is properly filed you will be able to answer with no problems.

A walk in tax jungle land is every year a new challenge but at the same time rewarding, in the sense that every year there are some new curves in the road, new special rules. For example, under residential energy efficient property you can read (page 41): if you are a member of a condominium management association for a condominium you own or a tenant-stock holder in a cooperative housing corporation, you are treated as having paid your proportionate share of any costs of such association or corporation for purpose of these credit. I like this: some of us are treated as if we paid!

The day that I take off for doing my taxes is not my most pleasant day of the year, but it is like any other choir (e.g. putting out the garbage...); when done it feels good especially if you earned the savings by doing it yourself!

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