Wednesday, January 30, 2019

WHAT I LEARNED AS A TAX PREPARER

Are you dreading the upcoming tax return?  Not sure how to fill out the forms and what documents are needed?  You are not alone.  

It was a long time ago that I got paid to prepare tax returns,  but I have done tax returns for myself and family up to the present.   H and R Block offered a part time job (I already had a day job), but you had to take a course.  I thought I knew it all, but sadly didn't.

I knew that we had a progressive tax system, but didn't really understand how it works.  The instructor was very good at explaining.  It starts with the premise that everyone has certain financial needs:  food clothing and shelter.  The exact levels are difficult to determine fairly, but it is generally accepted that some people do not earn enough income to pay taxes.  Others earn enough to survive with more for other goods and they are expected to contribute, but the government realizes many can only spare so much.  Still others, a minority make well more than needed to survive and in fact enjoy luxuries.  Usually they benefit more from government infrastructure than the rest and are able to pay more taxes.

Personally I owned a small amount of stocks and was pleased to learn about dividend tax credits.  The theory being that the country needed investors and many were of the widows and orphan types that needed encouragement and protection.  Many years later I learned that people who earn money through some investments pay a much lower tax rate, one American billionaire who thought this was a shame was Warren Buffet who paid a lower tax rate than his secretary.

My daytime job was selling office supplies and on one call to an accounting firm I boasted that I had taken the course.  The accounting company rep boasted back to me, "you learned the basic facts of how to fill out the form.  We figure how much you can get away with."  I always knew there were people in all income levels who bent the rules.

One memory-a client admitted that he had done flyer delivery for cash payments.  In another previous job I worked with flyer distribution.  I knew that his official income would not result in any taxes owed.  I shamed him into estimating his unofficial income.  We did it in such a way that he still didn't pay any taxes, but we both felt uncomfortable.  More on my circulation career which included a stint marketing flyer distribution:  http://www.therealjohndavidson.com/2012/08/my-career-in-circulation-part-3-winding.html

A common strategy I encountered with customers was to overpay taxes and get a nice rebate.  They hated the idea of having to pay extra taxes.  A better way to look at it is you do end up paying taxes that means you had the use of the money beforehand.  If you got a rebate that meant the government had the use of your money.  Forced savings such as buying mutual funds or bonds is a better way and if you register the investment plan you can save money on your taxes.

Another common practice was to buy a RRSP mostly around the month of February to get a tax deduction.  If enough people did this it would be enough to temporarily boost stock prices.  A better strategy would be to do monthly contributions such as to a mutual fund.  Dollar cost averaging helps to optimize fund growth and one overlooked fact is that earnings are protected from taxes until withdrawal.

If your income has any complications it may well pay to seek professional advice  If you income is simple such as wages and standard deductions it is not as difficult as too many people think and free advice is available.

What I had to say about tax collectors:  http://www.therealjohndavidson.com/2015/04/tax-collectors-dirty-job-frowned-upon.html


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