How Filing Your Own Taxes Will Boost Your Finances
By David Ning
Whether you are just beginning your career or already earning a large salary, there are many benefits to preparing your own taxes. I now work with a trusted accountant, but doing taxes myself for years gave me a huge leg up in the retirement savings game. Here are some of the benefits of filing your own taxes:
Understand the Impact of Taxes on Investments
Bonds, real estate investment trusts, stocks, dividends and capital gains are all taxed differently. It's not necessary to file your own taxes to learn the differences, but seeing the numbers for my own circumstances definitely prompted me to dig deeper into the details. By understanding the differences in how various investments are taxed, you can make more efficient asset allocation decisions. For example, putting particular investments in a taxable or non-taxable account can help you save on taxes. Tax knowledge can also aid in investment evaluation, because it's ultimately after-tax returns that are important.
Reinforce the Power of Tax-Advantaged Accounts
It's hard to grasp the tax impact of saving in a 401(k) when you write a few percentages on a sheet of paper, but the numbers all make sense when you file your own taxes. And every time you file the 1099-DIVs on your taxable accounts, you will feel grateful that you don't need to pay taxes on all the investments in your tax-advantaged accounts this year.
Inspiration to Refinance Your Mortgage
For years I knew I would benefit from a refinance because I could take advantage of lower rates, but I procrastinated doing the research and delayed going through the refinance process. Finally, typing a crazy amount of interest I paid into one year's tax return put me over the edge to do something about it. The process turned out to be pretty straightforward. It's too bad I didn't start earlier, because I lost money every day I waited. The good news is that I am still going to save tens of thousands of dollars due to that one move over the life of the loan.
Eliminate Misconceptions About the Tax Code
Going through the filing process from front to back is a great way to learn the truth about the tax code as it pertains to your situation. For example, some people mention a tax deduction as a benefit of having a mortgage, but many homeowners are only deducting part of the interest that was paid out each payment cycle, which means paying down your mortgage is still a good deal. When you learn about the tax code you will be able to make better decisions throughout the year that will help you financially at tax time.
Appreciating Your Wealth
The only thing worse than paying taxes is not paying any taxes at all. Many people complain about paying high taxes, but I sure hope I get to pay lots in taxes each year for the rest of my life because that means I'll have a high income for a very long time. For those who are in the highest bracket, there are plenty of people out there who envy your high income, despite the taxes you will owe this year. So take a moment to appreciate your success and how the taxes you pay are going to help others.
There are many benefits of knowing the tax code, whether you hire a professional to prepare your taxes or not. Making an attempt to file the necessary forms yourself once in a while will help you learn more about the complex tax system we have in this country. It may sound cumbersome to fill out the forms if you are used to paying someone else to do the work, but the move will surely boost your finances.
David Ning is the founder of MoneyNing.com.