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The Value of Essential Tax Knowledge

Contributed by mm | October 16, 2007 2:05 AM PST

Now you can always choose to tackle the annual chore of filing tax return by 1) learning to file tax yourself, or 2) paying someone else to file your tax. You may think the difference is just the $100 or so you pay someone sitting in the booth in Walmart in April, but it can be much more than that.

Take myself as an example, given that I'm working in Asia, taking paycheck from a US-based company corporate entity, running a sideline business and still having to pay federal income tax in the States, my tax profile is on the complicated end of the spectrum. I'm thankful that my employer is paying KMPG several thousand dollars a year to file my tax. I will never be able to figure out how to navigate the intrigue laws governing federal tax on foreign earned income.

Now I also need to confess I'm a control freak when it comes to managing money, so in each of the past two years, I took KMPG's draft return, and crunch every line again in a mass-market tax software, until I can satisfactorily say I understand how all numbers are tied together to produce my total tax number.

This exercise took me about 10 hours every year, and it is worth every minute I put to it. Why? In each of the past two years, I found at least $2,000 worth of error in my favor. The first year, KMPG classified my business income as US earned instead of foreign-earned, effectively depriving me of the opportunity to offset some of my foreign-paid tax. The second year, KMPG even forgot my employer withhold taxes from my vested restricted stock grants.

I'm not pointing fingers to say those tax preparers are not doing their jobs, but I suspect that they didn't pay enough attention to details, or didn't care to ask, or, maybe, outsourced my tax return to a "sweat shop" in India.

So my conclusion is: the benefit of tax education is worth much more than $100 a year. By educating yourself of essential tax rules, you can take most advantage of the long list of possible deductions and credits, and you can also plan your financial moves with the tax consequences in mind (think about selling a winning stock position, buying a house and seeking a mortgage, etc.). Depending on your tax brackets and tax profile, the value of essential tax knowledge can be in four figures every year.

So where should you start? I started by reading the tax columns of personal finance magazines and sites, and later read a few books like J.K. Lasser's Annual Tax Guide, the Ernst and Young Tax Guide, and The Tax Book for preparers. However, if self-paced reading is not your cup of tea, my advice is to enroll yourself to an income tax course, like the entry-level Income Tax Course (Basic Building Blocks) from H&R Block. For example, it only costs $174 for a 72-hour classroom program in Seattle -- H&R Block subsidizes these courses so it can find future preparers, but even without a future tax preparer career in mind, you can still do yourself a big favor by sitting in the classroom and learn the nuts and bolts of income tax.

This Post Has Received 25 Comments. Share Your Opinions Too.

MillionDollarJourney Commented on October 16, 2007

I've had the same experience with tax preparers, they just don't care enough. I also do the same as you, but I prepare a rough draft of my taxes before submitting to the tax accountants/preparers.

JB Commented on October 16, 2007

Increasing your tax knowledge not only helps in reviewing your return, but it also helps you going forward. As you gain a better understanding of how the system works, the fact that some deductions are worth more than others, etc. you will be more able to make better tax-advantaged financial decisions.

aaron Commented on October 16, 2007

I have a full time job, in addition I do a small side job which at best will do two or three thousand dollars this year.
I am looking to gain the most from the tax benefits from my side work
(deductions on gas, car and travel....) is this something I should learn to do myself or pay a tax pro?
any recommendation as to where I can find an inexpensive tax pro?

aindian1 Commented on October 16, 2007

Any websites or books to read for expats?

MM Commented on October 16, 2007

Aaron, you'd better learn to do yourself. An inexpensive tax pro can only get your return out of the door, but not necessarily maximize your savings.

Aindian1, start with IRS Pub 54.

Financialchoices Commented on October 16, 2007

Both my parents were self employed and I can remember the many different stacks of paper being sorted through in preparation for tax time. What a great benefit your employer offers to help in your tax preparation. The H&R Block route is a good one in my opinion for most people. I have used their services the last three years.

Creative Investor Commented on October 18, 2007

MM: A few questions for you: How useful did you find the mass-market software? Did you learn anything from the software itself or was it more of a tool to apply knowledge you gained elsewhere? What software did you use, TurboTax?
Thanks for a great post.

MM Commented on October 18, 2007

I usually get TaxAct but I guess TaxCut or TurboTax can do too. It is just a tool for me to run the calculations instead of building out in Excel.

Juan22 Commented on October 29, 2007

I usually use turbotax too, but you are right tax education can help out a lot.

hedge fund manager Commented on November 5, 2007

wow, you're working in Asia? exactly which part are you working as I'm an Asian as well. Asia is a lovely place right? Anyway it sad to hear KMPG such a large firm in the world can file tax in such a careless manner and you have to "chase the details up". Well, I guess we are living in a world that is full of human errors!

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