A PENNY SAVED…

With the end of the year approaching and newspapers offering advice on what to do about your 2008 income so it doesn’t get completely taken away from you by IRS next year, I’ve decided to contribute my bit to the flood of good advice pouring in on the necessitous taxpayer. At the end of this paper I’ve reprinted some directions for a process that will enable you to send in a perfectly calculated return to IRS where its correct arithmetic will lend credibility to its deductions and exemptions. The formula is derived from my experience working for H&R Block, but it’s not copyrighted so far as I know, so I’m free to pass it on.

My opening tax tip here is aimed particularly at my fellow citizens of New York. They are most in a position to take advantage of it because the New York government considers it’s such a privilege for you to be permitted to live here that you should be charged the earth for doing so. So, as the late Senator Moynihan said “Going from New York’s taxes to any other state’s is like falling off a cliff.”

It’s good to remember this if you’re an average New Yorker not having the advantage of home ownership, the average person’s tax shelter. In most states that would mean you can’t itemize your deductions and have to take the standard deduction offered by Uncle Sam. For 2007 this was $5,380 for a single person with no dependents. But in New York a person with taxable income of $55,600 after the $3,400 personal exemption would have paid $5,385 combined New York State and New York City tax, $5.00 more than the standard deduction. Clearly, the standard deduction should not be taken and Schedule A should be prepared and submitted. ”A” of course has room for lots of things that possibly are not fully considered in the standard deduction, such as charitable contributions, casualties and the like.

Between New York City and Yonkers, which also has a local income tax, it would not be surprising to find that there might be as many as a million taxpayers who would benefit from this. And a little exploration of the state tax schedules would enable non-city residents of New York to determine at what level of income they would be able to discard the standard deduction and start itemizing. If they find themselves unable to reach the right level to participate they might find it useful to pay two year’s state and local taxes in one year in order to take advantage of the opportunity to itemize not otherwise available. The penalties for late payment of one year’s taxes would have to be considered first.

Anything wrong with the above kind of thinking? Probably yes, if you’re a tax enthusiast who thinks that governments are unique creations which always know how to spend money better than private citizens do. Having spent twenty-eight years of my life working for a government, I disagree. Look at earmarks, for instance. They’re wrong since they all represent expenses which have been refused by the groups most likely to benefit from them because they don’t believe the benefits will justify the expenses. The famous bridge to nowhere is an example. No state, county or local government was willing to pay for it, but a little group of supporters still wanted it and managed to saddle the U.S. government with the expense. Too many government projects are no different from this. Whenever it’s proposed that government at any level should spend money on improvements that the local government closest to their site has refused to support, that should have the effect that an “Abandon Ship” signal has on the high seas. But still politicians choose to go down with the ship.

When I think about deductions I think about Dan Gurney, a native of my town, who was America’s leading race driver of the mid-Twentieth Century. As such he made up to $250,000 a year by risking his life on the track. It was big money then and taxed accordingly. Gurney had never heard of tax shelters and so paid top dollar to the government up to 70% or 80% of his income. Are there still people who believe in that kind of thing? Or do they agree with Judge Learned Hand that everyone is entitled to arrange his affairs so as to pay the least possible amount of tax and incurs no opprobrium (my phrase) by doing so?

Now we come to my recommended method, known as the Zero Check Tape, of getting your arithmetic straight so as to get an A and a gold star from the teaching staff at IRS. It goes like this --

Enter all income and all subtractions from income as follows: All income amounts are entered as negative figures. All subtractions are entered as positives. No totals are
entered. The only positive amount entered as positive is the amount on Line 43 of your 1040, Taxable Income. When you have entered this you will be ready to get your total. If the total is zero then all your arithmetic is correct and you will not be embarrassed by IRS notifying you about your mistakes.

If your total is a negative figure then you have over-reported your income amounts and you need to go back on your tape to find out where it happened. If your total on the other hand exceeds the Taxable Income figure then you have made the mistake(s) on the deductible side of the equation and you must examine those figures..

Usually you will find that you have put your figures in correctly and the problem is with the totals you entered when completing your return. Remember the Taxable Income figure is derived from these, not the individual entries on Schedules A,B,C,D and so on.

This is the reason for doing the check tape as a check and not as the original source of the return. It can be said that it goes back to the roots of the return and looks for trouble in the place where it is most likely to have started. To avoid searches for errors found by the tape pay close attention to the job of extracting correct totals from the schedules you use in completing your return. Add them up right and when posting them on Form 1040 see that they are valued correctly in summing up its figures. By the way, if you do a check tape with twenty or more figures entered and it comes out with a zero total, you will definitely experience a mathematical high. Thrill City, in other words.