Megan Johnson: Staying On Top of Your Taxes Makes Cents

I use a professional to prepare my tax returns each year, so there’s no point in me bothering to learn about taxes. In fact, that’s the entire reason I use an accountant.

I come across that line of reasoning all the time. And as a former tax accountant, let me say this: It’s a huge mistake–one that could cost you thousands of dollars each year. Even if you use a professional to prepare your tax returns, you still need to have a basic understanding of taxation.

To explain why, let me use an analogy:

You have a doctor, right?

And yet, you’ve still taken the time to learn the basics of how to live a healthy life, right? Why is that? As far as I can tell, the primary reason is this: You understand that ultimately you bear the responsibility for your health.

It’s the same thing with your accountant. Yes, he (or she) can prepare your taxes. And yes, there are many things he (or she) can do to help you save on taxes. But ultimately, it’s your money. And if you don’t understand the tax consequences of the financial decisions you make, you’re going to be throwing your money away.

Make the Most of Your Doctor (and Accountant)

You need to know the difference between your heart and your lungs if you hope to have any sort of meaningful conversation with your doctor. Similarly, you need to know the difference between a tax deduction and a tax credit if you want to understand (and get the most value from) your accountant’s advice.

Making Good Decisions

Your doctor isn’t available before every meal to help you decide which foods to eat. You need to know about the nutritional significance of protein, vitamins, fiber, etc. (as well as which foods contain them) if you want to make healthy eating decisions.

In the same way, you need to know how tax brackets work in order to make good financial decisions. For example, it’s important to understand that if you’re in the 25% income tax bracket, that doesn’t mean that all of your income is taxed at 25%.

Where to Find Tax Information

Luckily, there are plenty of good resources for finding information about taxes, and many of them are freely available online.

For example, the IRS publishes a series of plain-English tax guides. There are Publications on topics ranging from Investment Income and Expenses to Medical and Dental Expenses. (Or, if you’d like a list of IRS Publications, sorted alphabetically by topic, you can find that here.)

If you know very little about how income taxes work, I’d suggest starting with IRS Publication 17: Your Income Tax (pdf). It’s an excellent introduction.

Or, if you’re looking for the answer to a specific tax-related question, I’d suggest making the following Google query (without the brackets):

site:irs.gov [insert topic here]

What this does is use Google to search the IRS website for whatever keywords you entered. The reason I use this method is that the IRS’s site has tons of information, but its built-in search function is decidedly mediocre. Unsurprisingly, Google does a better job.

Be Proactive

If you sit at your computer all day and eat fast food 15 times per week, you’re going to have health problems. You won’t be able to visit your doctor and have her magically fix you (at least, not for the long-term). There’s no question that the best route to good health is to stay healthy in the first place.

When it comes to taxes, something very similar occurs. Every year, there are many things you can do to save on taxes. But if you wait until April 10th of next year, it will be too late to take advantage of many of them.

Don’t let that happen to you! Take the time to educate yourself by doing a little reading.

About the Author: Mike Piper is the author of Investing Made Simple. He also blogs at The Oblivious Investor.

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