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Wednesday, November 26, 2014
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Published: Tuesday, 4/5/2005

Along with burdens, tax time offers financial revelations

It's very unfortunate that the tax season comes at exactly the same time of year as March Madness, the opening of the baseball season, and the beginning of the golf season - all of which are eminently more enjoyable than doing tax returns.

However, there's a silver lining in the cloud of taxes: It's taxpayers' annual chance to find out where the money went.

And it's a good opportunity to reflect on good and bad choices - ours and the government's.

Also, tax time is a great way to keep the mind active, as we read through hundreds of pages of rules, forms, instructions, and publications and try to figure out what they mean.

Doing our own taxes - or, for that matter, simply gathering the documents for an accountant to do the taxes - gives us taxpayers a chance to step back and question ourselves.

What's the real cost of taking the easy way out by paying with plastic? Was it smart to tap the home-equity line of credit? Is it wise to be a saver and a borrower at the same time?

Investors can ask themselves whether it makes sense to buy stocks that pay dividends and then pay taxes on them annually, or to load up on high-tech and growth stocks that pay no dividends and hope instead for a (taxable) capital gain down the road.

Homeowners can ask themselves whether ownership is all it was cracked up to be.

Yes, mortgage interest and real-estate taxes are still deductible, but those deductions yield only cents on the dollar compared with the actual costs of the interest and county taxes.

Taxpayers who owe Uncle Sam can question whether they should increase withholdings and solve their problem with a bit of pain each payday or bite the bullet once a year, at tax time.

That topic is often debated. Most experts say there's no point in giving the government an "interest-free loan."

But students of human nature know that it's easy come, easy go for most taxpayers. The extra cash created by lower withholding tends to disappear long before taxes are due.

What's the break-even point for 401(k) accounts? Is it smart to continue loading up on 401(k)s even if we believe tax rates are likely to be higher in coming decades? In other words, does it make sense to shelter money in the 25 percent bracket if it will be withdrawn (and taxed) in the 28 percent bracket, or possibly in a 30-plus-percent bracket?

There questions on a larger scale as well.

Was it smart for Congress to cut taxes during wartime? Why didn't Congress do something about the insidious alternative minimum tax before it became a problem for millions of taxpayers?

One big question asked by many taxpayers: Whatever happened to tax simplification? The basic 1040 tax packet can run close to 100 pages.

Add to that Publication 17 (Your Federal Income Tax), the 322-page "bible"; Publication 530 (Investment Income and Expenses), 81 pages; Publication 529 (Miscellaneous Deductions), 24 pages; and Instructions for Schedule D, nine pages.

Pity the poor taxpayer with rental property, K-1 statements from limited partnerships, or a complicated alimony arrangement, or one who has to figure out the alternative minimum tax.

Everything financial becomes clear, once a year, when we're confronted with all the canceled checks, the statements, and the results of our decisions.

"Know thyself," was good advice from Socrates 2,450 or so years ago. And it's good advice to taxpayers in the 21st century.



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