Tackling Tax Time

Dread tax time? A little preparation will go a long way toward easing your stress.

By James R. Armstrong, CPA

As April 15th approaches, many taxpayers become overwhelmed by the perceived impending doom of the deadline. But tax day doesn't have to be the most dreaded day on the calendar. With a little planning and organization, most people can avoid much of the stress that's associated with filing their taxes.

Procrastinators Beware …

Nothing can create undue stress like waiting until the first week in April to start working on your taxes. If you use a paid preparer, you may not be utilizing your money to the best of its ability. By April, tax preparers are exhausted and though most wouldn't admit it, the final product—your return and thus your money—may suffer if you wait until late in the filing season to get started. I'm not suggesting you forward your tax preparer each piece of tax information as you receive it, but as soon as you have all or nearly all of your information, get it to your preparer so he can begin working on your return. This will allow him ample time to contact you with questions or request additional information as necessary. The bottom line is that if you choose to wait until the last minute, it could cost hard-earned cash.

Everything and the Kitchen Sink?

Most people would be amazed by the information some clients bring to their tax preparers. A little organization on the front end can save tax preparation fees on the back end. Many tax preparers charge by the hour, or more specifically by the tenth of an hour, so any time spent sorting through your dry cleaning and salon receipts will be directly reflected in your tax preparation bill. Keep your business receipts organized by vendor or type of expense and don't give your preparer receipts that are purely personal in nature.

If you find yourself struggling to find tax documents because they're scattered all over the place, you may benefit from designating a file cabinet, a small file box or at least a folder that will be devoted to tax documents. As you make charitable contributions, pay for car tags or obtain other tax documents, simply place them in the folder. You don't need a complicated filing system or expensive software to be prepared for tax time. Too often, people choose to bury their heads in the sand versus taking a proactive approach to their taxes. Small steps throughout the year can be taken to prepare you for the taxes due or even better, help you reduce them. A tax planning session with your preparer midyear or in the fourth quarter may be all it takes.

Advice for New ODs

One situation where a new OD may run into a tax "surprise" occurs when he works for two clinics as a traditional employee or a potentially more costly situation, where he works in one place as a traditional employee and in another place as a contracted optometrist.

For instance, an optometrist works for two separate clinics, both as a traditional employee, earning $25,000 at the first and $50,000 at the second. This optometrist probably will owe taxes in April unless he took the total wage amount into consideration when filling out his employment paperwork, specifically the W-4. To explain, federal withholding is deducted from both paychecks, however the withholding for the first job is based on the optometrist earning $25,000, when in reality the withholding should be based on his total salary—$75,000. If you're in a similar situation, you should discuss your tax status with someone in payroll or with your tax preparer to prevent a headache when the tax bill comes.

The second situation where new ODs can get into trouble is when they work for a clinic as a traditional employee, then work as a contractor for someone else.

Traditionally, optometrists that work as contractors don't have payroll taxes or income tax withheld from their pay. If you're a traditional employee, your employer pays half of the employment taxes and you pay the other half, your portion being deducted from each paycheck. If you're a contract laborer and receive a 1099 at year end, you pay all of the employment taxes, which are calculated and paid on your income tax return. As you'll see in the example below, the amount of taxes can escalate quickly.

In the following scenario, Dr. Wally is single, doesn't itemize deductions and earns $50,000. For this example, we will assume that Dr. Wally has no federal withholding on his traditional employee income.

■ If Dr. Wally earns this as a traditional employee and receives a W-2 at year end, he had $3,825 in payroll taxes withheld from his paycheck and will owe $6,356 in income taxes at filing time, for a total of $10,181 in payroll and income taxes.
■ However, if Dr. Wally works as a contractor and receives a 1099 at year end, he'll end up paying $7,065 in payroll taxes and $5,469 in income taxes for a total of $12,534, which is payable when he files his income tax return.

The total tax calculated as a contract employee is higher, but a potentially larger issue is that instead of having the payroll tax withheld in small increments throughout the year, the total amount is payable in one lump sum at filing time, in addition to income taxes calculated.

It's a Write-off for Them …

One concept often misunderstood is how itemized deductions and the standard deduction are related. Itemized deductions are items such as charitable contributions, mortgage loan interest and real estate taxes that offsetwages in determining taxable income.

The standard deduction is a set amount determined by your filing status (single, married and so on) that is used to offset wages in determining taxable income. For single taxpayers, the 2009 standard deduction is $5,700; for married taxpayers, $11,400.

Itemized deductions and the standard deduction are mutually exclusive; you can't take them both. In order for itemized deductions to be beneficial, your itemized deduction tally must be greater than the standard deduction.

Some of the most common itemized deductions include:

■ Mortgage loan interest
■ Home equity loan interest
■ Personal property taxes (car tags, for example)
■ Real estate taxes
■ Charitable contributions
■ Medical expenses, including health insurance, in excess of 7.5% of your adjusted gross income (AGI)

There are a host of deductions that are deductible only if, in the aggregate, they're above 2% of your adjusted gross income. Some of the most common 2% deductions are:

■ Job-hunting expenses
■ Professional dues
■ Certain job expenses
■ Tax preparation fees

There are certain deductions that can be taken even if you don't have enough deductions to itemize, the most common of which are:

■ Moving expenses (if moving closer to your job location)
■ Student loan interest (up to $2,500)
■ Traditional IRA contributions
■ Taxes paid on new automobiles purchased between 2/16/09 and 12/31/09 if certain circumstances are met
■ Up to $500 ($1,000 for married taxpayers) of real estate taxes paid in 2009, even if you don't itemize deductions.

What's Better Than a Tax Deduction?

Two terms often confused are tax credits and tax deductions. Let's go back to Dr. Wally. He's in the 25% marginal tax bracket, meaning if he earns one more dollar, it will be taxed at 25%. Let's say Dr. Wally has a $100 tax deduction. This will save Dr. Wally $25 in taxes, 25% times the deduction amount of $100.

On the other hand, if Dr. Wally has a $100 tax credit, it will save Dr. Wally $100 in taxes. Tax credits reduce taxes dollar-for-dollar, whereas tax deductions reduce the amount of income subject to tax.

There are two types of credits, refundable and nonrefundable. For instance, Dr. Wally had $6,536 in income taxes in the first scenario. If he had $10,000 of refundable credits, those credits would directly offset the tax of $6,536 and he would be due a refund of the excess, or $3,464, thus the name refundable. If that same credit was non-refundable, it would still directly offset his tax liability, but the excess wouldn't be refunded to him and he simply wouldn't owe any taxes.

Some of the most common credits taken by new ODs are:

■ Child tax credit ($1,000 per child – phased out for single taxpayers whose AGI is greater than $75,000 and $110,000 for married taxpayers)
■ Childcare credit (amounts paid for childcare for children under 13 that allow you to work or seek work)
■ Retirement saver's credit (for single taxpayers who earn less than $28,000 or married taxpayers who earn less than $56,000 in a year and make a retirement plan contribution)
■ Making Work Pay credit (new for 2009, lesser of 6.2% of earned income or $400, phased out for single taxpayers whose AGI is greater than $75,000 and $150,000 for married taxpayers)
■ First-time homebuyer (credit is the lesser of $8,000 or 10% of the purchase price and is fully refundable; a first time homebuyer is someone who hasn't owned a home during the 3-year period directly preceding the date of purchase of the home subject to the credit)

Credits get phased out at varying income ranges depending on filing status. These credits may not be applicable to each person, but it's worth discussing with your tax preparer.

Whom to Choose?

The tax code and regulations have ballooned to a length in excess of 66,000 pages, and there's no indication that their growth will slow any time soon. Many new ODs are overwhelmed and struggle to choose a tax preparer.

There are several options:

■ Off-the-shelf software, such as TurboTax or TaxCut
■ National chains, such as H&R Block or Jackson-Hewitt
■ Agents are individuals who've passed a test issued by the IRS and are qualified to practice before the IRS
■ Certified public accountants (CPA) have passed a national exam and are required to register with the state board of public accountancy

Tax preparation fees will vary depending on how and whom you choose to prepare your return, the most expensive of which will be utilizing a CPA. Many firms have minimum fees for returns and charge by the hour.

I suggest you discuss the fee arrangement before you engage a tax preparer so everyone has the same fee expectations. Just remember, as with most things in life, you get what you pay for.

Know Your Limitations

When my wife and I purchased our first home, I was terribly excited at the idea of unleashing the handyman within me. After a few small projects, I learned I'm better at tax planning and consulting than I am at measuring twice and cutting once.

The decision to get your taxes prepared by a professional versus doing them yourself is akin to installing a programmable thermostat—if you know what you're doing, it'll probably work out fine, but if you're like me, the benefit of using an electrician far outweighs the cost. You may be comfortable preparing your own taxes, but know your limitations. Remember, the more your life evolves, the more complex your return becomes.

Another less tangible aspect of using a paid preparer that many fail to recognize is the value of their own time. I personally dreaded mowing the lawn. It took hours every weekend, valuable time that I would have preferred to spend with my family, so I enlisted the help of a professional to handle the grass for $45 per week. I wasn't paying to have my grass mowed, but rather paying to gain additional time with my family. When I finally made that move, my only regret was not doing it sooner.

Contrast the time spent worrying and poring over your taxes versus the cost of hiring a professional to prepare them and ask yourself if it makes sense to seek professional help.

Once you decide to utilize a professional tax preparer, I suggest asking your colleagues for recommendations regarding who to use and who to avoid. As long as you work for a clinic as a traditional employee, you don't necessarily need a tax professional that works specifically with optometrists. It's only when you venture into business as an owner or part-owner of a clinic that you should seek a tax professional who specializes in optometric tax consulting and preparation.

All aforementioned advice deals strictly with individual returns. I strongly suggest that you seek the assistance of a paid preparer if you operate your own clinic.

Many people dread tax time, but all the heartache can be avoided with a little planning. Be organized, be proactive and be ready—it will make for a better April 15th. nOD