Tax planning is not a spectator sport

Aug. 1, 1998
Hiring an accountant to prepare your tax return does not guarantee that the best return will be prepared or that you will get good value for the fee you pay. Tax planning is not a "spectator sport" - even if you hire a professional to handle your taxes. You must become knowledgeable about tax planning. Too often, people who hire tax professionals think they don`t have to know much about taxes themselves. After all, that`s why they pay the professionals. But this type of thinking is a big mistake

Hugh F. Doherty, DDS, CFP

Hiring an accountant to prepare your tax return does not guarantee that the best return will be prepared or that you will get good value for the fee you pay. Tax planning is not a "spectator sport" - even if you hire a professional to handle your taxes. You must become knowledgeable about tax planning. Too often, people who hire tax professionals think they don`t have to know much about taxes themselves. After all, that`s why they pay the professionals. But this type of thinking is a big mistake.

The reality is that the more you know about taxes, tax law, and your specific situation, the more money-saving strategies you will be able to discover. For the fee you pay your tax professional, you should expect more than just a tax preparer. With your participation, you will file a better-quality tax return each year.

Plenty of educational resources are available for those who wish to become better informed about taxes. Many good tax guides are published annually and are readily available in bookstores. IRS publications on dozens of specific topics are available free by calling (800) TAX-FORM. A partial listing appears in the back of the instructions to your tax return. IRS publications, plus other tax information, are available free through the IRS web site: http://www.irs.ustreas.gov.

Tricky mortgage misstatements

Check mortgage statements and other communications from your lender carefully to make sure you are not paying more than you should. Lenders may misstate the monthly payment ... fail to credit advance payments on principal ... make errors on escrow or tax payments ... or charge for Private Mortgage Insurance (PMI) even when home equity has reached the 20 percent threshold. On adjustable-rate mortgages, be aware of all details including the index used for adjustments, frequency of adjustments, and rate ceilings/floors.

Computers! Computers!

Virtually all jobs will require computer skills in the future. To keep up, do as much computer-related work at your practice as possible. Consider taking a class at a vocational center, high school, or computer store - focusing on a specific application such as word processing, desktop publishing, or spreadsheets - that you can put into use right away to monitor practice productivity. Get on-line and explore the Internet. It will have a major impact on your practice.

For home-equity credit lines, ask:

* How much will I pay in total closing costs?

* Is there a prepayment penalty?

* Is there an annual fee?

* What is the lifetime rate cap?

* What is the highest rate I can be charged during the life of the loan? Many loans have variable introductory rates that can jump after a few months.

* What is the minimum amount I can borrow against my credit line?

* Will I be charged an inactivity fee if I do not use any of the money in my credit line for a year?

Changing times fund trap

As interest rates decline and the Dow swings unpredictably, some fund managers may be tempted to invest more aggressively to stabilize or boost returns.

Warning: Bond-fund managers may invest in higher-risk securities or foreign issues. Small-cap stock fund managers may buy sizable amounts of mid-cap stocks. Suggested strategy: Call your funds for their asset allocations and top-10 holdings. If you`re displeased, sell and then find funds that match your objectives. Or invest in index funds whose objectives always remain the same.

Taxable income

Individuals, businesses, and trusts compute their taxable income differently ...

- Individuals subtract allowed deductions from gross income to determine "adjusted gross income." Then, standardized or itemized deductions and personal exemptions are subtracted to determine income on which taxes are due.

- Corporations subtract all deductions - including allowances for special dividends and losses compiled in previous years - from total income to determine the level of taxable income.

- Trusts and estates take total income minus the income-distribution deduction, allowable expenses, and any specific exemptions to determine taxable income.

Hugh F. Doherty, DDS, CFP, is a national lecturer, financial advisor to the health-care profession, and CEO of Doctor`s Financial Network. For personal financial consultations or to have Dr. Doherty speak to your study club or dental society, call (800) 544-9653.

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