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Learn to Live by the Tax Code Print E-mail
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Personal Finance - Taxes
Written by The Frugal Nomad   
Monday, 14 September 2009 18:05
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Death and Taxes, both are inevitable. Right?  Well sort of. I mean the government taxes you even after you die by taking a bite out of your estate. It's their way of kissing you goodbye and making sure you're a good loyal citizen in the great beyond.

There's no avoiding the great equalizer - death. But taxes are an entirely different matter. Over the course of a life time, the average household can save tens of thousands of dollars in taxes. But there is one requirement that is absolutely mandatory - you need to become familiar with the tax code and keep up with the frequent changes.

Most people have this crazy notion that if they can just locate an aggressive tax accountant or go to the right tax preparer, they'll get to pay less taxes. And, a good tax professional can definitely help you take advantage of all the credits and allowances that you're eligible for. What they can't do is change the way you handle your money. And the surest way to beat the tax man is to live and die by the tax code.

Living by the tax code requires that you become intimately familiar with allowances, deductions, exemptions, tax credits, special retirement accounts, penalties for early withdrawal from an IRA,  depreciation, short term capital gains as opposed to long term capital gains and one time incentive programs like the $8,000 tax credit for new home owners. If you have pre-school children - you should understand the child care credit backwards and forwards and learn the benefits of flexible spending accounts. If you have rental property you should teach yourself how to fill out a Schedule E.  If you're getting disability, you need to figure out if only some of it is taxable.

You can't read the Tax Code the way you'd read a John Grisham novel. For one thing, the tax code is a much more sinister piece of literature that is authored by some of the most unscrupulous people on the planet - the members of congress.  So if it reads like it's in Latin - you need to learn a second language. Because once you get the basic terminology down - you're half way there.



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haverwench  - Estate Tax |2010-05-05 19:50:43
"I mean the government taxes you even after you die by taking a bite out of your estate."

Not to nit-pick here, but technically, it's not taxing you, it's taxing your heirs on the money they inherit from you. (And they're only taxed on the portion of the estate that exceeds $3.5 million. And if you die this year, they won't be taxed at all.) Dead people themselves aren't required to file tax returns. So death and taxes may both be inevitable, but only one at a time.
Omiewon  - Interesting Conversation with Accountant |2010-05-05 21:23:43
Speaking of this year. My accountant offered and interesting assessment of what the heirs might be thinking later this year. Since there isn't a tax this year, there is a very large financial incentive for the ultra rich to suddenly pass before December 31st. What he was saying is that he wouldn't want to be someone who is in poor health that is ultra rich at the end of this year. With millions of dollars on the line some of those heirs might find it far too tempting..... he was serious too.
haverwench  - Time to change the will |2010-05-06 05:45:35
Maybe the best thing to do if you're that rich is write your kids out of your will this year--leave it all to charity or something, so it isn't taxable at all--and then inform them that you intend to make a new will first thing next year that favors them. That will give them an incentive to keep you alive until 2011.
frugal nomad  - What about a contract |2010-05-06 05:55:08
If you're that paranoid about the little darlings, you could always take defensive measures - like taking a contract out on them and then telling them about it. That'll put them on the run and keep them out of your way for the rest of the year. I know that's a bit drastic but kids always can use a little detterence. Call it tough love. Looks like it's going to be a lonely eight months till that ball falls in Times Square.
Omiewon  - Funny |2010-05-06 08:17:17
The things that 99.99% of us don't need to think about. I'm sure that the heirs are far more aware of this than the elderly "donor". Like I said, this doesn't effect very many people but it's a crazy big loophole that was a fluke this year.
 
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