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If you have a question or comment, please drop me a line. Paul @ PIM Tax.

07 January 2017

panic2Money is tied to most of the decisions we make in life. Where we work, if we work, which schools our children attend, the car we buy, the house we live in, how and when to retire, where we eat, what clothes we wear - money is a factor in all these decisions and many many others. Anything so intricately entwined in our lives will influence our emotions. It cannot be escaped. I don't look at this as a good or bad situation. It simply is.

On paper taxes are all about numbers. There are columns of numbers to be added and subtracted until you get to the final answer. There shouldn't be anything emotional about it. In the real world, however, there can be a tremendous amount of emotion surrounding the preparation of a tax return. These emotions are natural, but I have witnessed them influence people's behavior in a variety of ways that cost them money. I believe that's OK as long as they understand that is what they are doing. I could save money by changing the oil in my car myself, but I don't want to. That's my choice, and I know why I am making it.

Below are some of the emotions I frequently see and the results they can have that cost people money.

1. Reluctance to See a Professional Tax Preparer. Hiring a professional to prepare your taxes is going to save you time and if your tax situation is even a little complex it will likely save you money. Yet, many people are reluctant to hire a professional to prepare their taxes. I see several emotions behind this:

A. Fear of Looking Ignorant and/or Disorganized. In our society money is one way we keep score. If you have more money, you are winning the rat race. Even more valued than having lots of money is the perception of being shrewd and efficient with your money. Mr. Money Mustache has made a career out of demonstrating his ability to live well on very little money. Many people don't want to use a professional tax preparer because they fear looking ignorant and inefficient with their money. They avoid that feeling by avoiding professional tax preparers. It is probably costing them money.

B. Overconfidence. Some people find this difficult to believe, but we humans are naturally more confident than we should be. Evolution bred lack of confidence out of us long ago. Picture a nomadic tribe during a drought thousands of years ago. They have been walking for weeks looking for water. They get to the top of a hill and they see nothing but another hill on the horizon. The confident ones set out for that next hill, certain they will find water if they keep looking. The ones lacking confidence sit down and perish. We have evolved to be confident. That's why I yell instructions at the Browns' quarterback on my TV on Sundays in the fall. In my fervor I somehow believe I know more about football than someone who made it to the NFL. At tax time a lot of people think they know a lot about taxes. They are determined to prepare their own tax returns, and it is probably costing them money.

C. We're All a Bunch of Crooks. Some people had a bad experience with a tax professional in the past. Or someone they know did. Or they read about it in the paper or saw it on the news. It's a legitimate fear. There are scoundrels in every profession and tax preparation is no different. There aren't as many as you think, though, and there are easy ways to tell the good ones from the bad ones. Don't let your bias against tax professionals cost you money.

2. Immediate Gratification. Some people are just not very patient when it comes to pleasure. Getting money can be a pleasurable experience, and some people can't seem to wait a week or two to experience it. They want their refund and they want it right now! That's why refund anticipation loans (RALs) and refund anticipation checks (RACs) are so popular. They provide instant gratification to the taxpayer - you can walk out of your tax preparer's office with a check or a direct deposit to your bank account already on the way. But make no mistake, those RALs and RACs are expensive. There might be a good reason why you can't wait a week or two for your tax refund, but most of the time people are just feeling an urgency to have the pleasure of getting their refund, and it is costing them money.

3. Fear of Owing the Government at Tax Time. Behavioral economists call it loss aversion. It is the concept that losses feel about twice as bad as gains feel good. In other words, losing $100 has about the same amount of psychological impact as finding $200 - just in the opposite direction. With respect to taxes people react to loss aversion by allowing the government to withhold excessive taxes from their paychecks throughout the year so they can get a refund when they file their tax returns. There is no logical reason to do this. It is your money. A tax refund check is not a bonus from the government. They are simply returning the money they took out of your paychecks all year to cover your tax bill. If you get a refund it is because they took more than was necessary to pay your taxes and they are returning it to you. I don't think anyone would voluntarily overpay their Cox Cable or Dominion Power bills every month just so they could get some of it returned at the end of the year. Yet millions of Americans overpay their tax bill every paycheck so they can get a refund when they file their taxes, and it's because writing a check to the government feels twice as bad as getting a refund feels good. That is an emotional decision, not a logical one. If you are providing the government with an interest free loan it is costing you money.

Make Informed Decisions About Your Taxes

I am not trying to convince you that we should all make the same decisions about money. Money impacts emotions and different people react differently to money situations. We all have our own comfort level. Some of us lay awake at night because we didn't do the most logical thing with our money, and some of us lay awake at night because we did. Each of us has to make decisions that leave us relaxed enough to sleep. The point of this article was to raise awareness that many people (maybe you) are making decisions regarding their taxes based on emotion, and that they might not be aware that they are. Most people would prefer to pay the absolute minimum amount of tax they are required to pay, but many people are not paying the lowest possible tax because they are unknowingly making emotional rather than logical decisions.

Like everyone, I get emotional about my money. I try to limit it, but it is unavoidable. However, if we are talking about your money I will be the calm, rational person in the discussion. If you would like a calm, rational perspective on your tax situation you should give me a call.

 

 

Disclaimer

Information in the Tax Blog is current as of the day it was posted. Tax laws change frequently, and it is likely that as time passes acts of Government will make some of the older blog content out of date.

The information provided is for education purposes only. It is general in nature and may not pertain to the Reader's situation. Every taxpayer's circumstances are unique. Reader's are urged to do some research or talk to a tax professional before acting on any of the information posted in this blog.

Paul D. Allen is a proud member of the National Association of Enrolled Agents, the National Association of Tax Professionals the Financial Planning Association of Hampton Roads, the National Association of Personal Financial Advisors (NAPFA), and The Tidewater Real Estate Investors Group. You can read more about Paul's background here.

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Common Acronyms

ACTC - Additional Child Tax Credit

AGI - Adjusted Gross Income

AMT - Alternative Minimum Tax

APTC - Advanced Premium Tax Credit

AOC - American Opportunity Credit

CTC- Child Tax Credit

EIC - Earned Income Credit

HoH - Head of Household

LLC - Lifetime Learning Credit

MFJ - Married Filing Jointly

MFS - Married Filing Separately

MAGI - Modified Adjusted Gross Income

PIM - Plan of Intended Movement

PTC - Premium Tax Credit

QC - Qualifying Child

QHEE - Qualifying Higher Education Expenses

QR - Qualifying Relative

QW - Qualifying Widow(er)

 

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