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I switched this year from taking the standard deduction to itemizing my deductions. I was surprised, but Turbo Tax told me that I'd keep more money by itemizing, and when I looked at the return, it was definitely correct.

This switch has me wondering: now that I am itemizing, what other tax planning and/or tax strategies should I be looking into?

I don't think I make enough money to worry about a CPA or EA yet, but I would like to start reading. So I'm asking for recommendations on the subjects of tax planning and tax strategy. (US individual income taxes, specifically.) Any recommendations?

  • A honest question: what's "enough money" to worry about a CPA or EA? (My fellow students use EAs to fill out their tax forms as they are too involved with their research work and don't want to fill out their own forms) – f1StudentInUS Apr 5 '12 at 19:15
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    @f1StudentInUS: I actually considered posting that same question. I guess there are at least two things to consider: 1. how much time does a CPA save you versus doing it yourself and 2. how much more efficient is a CPA at extracting every single tax savings possible versus doing it yourself? I was really thinking more about #2: if my income is not $1M and I don't have exotic investments or income, then I don't think there's a lot a tax planner can do to save money that I don't already know about. #1 is also very relevant to many people, but I find TurboTax is better than a CPA for saving time. – Mark E. Haase Apr 6 '12 at 14:53
  • Hmm, very valid points! However, there's an interesting thing hiding in #2: How do you know if a CPA will be better if 1. you have not used a CPA before or 2. not a CPA yourself. I guess this is a question I will ask in the future (unless you go ahead :-) ). The cheapest CPAs I know who are recommended by people are $200+/hr! – f1StudentInUS Apr 6 '12 at 18:59
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Keep in mind that chasing after tax savings tends to not be a good way of saving money.

What is a good strategy? Making sure that you take all the deductions you are entitled to.

  • Look at the sections of turbo tax related to deductions for clues.
  • Are there any sections that you might be able to take advantage of if you can document them?
  • One area that trips up a lot of people are the requirements to claim a charitable deduction. They don't get a receipt when they need one, or they make a cash donation when using a check is required for proof.
  • Are you using your IRA/401K to your best advantage?
  • Are you using your Flexible savings account to pay for medical expenses pre-tax or a similar account for child care?
  • Are you saving for college using a 529 or similar account? = If you are selling part of an investment do you know how to determine which shares to sell?

What is a bad strategy:

  • Getting a mortgage just to save on your taxes. The tax savings calculations are complex, and don't tend to be as big as most people expect.
  • Selling a stock just to get a deduction.
  • Move to specific local jurisdiction just to save on taxes.

You asked for a book recommendation. The problem is that I don't know of any books that cover all these topics. Also keep in mind that all books, blogs, articles, and yes answers to questions have a bias. Sometimes the bias can be ignored, other times it can't. Just keep looking for information on this site, and ask good specific questions about these topics.

  • Sorry, which book is this answer recommending? ;-) – Chris W. Rea Apr 5 '12 at 12:32
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    I realized that I never recommended a book, and I never addressed the lack of a book in my answer. I meant to say, I know of no book that covers all of these, most books I have seen have a built in bias towards a particular solution. The goal should be reading a lot of sources, and make your own decisions. I will edit my answer in a moment. – mhoran_psprep Apr 5 '12 at 13:06
  • @mhoran_psprep: In regards to "take all the deductions you are entitled to", yes I agree that's a good idea. But most of the deductions in TurboTax are extremely obscure ("did you receive any income from teaching karate to a fisherman?"). I'm sure that wealthy, tax-savvy people employ some common approaches to tax planning; that's what I'm interested in. EDIT: For example, everybody knows that a mortgage payment is a "common" tax strategy (notice I said "common", not "good"). I'm wondering if there are other high-level strategies that I should be paying attention to. – Mark E. Haase Apr 6 '12 at 14:58
  • The key item in your question is the change from standard to itemized. This means that charity, property tax, state income tax, car tax, all become relevant. The rest I outlined in my answer. – mhoran_psprep Apr 6 '12 at 15:08
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"J.K. Lasser's Your Income Tax" is, remarkably, a great read. It's a line by line review of the tax forms, and offers commentary and examples for every scenario. Of course, it's updated every year to reflect new rules and numbers. I actually read it from cover to cover the first year I started working.

It's not going to offer convoluted strategies to use, but, you'll understand your tax return well enough to respond to the advice you encounter elsewhere.

To mhoran's point - "Don't let the tax tail wag the investing dog." Taxes are important, but should take a back step to earning and investing. Those who didn't sell at the height of the dotcon bubble "to avoid the big tax bill" only saw in hindsight that paying taxes is part of success not failure.

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    +1 I second JoeTaxpayer's recommendation. Long before the Apple I was only a gleam in Wozniak's and Jobs's eyes and TurboTax was not even a dream, I too read this publication from cover to cover to understand the basics of taxes, and have bought it every now and then since. – Dilip Sarwate Apr 5 '12 at 19:38
  • @JoeTaxpayer You haven't steered me wrong once on this site. I'll try that book. And roger on the tail wagging the dog. I have good confidence in my career and investment strategies; but I feel like I don't know diddly squat about tax strategy. That's why I asked. – Mark E. Haase Apr 6 '12 at 15:02

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