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The Spokesman-Review Newspaper
Spokane, Washington  Est. May 19, 1883

Make Tax Preparation Pay Year-Round

Associated Press

Amid all the tedium and frustration that go with doing your income taxes each year, financial advisers say there are ways to turn the process into a very productive use of your time.

If you take it as a chance to review and plan how you manage your money, the work you have to do to satisfy Uncle Sam can serve a personal purpose as well, and the exercise can yield benefits far beyond any tax refund you may receive.

So whether you fill out the forms yourself before the April 17 deadline, or hire a professional to do the job for you, the experts urge you to try to learn as much as possible along the way.

“The temptation is to forget it all until next year,” concedes the accounting firm of KPMG Peat Marwick in its newsletter Financial Independence. “But the smart individual is taking a long look at what he or she wants to accomplish and determining how to do it.

“Information gathering is the first step in preparing your federal income tax return. It is also the first step in the financial planning process.

“You’ve specified the sources of your income. You’e also determined your expenses and whether they are tax deductible.

“This information has provided you with a look at where you are and where your money is going. You can easily track how much you spend on housing, interest and taxes. You also have most of the information you need to begin planning for the future.”

The tally you make of your income and outlays can tell you a lot about whether you could manage your cash flow better, and perhaps increase the amount that you save.

As you look at any interest, dividends or capital gains you earned, you can also review how your investments are doing and whether they are advancing you toward your longer-term goals.

Tax time is also an ideal occasion to put together a statement of your net worth - your assets minus your liabilities such as mortgage and consumer debts. If one member of a family handles most or all of the finances, the tax return and net-worth statement can be used to help keep the other members informed of how you stand.

Beyond these general benefits, most people need to know their tax status to make good decisions about how to use their money wisely.

After completing your tax return, for instance, you know your marginal tax rate - the rate at which each additional dollar you earn is taxed.

If you are, say, in the “28 percent bracket,” that means that under the U.S. graduated income tax system the next dollar you earn will be subject to a claim of 28 cents by the federal government.

That number, plus the marginal rate on any state and local income taxes for which you are liable, gives you your “combined tax bracket.”

With that number, you can determine the aftertax value to you of an increase in pay, income from a second job, or taxable interest you might earn on an investment.

For instance, if your combined tax bracket is 33 percent, you can readily figure that a taxable investment yielding 6 percent is actually worth 4 percent to you after taxes. That knowledge might encourage you to invest in a tax-exempt bond investment yielding 4.5 percent or 5 percent.

The same math can show you the real cost of a deductible outlay such as a charitable contribution - in the 33 percent bracket, for instance, only $2 for every $3 you contribute.