Avoid these 3 bad habits and cut your tax liability

Challenging economic times bring to mind advice from our Utah Valley neighbor, Stephen Covey, to become more “highly effective people” — especially with our money.

As soon as the snow melts, we fill manila folders with documents that sound like a round of bingo (W-2 … “Bingo!”) and make sure we’re settled up with Uncle Sam.

In this time of adjustment and efficiency, paying Uncle Sam as little as possible is the game we all want to win.

Below are three bad habits that keep you from being a highly effective taxpayer, and how to kick them.

Bad Habit #1: Being reactive instead of proactive
The time to fix a dam is before the dam breaks.

While this statement seems obvious, many people don’t fix their tax leaks until the money is already seeping through.

“I would say that 90 percent of the tax dollars we save our clients isn’t done from January to April,” says Eric Nuttall, a partner at Hawkins Cloward Simister in Orem. “You shouldn’t just use your tax professional to prepare your taxes. If you do, you’re missing the boat.”

A quality tax professional — and that doesn’t include your advice-filled non-accountant brother-in-law — should be part of your overall financial plan.

Scott Peterson, owner of Peterson Wealth Advisors in Orem, uses Eric to assist in his planning. As a small business owner, his income can fluctuate greatly, making it hard to be a do-it-yourselfer come April 15.

“Sometimes you can’t see the forest for the trees,” Scott says. “Eric sees the big picture. He acts as a business adviser and helps me make sure I limit my tax liability.”

This team approach is especially helpful when it comes to one-of-a-kind or every-so-often financial transactions. Which leads us to bad habit No. 2 …

Bad Habit #2: Trying to wade through the every-so-often transactions yourself
While some families’ tax filings may be relatively routine and predictable, Eric warns against trying to “do it yourself” when it comes to planning large financial transactions and navigating impending tax issues.

“If you receive an inheritance, sell an investment or have huge losses in the stock market, it’s all the more important to have a solid relationship with a tax professional,” Eric says. “It’s in these situations where having help really pays off.”

Bad Habit #3: Failing to keep records
The holidays always bring out charity in people’s hearts. But if you left a store this season and dropped some money in the bell-ringing Santa’s bin, you better have asked for a receipt — at least if you want to claim it on your taxes. A recent law change means receipts are required for all charitable donations — even to the bell ringers.

“Record keeping definitely isn’t fun, but it’s necessary to make the most of your tax preparations,” Eric says.

THE BUBBLE EFFECT
Here are two things Utah Valley residents deal with more than the rest of America.

1. Large, regular charitable donations. Many Utah Valley residents pay large contributions to their churches, but some planning could make their donation go further.

When stocks and real estate appreciate, the giver can donate it and claim the asset’s full value as a deduction but doesn’t have to claim it as income because it wasn’t sold.

2. The Alternative Minimum Tax. Large families can face problems with the Alternative Minimum Tax. The AMT doesn’t adjust with inflation, so the number of households required to pay it is expected to increase.

The problem for Utah County residents? The deductions given for each child in a household could be disregarded, meaning large families can be hit harder by the AMT.

In fact, the National Taxpayers Advocate’s 2008 annual report to Congress estimates that “77 percent of the additional income subject to tax under the AMT is attributed simply to family size or residing in a high-tax state.”

That is why Eric Nuttall, partner at Hawkins Cloward Simister, thinks every Utahn should be in the ear of his or her congressman about finding a permanent solution to this issue.