7 Tips From a Tax Attorney

I’m so excited and honored to have Kelly Phillips Erb guest post for careergirls today!  Kelly is Tax Attorney and the author of taxgirl.com.  She is brilliant and a  fabulous writer too!  Enjoy!

By, Kelly Phillips Erb, PC

When I accepted my first “real job” after graduation, I did what any career girl in her 20s would do:  I updated my look.  I bought a new bag (somehow my canvas school bag seemed inappropriate), some real shoes (my Docs wouldn’t fit in at the office) and I ditched my jeans for a nice outfit or two.

What I didn’t do?  Update my finances.

Despite being a tax attorney, I was somehow under the impression that the transition from my job at the Gap to my job at the law office wouldn’t affect my bottom line.  I didn’t own a house, I had no investment portfolio and I was spending almost everything that I took in to pay expenses, including student loans.  Come tax time, I quickly filled out a form 1040-EZ and moved on.  I figured, as a young career woman, that my taxes were simple and the money would work itself out later.  I was wrong on both counts.

One of the biggest mistakes you can make early in your career is assuming that your finances are too simple to focus on.  It’s never too early to start making sense of your finances.  Here are a few tips to speed you along:

1, Understand your organizational style. The thing to keep in mind is that no matter how great an organizational tip is, it’s not great if it won’t work for you. I will never successfully use a Franklin Covey binder – my husband swears by his. I like post it notes stuck all over my computer – “experts” say this is a terrible idea. You have to find what works for you. And no web site, no expert, and no blog, no matter how fantastic, can figure that out for you.  Experiment. Play. Don’t be afraid to throw things away. Don’t be intimidated into buying new products if they’re not for you. Don’t let anyone tell you that you’re doing the “wrong” thing when it comes to organizing.

I tell my clients to keep their receipts and important papers together but I don’t tell them how.  Some folks are great at organizing from scanning receipts into their computer to entering expense reports into their Blackberry.  But if you’re not like that, don’t make the mistake of doing absolutely nothing, which tends to be the default when folks get overwhelmed.  Do something.  Keep a list of expenses in a spiral notebook if that works for you – and always keep receipts, even if that means piling them into a drawer.  Yes, it’s better to be super organized.  But know your limits and work around them.

2, Be picky about your records. Once you’ve mastered your style of organizing, keep it up.  Divide your records into things you can easily get your hands on for the current tax year and “old records.”
Here’s a handy list for what you might need to access quickly for the current tax year:  http://www.taxgirl.com/ask-the-taxgirl-first-time-filer/

With respect to “old records”, it’s important to understand what to keep and what to toss. You don’t need to save everything. I suggest that you hold onto your tax returns for 3-7 years, depending on your circumstances; absent fraud, failure to file or serious/gross understatements, the statute of limitations is 3 years after the latest of the filing date or the due date for most federal returns. Supporting documents for those returns should be held onto for as long. Supporting documents would include canceled checks, old bills and bank statements.

But other financial records? That parking ticket from 2 years ago? Throw it out.
3, Know where to look for information. You don’t have to know everything about finance and tax – but you should know enough to make smart decisions.  Choose one or two solid sources for finance and tax information and make a commitment to browse the headlines at least once every day (subscribing via email is very helpful).  Alongside mainstream sites like CNN Money and WSJ.com, there are a number of terrific financial and tax blogs that offer tips, information and more.

You can find instructions and tax forms for all federal tax returns on the IRS website.  Also consider bookmarking your state tax department web site for easy access to forms, instructions and FAQs (just Google the name of your state + the word “tax” to find the site).

Don’t get sucked in by the “sky is falling” hysteria with new administrations and new laws.  Find out the facts yourself and how they might affect you.

4, Surround yourself with smart people.
Nobody said you have to do everything on your own.  You could do your books and your taxes yourself. But consider the time value of money. How long do you think it will take you to do your own taxes? What is your hourly rate? Consider that a CPA will usually be able to prepare your return for between $200 and $500, depending on the complexity and your geographic location.  If you can do it on your own – and you want to – for the equivalent of $200-$500 of your own time, then do it. If you can’t, hire someone.

There’s no shame in hiring someone to help. It’s not waving a white flag. It’s being smart. Do you really think that Oprah is hunched over a computer with TurboTax trying to make sense of it all?

5, Understand that things change.
I had my life all mapped out when I entered college.  But life happened.  I moved to a different city, fell in love, bought a house, got an additional graduate degree, quit my job, started a business and got married – in that order.  Practically nothing happened like I had planned.  And it all happened so quickly.

Since life isn’t going to slow down for you (and c’mon, you don’t really want it to), take the time each year to do a quick self assessment.  One year, your income may be too high to allow you to take a student loan interest deduction but the next year, you may qualify.  Laws change and circumstances change.  Regroup each year and think about what’s different – and what you hope will be different in the new year – and plan accordingly.

When to plan an assessment is the tricky part.  I think mid-January is a much better time than the often-recommended end of the year.  Why?  For one, your spending patterns in December tend to not be representative of your regular behavior.  Plus, with all of the social and family obligations that have at the end of the year, you may not have the time to make a proper, honest assessment.  To do it right, wait until things slow down, then take a deep breath and look at last year’s books.  Make a mental note about what you could have done better and what you plan to do differently next year.

6, Plan ahead. While you can’t plan for everything (see #5), you can take steps now to maximize tax and financial benefits.

Worrying about deductions in April isn’t as smart as thinking about them in December. Check out this list of year end savings strategies and make a note to reconsider them next year.

Instead of dumping a year end bonus into your regular bank account, consider putting a few dollars into a deferred tax savings plan, such as an IRA.  You can make a contribution to an IRA through April 15 and still get credit as if you had made the contribution in the prior tax year.
Considering a major medical expense this year?  If it’s something you can plan around, such as braces, major dental work or corrective vision surgery, fund a medical savings account (MSA) or flexible spending account (FSA) early in the year, depending on what your employer allows.

There are also tax credits and deductions available if you’re shopping around for a new job, buying a new car, buying a new house or improving an existing house.  Plan ahead and get the facts first.

7, Never be afraid to ask questions. One of the things that I see most often – and I’ve been there – is that many finance and tax professionals assume that they know what’s best for you, especially if you happen to be a young woman.  They don’t.  You do.  You just need to arm yourselves with the facts.  Ask why your financial advisor thinks a Roth IRA is a good idea.  Question whether investing in tech companies is a good idea.  Request a copy of the types of accounts a bank offers, complete with a fee schedule.  Insist that your tax professional walk you through your tax deductions.  It’s your money.  And people who are working for you should take the time to make sure that you understand everything.  If your finance and tax professional isn’t willing to take the time to give you thoughtful answers, it’s time to move on.

Taking control of your finances is an important step for all career women, but that doesn’t mean that your finances have to control your life.  By making a few key changes now, you can stop worrying about your money and start focusing on the future.

This article was brought to you by Kelly Phillips Erb, a founding shareholder of The Erb Law Firm, PC, in Philadelphia, PA, where she focuses on tax law.  Kelly authors the popular tax blog, taxgirl.com, recently cited as one of the top 100 legal blogs by the ABA Journal.  She also used to be a little something of a diva.

Ms. Career Girl

Ms. Career Girl was started in 2008 to help ambitious young professional women figure out who they are, what they want and how to get it.

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