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Understanding Taxes; Understanding Finances

Taxes are not as sexy as investments, yet alone real estate, retirement plans, or even insurance. This is understandable, as taxes do involve paperwork, forms, and rules, exceptions, and exceptions to exceptions. But that is not the whole picture.

Think about it this way. If the average person spent two hours per week thinking and reading about how to get out of debt or how to maximize investment returns, they would probably save a few thousand dollars each year and they would probably be able to generate a few thousand dollars worth of profits each year. Chances are that they would also end up paying most, if not all, of their savings and extra profits to the government and that any savings or gains in one area would come from additional debt or losses in other areas.

Why is this the case? I would argue that in many cases this happens because focusing time and energy on one or a few areas skews our financial perspective. That is why I am comfortable saying that in many cases the average person would be best served by spending a few hours per week thinking about and reading about how to reduce their tax liabilities, rather than focusing on how to eliminate debt or improving investment returns. While this can result in tax savings, the real benefit comes from organizing life and finances in a way that makes them more manageable. Ironically, taxes can provide a method to the madness.

Okay, so now you think I am crazy. Well, in an effort to change your mind, here is what I propose: I propose to walk through common tax and related financial issues that are faced by many Americans. More specifically, I propose to set out a common fact pattern and discuss various tax and financial issues that should be considered. I will write this as a series of short blog posts, as, like most of you, I to have a real day job to attend to.

With that said, here is the fact pattern: the taxpayer is 32-years old, she is single, and she is has been a public school teacher for six years. She has one nine-year old child and one dog (both from a prior relationship), she is in good health, and she lives in a small apartment in a midwest city. As far as money goes, she makes $42,000 per year, she has $500 in her checking account, and she as accumulated approximately $12,000 in the mandatory teacher retirement plan. As far as debts go, she owes $3,000 in credit card debt and $15,000 in student loan debt. By the way, to make the series a bit easier to read, let’s refer to our taxpayer by the name Terri, Terri the Teacher.

So where should Terri start in thinking about taxes? I guess that will be article number one….

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