A Basic Understanding of the Income Tax Code Needed

Since I work as an accountant, I am frequently asked income tax questions by friends and family. Here is the latest from a college student:

"Ms. Colere, could you please review my 2006 federal income tax return, my tax preparer calculated that I owe money this year. I don't understand how this could possibly be correct. Last year, I got a refund. I didn’t work any more hours this year or change my tax withholdings." Upon further review, I discovered this particular college student owned a taxable mutual fund account in her name that had incurred a large capital gain distribution in 2006. The tax-withholdings withheld from her part-time job earnings did not cover her tax bill once she included the capital gain distribution into the tax calculation resulting in money owed.

This scenario led to my conclusion that as part of a financial literacy program everyone should be able to complete a 1040EZ tax return and have a basic understanding of the Federal Income Tax code. This is important even if you hire an accountant to do your taxes. It could save money on taxes; not to mention interest and penalties for unreported income or unallowable deductions, lead to better investment decisions and save money on tax preparation fees.

“The hardest thing in the world to understand is the income tax.” — Albert Einstein, physicist

"I don't think you want to do that!"

My ultimate dream has always been to someday teach financial literacy in my community. I would keep my options open to whom my students would be: children, young adults, single moms, widows, senior citizens or even non- financial savvy entrepreneurs.

Occasionally when the opportunity arises, I will share this dream with someone I meet. I had just such an occasion this week. I met a woman who is very active volunteering in Milwaukee's inner city. The program she is involved with provides hot showers and meals for families in need. Seeing this as a perfect opportunity to discuss my dream; I asked if her volunteer organization taught financial literacy and expressed my desire to some day do so. To this she stated that the people she works with have much more pressing needs than financial planning and are not ready for a financial literacy program. I continued pressing my issue to which she replied, “I don't think you'd want to do that.” She expounded by saying these people have a different value system. She has been in homes where families will have two big screen televisions but no food to feed their children. They are not ready to hear my message and my time would be wasted.

How timely that last night I read the following in "Black Enterprise" magazine: In 2004, black buying power rose to $723 billion, up from $585 billion in 2000, according to The Multicultural Economy of 2004, a report by The Selig Center for Economic Growth. The report defines buying power as the total personal income available to individuals after taxes for spending on goods and services. The report also found that blacks spend more money on telephone services, shoes, personal care products, and children's apparel and less on healthcare, reading materials entertainment, and household textiles, compared to other groups. Although buying power is increasing in the African American community, experts say consumers should not mistake that statistic for a sign that the community is becoming wealthier. In fact, to the extent that African Americans spend more of their increased income rather than save and invest it, in many cases their wealth might even decline in light of the increase in their income.

I have never responded well to someone telling me, “You don’t want to, can’t or shouldn’t do something I have already set my mind on doing. Obviously, there is a great need for my services and I will not be deterred.

One more thing to do before it is too late

Having recently experienced a death in my husband’s family, we have spent several hours over the past few days looking through boxes of old photographs. How saddened we were to discover that many of the very old photographs were thrown haphazardly into a box and were not labeled. How unfortunate. There are far too many pictures that we will never be certain who they are of or what the occasion was.

Take the time now to sort through your family photos; you never know when it will be too late.