Calling All Tax Geeks

Brian Taylor

April 11, 2010

The only time that Pennywise has ever wished he were a schoolteacher is around April 15 of every year.

I would love to say that is because the Easter season fills me with a spirit of service to humankind, making me eager to face a roomful of middle-school students every day. But middle-school teaching would demand either inner sainthood or a shield of indifference well beyond Pennywise's constitution. A less-noble concern underlies my K-12 longing, namely that schoolteachers receive special tax breaks that university professors are not permitted. That seems unfair—after all, we teach, too—until one reflects upon a life spent in a middle-school classroom in Altoona, Pa. Some of life's callings deserve all the small nurturing incentives we can award them.

It seems that taxation—or at least the arcane American income-tax system—is the wellspring of endless resentment. This year all the press coverage is about the rage-filled Americans possessed by the feverish conviction that the president of the United States is a Marxist Muslim born in Kenya who personifies the Antichrist.

An altogether different sort of fantasy captivates Pennywise as I sit with pencil behind ear totting up rows of expenses every April. I like to imagine a new tax itemization, one where we allocate where our dollars go. "Not a farthing to the salary of Rep. John Boehner, that ignorant scoundrel," I would say. "Not one penny to the unmanned drones killing villagers in Pakistan. Yes, yes, a bit more to the K-12 teachers."

Truth be told, I like paying taxes. I'll even go further—gasp, if you must—and say that I like the redistribution of wealth. I like knowing some of my money goes to medical care for the poor, benefits for the jobless, federal parks, passenger rail, well-paved roads, and a public postal service. I wish a bigger bite were taken from the Big Boys whose share of the national pie is now at positively gourmand dimensions. Improved tax fairness would benefit civilization while reducing the proportion the rest of us must pay every April.

Even the annual tax chore, believe it or not, holds appeal for me. I think of tax time as a giant game in which I figure out what I made, what I can deduct legitimately, and whether or not I owe more than was withheld from my paycheck. Call me a tax geek. Admittedly, this became a whole lot more fun with the invention of tax-preparation software. Back in the day, Pennywise used the long forms provided by the IRS. That was no fun at all.

Academic professionals and other university employees can legitimately shield their hard-earned income from the Man. This column contains myriad suggestions. But first a bit of advice: Play it clean. Be careful about claiming a home office or deducting a "research" trip to Cancun. Such maneuvers can flag an audit. Study the rules. Deduct only if the claim is legit. But do consider these sound measures for reducing your tax hit:

Retirement savings. The most effective way for academics to shield income from taxation is via tax-favored retirement saving. Here are some options:

  • Increase your contributions to your employer's plan. That will diminish your taxes while improving your long-run financial security and allowing you to take full advantage of your employer's match. In 2010, contributions for each income earner are capped at $16,500 ($22,000 for those age 50 or above). How does it work? Let's say you are 48 and your salary is $65,000. If you save the full amount allowable in 2010, the IRS will count your taxable income as only $48,500.
  • Open a supplemental retirement account. Your institution may offer an opportunity for further contributions—$16,500 more—in a voluntary additional savings account. High earners should consider this.
  • Open a Roth IRA. A Roth is a superb tax diversifier. It minimizes taxes in a way distinct from employer-based accounts, with no present-year tax deduction but accumulations that grow free from taxes forever after. This protects you should tax rates increase over time or should your later-life income put you in a higher bracket. Tax diversification—shielding wealth and income from taxation in a variety of ways, both present and future—is a shrewd part of any financial strategy. Each person can contribute (corrected wording here-eds.) up to $5,000 ($6,000 for those age 50 or above) to a Roth in 2010. Any number of providers, including Fidelity, Schwab, TIAA-CREF, and Vanguard, offer Roth IRA's.

College savings. Saving for college is another excellent tax reducer. If you have children or grandchildren, Coverdell Education Savings Accounts—available at the same companies that offer Roth IRA's—allow tax-free earnings.

State-specific plans (529s) are also worth exploring. In them savings grow tax-free and, as an additional plum, the current year's contributions may be deducted from state taxes. College Savings Iowa, for example, allows Iowa taxpayers to deduct $2,811 in contributions for each beneficiary account this year. Ohio's plan, CollegeAdvantage, allows a deductible contribution of $2,000 for each child from Ohio taxes. Be sure to examine the plan's fees and expense ratios carefully, as some are scandalous. (Iowa's and Ohio's are both excellent.) Typically they need not be spent in-state.

Tax efficiency. If you have savings or investments in taxable accounts (you will know if you receive the 1099-INT or 1099-DIV forms), then scrutinize their tax efficiency. Tax-efficient investments include tax-exempt bond funds, index funds, and funds designated as "tax-managed." Also consider drawing upon any excess taxable holdings to subsidize living expenses while maximizing tax-favored retirement saving—in effect, moving taxable sums into tax-advantaged shells.

Prepare your own taxes. Around 60 percent of Americans pay someone else to do their taxes, at a cost of roughly $200 or more a year. For most people, there's no need for that. Tax-preparation software offers simple interview formats and sound guidance about IRS rules, making self-preparation a snap. TurboTax is the best known brand, but this year I downloaded H&R Block at Home 2009 Deluxe from for $22.50. That covered the entire cost of my tax preparation, state and federal. Hiring a preparer is acceptable if you lack the confidence, time, or inclination to do your own taxes, but you may save yourself more if you do them yourself, since you know your particular financial history better than anyone. The sense of authority and expertise a tax preparer provides may be largely illusory, given the cattle-call nature of the business.

Adjust your withholding. If you are due for a huge refund, it may seem a triumph. In actuality it's as if you loaned all that money, interest-free, to the IRS for a year. Reduce the amount withheld from your paycheck by consulting with your institution's human-resources office, and then redirect the savings to tax-advantaged retirement savings. A double advantage will result.

Professor Pennywise is the pseudonym for a professor in the humanities who has taught from the Pac-10 to the Big Ten. He is merely a frugal academic, not a financial professional. Send questions and suggestions to