Two economists and a cognitive psychologist at the University of Oregon recently conducted a study that found some people really don’t mind paying taxes. The study participants were given $100 each and told that they had to pay a portion of the money as a tax to a local food bank. A machine studied which of their brain regions were tapped as they did this.
When the students paid the tax, two regions of their brains—the caudate nucleus and the nucleus accumbens—lit up. The researchers then asked the students if they would like to contribute even more money to the food pantry. The same regions of the brain lit up brighter and larger when the students gave voluntarily. Incidentally, these areas also light up when people eat chocolate or see friends.
The research findings concluded that when people know their money is going to a good cause, whether it’s mandated or voluntary, they get a “warm glow.”
Whether or not you get that warm glow when you pay your taxes, you may be wondering about your current tax situation. Here are some ideas that may help you gain a better idea of where you stand:
- Review your finances from the start of the year to be sure your income is not outpacing the taxes you currently pay.
- Organize your paperwork for next year’s tax return preparation. Locate all necessary receipts and proofs of deductions.
- Increase your contributions to your 401(k) plan to reduce your taxable income or change your paycheck withholding.
- Start monitoring your portfolio for any long-term underperformers with an eye to selling them by December 31 to create capital losses that you could potentially carry forward.
- Plan the charitable donations you intend to make by the end of the year, and when you make them, be sure to get proof in the form of a receipt, canceled check, or bank statement, regardless of how small or large the donation. The previous IRS documentation requirement for a single gift of $250 or more expires with the 2007 tax year, and you would be wise to have proof of your donations in case of an audit.
- Look for tax breaks. If you need to buy a new car or renovate your home, you might get some tax relief. If you open a home equity line of credit to pay for these items, the interest may be tax deductible. And if you buy a hybrid car or make energy-efficient improvements, they may come with incentives under the Energy Tax Act.
If you need assistance in tax planning, consider consulting with a financial advisor to ensure that you’ve considered all the possibilities.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Investors may wish to consult a professional tax advisor or a lawyer.