In it, I cover the changes that occur when you get married and how they impact your taxes. We’re talking filing status, the marriage penalty, ways in which you might actually get a tax break by getting married, and whether it makes sense to file separately from your spouse. (Spoiler alert: it’s rarely advantageous!)
Check it out and let me know in the comments: If you are married, did you have any tax surprises as a result of tying the knot?
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Another tax season has come to a close, and my tax pro friends around the country are likely enjoying some much-needed rest and relaxation. Hopefully, despite the crazy hours they’ve been working over the past couple months, they took a little time out of their days to laugh.
At one firm where I used to work, two of my coworkers brought comic relief to tax season with a “wall of shame.” On one wall in their office, they’d collect the craziest and most absurd emails, notes and documents from clients. Stuff like a client dropping off a note on April 14th that says, “I can’t find any of my W-2s or 1099s, but I’m pretty sure I made $150,000 last year. We can still file on time, right?” Or maybe another client who felt compelled to attach a political screed to his tax organizer, as if his CPAs were personally responsible for the Internal Revenue Code.
Because most tax professionals I know love sharing this stuff (while safeguarding confidential client information, of course!), I asked a few of them to share some of the craziest deductions they’ve seen clients try to claim on a tax return. Enjoy!
The Sharp Shooter
Enrolled Agent Steven J. Weil, Ph.D. and President and tax manager of RMS Accounting in Fort Lauderdale, FL says one of his clients tried to deduct the cost of practicing at the firing range to increase his firing accuracy. “When asked just how this was business related, he said ‘Well, when you [tick] off as many people as I do every day at work, you need to be prepared.”
No word on the profession of Dr. Weil’s client. I’m hoping he wasn’t an IRS auditor.
The Board of Directors
I’ve seen companies deduct expenses for some pretty lavish board meetings, but Tax-Free Wealth author and CPA Tom Wheelwright’s client pushed the boundaries even further.
“One of the craziest tax deductions we’ve seen is a client who thought their boat was deductible because all of their kids were on their board and the boat was always used for board meetings,” Wheelwright recalls.
Maybe I should incorporate, appoint my six-year-old as Vice President and deduct the cost of his Legos as an honorarium?
Dr. Weil shares another story of a client who reported very little income on her tax return, despite showing up to her appointment in a very expensive car.
“I had to ask some questions to make sure that all income was being reported,” Weil recalls. “After asking about any other income and getting a negative response, I said, ‘I see you are driving a new Maserati. How can one afford that on such low income?’ To which she replied, ‘It’s a charitable contribution. You see, my boyfriend is a much older man with a wife and family, so he gave me the car as a charitable gift, to make sure I remain charitable.’”
The Match Maker
I was delighted to learn crazy tax deductions aren’t limited to the U.S. Hannah Xu, a tax accountant and founder of Xceptional Consultancy in London, says one of her clients is a relationship expert. “One of his clients successfully found a partner and got married. My client was invited to attend the wedding, which required him to fly from London to India. He claimed his flight and accommodation and argued that the purpose of the trip to India was not for leisure, but to feature a solid case study for his business to attract more clients.”
The Road Warrior
Xu shares the story of another client who took his travel expenses too far. “In the UK, if you or your employees have to travel more than five miles to work on a client’s premises and you stay there for more than five hours, you are able to claim your travel and food expenses,” Xu says. “One employee drove around the same roundabout several times until he recorded enough mileage so that he could claim his travel and food expenses tax-free.”
The Uninformed Advisor
Unfortunately, sometimes the worst advice comes from the people you are paid to give it. Wheelwright worked with a client who got terrible advice from their former tax preparer. “They actually told the client that as long as he used money from his corporation to pay expenses, pretty much everything was deductible, whether or not it had anything to do with their business.”
Spoiler alert: That’s terrible advice.
Do you have any great stories to add to this list! I’d love to hear them!
Last night I was deep into one of my favorite pastimes – watching Instagram stories – when I came across a small business owner asking for tax advice. Like many small business owners coming up on another year-end, she was worried about her tax bill and wondering if there is anything she should do before year-end to lower it. Specifically, she asked whether she should spend money to lower her tax bill before the end of the year.
This small business owner had posed this question to her accountant, asking if there was a “sweet spot” for the amount of money she should spend so that she doesn’t have to pay too much in taxes. According to her story, the accountant answered yes, there is a sweet spot and more expenses are always better. But the accountant never told her where exactly that sweet spot is.
I sent her a short message with my thoughts on the subject, but because I know so many other small business owners and freelancers may be asking the same question right now, I thought I’d expand on it here.
Should I spend more money to lower my tax bill?
In a word: No.
Let’s consider a fictional scenario: Justin runs a small consulting business. He’s had a great year, landed several new clients while keeping the existing ones happy. Justin is concerned about his future tax bill, so like my friend above, is considering whether he should invest in his business before year-end to lower his tax bill.
The costs he’s considering include:
A new car (his consulting work has him driving his personal vehicle for business quite often)
A new laptop
Office supplies such as paper, pens, notepads and ink cartridges for his printer
Registration for an upcoming conference and airfare to travel there
If Justin came to me with this question, I would ask him what he NEEDS for his business today or what he will definitely be purchasing in the near future. Perhaps Justin is running low on office supplies and would probably put in a big order sometime in the next month anyway. In that case, if he has the money to buy the supplies now, it definitely makes sense to accelerate those expenses into 2017 so he can get the tax benefits now.
Likewise with the conference registration. Maybe it’s a conference Justin attends every year where he makes great connections that help propel his business to new levels of success. Buy those tickets!
But what if Justin’s current car and laptop are working just fine? He wasn’t really in the market for either a new car or a new laptop, but he’s considering buying them now just to lower his tax bill.
PUT YOUR WALLET AWAY, JUSTIN!
Some of you reading this may be saying, “That’s crazy! Who would spend money on stuff they don’t need just to avoid taxes?” But I can’t tell you how many times I’ve had clients in my office posing questions just like this.
When I worked in public accounting, we told our clients, “Don’t let the tax tail wag the dog.” In other words, don’t let the least important part of something control the more important elements.
If you’ve had a record year, first, celebrate! Then, face the fact that taxes are a cost of doing business. Paying taxes means you’re making money. Of course, we all want to do what we (legally) can to reduce the amount we have to pay, but spending money on stuff you don’t need is not the solution.
Plus, you don’t get a dollar-for-dollar reduction in your tax bill for every dollar you spend.
Going back to Justin, let’s say Justin is in the 25% tax bracket. For every $100 he spends, he’ll save about $25 in taxes. So Justin can go buy a $1,000 MacBook and save $250 in taxes, but unless he actually needs the MacBook, he’s probably better off keeping the $1,000 and just paying the tax. Don’t you think?
Smart ways to reduce taxable income
There are a couple of ways you can spend money to reduce your taxable income, while actually keeping the money for yourself. This includes:
Contributing to a retirement account such as a Traditional IRA, SEP IRA, or 401(k)
Contributing to a Health Savings Account (HSA)
Making an S-Corporation election
I’m not going to go into the nuts and bolts of an S-Corp election because it’s complex and it’s not the right decision for everyone – talk to your tax advisor if you’re interested.
But if you’re eligible to contribute to an HSA and if you haven’t already maxed out your contributions to your retirement accounts, you may be able to lower your federal income tax while keeping the money in your own pocket. It won’t be quite as accessible as it is in your business checking account, but it will be yours. That’s a smart way to lower your tax bill.
Disclaimer & disclosure: While I am an accountant, I am not a lawyer, nor do I know your individual situation. This advice comes from my personal and professional experience, but your circumstances could be very different. I recommend that you seek the help of qualified professionals. Also, some of the links included above may be affiliate links. If you click through and enroll or make a purchase, I may receive a commission. Thank you!