Happy New Year to one and all! Here’s hoping that everyone has the best year they have ever had.
OK, now that the niceties are out of the way, let’s ruin the year with talk of taxes. Just kidding – we are not going to ruin your year at all. In fact, we hope you might get some novel ideas that can help you file your tax return with novel deductions.
Most of you know that some deductions can be taken to arrive at Adjusted Gross Income while some have to be taken as Itemized Deductions. Itemized deductions are advantageous if they exceed the Standard Deduction the IRS already allows and typically include medical costs, taxes, contributions, home interest and a host of other deductions.
Where is as Important as When
Tax preparers understandably spend a lot of planning time around the question of when to execute a transaction or make a deductible payment. After all, if you don’t spend the money by the deadline, you won’t get the deduction.
Where you take a deduction can be as important as when. Let’s look at an example. We all know that contributions to a charitable organization are deductible as Itemized Deductions. So when the development director of your local United Way asks for a contribution to help sponsor the Annual Campaign Dinner, you have no problem providing a $1,000 donation as a Silver Sponsor.
Before you record that donation as a charitable gift, though, think about what you are really getting for your money. Do you get any meals out of it that you can use to entertain your top customers? Perhaps you get special listing as an event sponsor and nothing else. Maybe you get a combination of both or neither. The distinctions are important.
If all you receive as a result of your sponsorship is recognition for your business in the dinner program and signs around the room, then you should consider the payment to be a deductible business expense. If you are self-employed, this will allow you to reduce your income and self-employment taxes. As an itemized deduction, you will only get a reduction in your income taxes. This one simple reclassification will save you $125 in taxes – and it’s legal.
It’s Not Deductible – But Are You Sure?
Let’s take an example of a seemingly non-deductible expense that was held to be deductible. In most instances, cosmetic surgery aimed at enhancing one’s appearance is a personal expense that is not deductible. The exception would be reconstructive surgery.
In a case out of Texas, an exotic dancer underwent surgery to insert breast implants. Her reasoning was that the implants would enhance her income earning capacity. She reflected the cost of the surgery as a business expense on her tax return. The IRS denied the deduction, but the Tax Court found in her favor, citing her own testimony that she would gladly take them out after each performance if she could.
Many Americans are under the impression that there is no way to beat the IRS. In many ways, that is true. On the other hand, the current law is written broadly enough that there are sometimes openings to save taxes legally by looking deeper at the essence of a transaction. By looking at an expenditure for its primary purpose and for what was received as a result of the expenditure, taxes can be saved. Just because the IRS does not specifically state an expense is deductible, don’t assume you shouldn’t ask us about it. The worst we can tell you is that the expense is definitely nondeductible.