By John Wurts
By letting your creative juices flow, you can go the road less traveled and save money in the process. Here are tips for both high and low-income taxpayers.
Where you put a deduction on the tax return may determine if it will be deducted by only the state or by both the state and federal. For example, if you are working in a partnership, instead of putting driving, cell phone, and home office in Schedule A miscellaneous deductions, where it will only count for the state, put it as an adjustment to your K-1 income on schedule E, page two. This will not only subtract from both your federal and state income, but also reduce your adjusted gross income freeing up other deductions which may be phased out or eliminated by too high of an adjusted gross income, such as rental property, college tax credits, student loan interest and medical.
If you are a server paying taxes on tips, and you pay out tips to bartenders and busboys, subtract the tips paid out as a negative miscellaneous income which reduces your gross while still taking the full standard deduction.
If you have a huge amount of employee business expenses, such as an outside sales rep, or a long haul truck driver, form an LLC so all income and expenses are put on an LLC return where they will all count. Then still take the large standard deduction. As an added bonus, you get an extra deduction of qualified business income under the 2017 cut which only applies to “self-employed” taxpayers. As a W-2 employee, you would pay much higher taxes with the same income.
If you have been stiffed by your ex-spouse who has failed to pay court-ordered child support, you can write it off. This even applies to missed payments from many years ago. I have seen people who never knew it before write off tens of thousands of dollars using this bad debt deduction. Simply state the debtor’s name and amount owed and that the debt is uncollectable on schedule D of your tax return. The same holds true for any monies owed to you. Once you now determine the debt is uncollectable, it may be written off, no matter how long ago it was incurred.
If you sell stock that has been owned for a very long time and you don’t know (and could never find) the amount you paid for it, just remember the most beautiful word in the English language is “estimate.” The IRS will be told by the stock brokerage how much you sold it for, but if the broker cannot report the cost basis, the IRS will not have a clue how much you paid for it. If you inherited the stock (or for that matter, a house), your cost basis is the value it had the day the benefactor died. Get a real estate agent or a stockbroker to give you a written cost estimate as high as is reasonable.
If you donate clothes or goods to a tax-exempt organization (not a person), be sure to take digital photos first and make a complete listing. The things you donate are probably worth a lot more than you think. Always get a receipt and you can go online to see what Goodwill or Salvation Army considers current market value for everything now. You may be surprised.
If you are behind in taxes and have not filed in years, the best thing to do is get caught up as soon as possible so it is no longer weighing on you. The fed and state tax officials are easy to work with and you may not owe as much as you think. On the other hand, if you owe a lot and there is no way to ever pay it, relief is available by doing an “Offer in Compromise” to settle it. It is not unusual for taxpayers to eliminate huge unpayable tax bills for pennies on the dollar. Tax officials are reasonable and understand that it is better to collect a little than to collect nothing at all. By getting rid of the tax debt, you can get rid of tax liens and regain your credit score and life.
Even though the tax code is incredibly complex and difficult at times to understand, there is almost always a way to do it better. Where there is creativity, there is a way.
John Wurts has a tax office in Woodland Hills.