I was reading an article last week about crazy things that people do on their tax returns. The article was a CPA sharing some of the more humorous stories from the past few years. I thought I’d share a few with you as well as my thoughts.
The first was about clients who want to claim excessive vehicle expenses. Americans tend to have a love affair with cars, and there have been some “incentives” in the past to stimulate the economy by purchasing large vehicles. I put “incentives” in quotes because it always makes me laugh that someone would spend large amounts of money on a vehicle in order to save some money on taxes, but perhaps paying less to Uncle Sam IS one of the best ways to stimulate the economy. One client was a doctor who asked his accountant if his new large SUV could be considered an ambulance!
Closely related is the client who wants their ski condo to be a “second office”. Paying the mortgage or even the condo fees through your business is a sure way to get the IRS looking very closely at your entire tax return.
There were several stories about professionals who make bad investments, and then want to write off the losses. Typically, these involve some reasonable sounding scenario in which a start-up company is going to exploit a new technology or a new trend. These clients never seem to recognize that legitimate start-up companies go through large investment firms to obtain financing. If a spokesperson for the company calls you and offers you a special opportunity to “get in on the ground floor”, you should probably be very concerned.
Personal investments fall under the category of capital gains and losses. Gains are obviously good in any investment, but for tax purposes losses can only offset gains, or if losses exceed gains, then the deduction is limited to $3,000 per year. If the losses are taken inside retirement accounts, then no tax benefit is achieved. It never ceases to amaze me how clients that are concerned when the stock market is down 10% will take a 100% loss on a risky investment and just shrug it off.
Turning your hobbies into a business might be a favorite theme of the books on the business best-seller lists at your local Barnes & Noble, but the IRS looks suspiciously at such tax deductions. One client (in this article, not one of mine) wanted to deduct the costs of his new business, which was arranging for tours to see Grateful Dead concerts. The client wanted to deduct the costs of traveling to and attending 42 concerts that year, but had not obtained a single paying client hiring them as the tour guide. Needless to say, the CPA was not thinking that was a great idea.
One more scam out there is the “business consultant” who, for an upfront fee, will tell you all the ways to save money on your taxes “that your accountant doesn’t know about”! If you pay their fee, they’ll propose a bunch of ways to spend money that don’t work, or that will make you much more likely to have an IRS audit. Most of the tax savings you achieve will come from the deduction you get for their fee.
We all want to pay less in taxes, and this time of year I enjoy seeing my clients who do good tax planning pay less than they would otherwise. But taking deductions that are not legit, or spending money unwisely just to save a portion of that spending on your taxes, is not what we’d call good planning.
Daniel Cook, AIF®, CFP®
Chief Financial Officer