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Which Clients Legally Pay the Least Taxes?

Jun 20th 2019
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In six previous columns, I explained how I use “tax tidbits” to enliven conversations when talking taxes with clients or speaking to groups like retirees and self-employed individuals. The tidbits discuss amusing court decisions and tactics that trim taxes. I mentioned several that interested clients and audiences.

Below are few more that I would like to share with you.

Clients often ask me questions like:

Q. The settlement costs for my new home included transfer taxes. Are those deductible?

A. While there’s no current deduction, the law allows you to add them to the cost basis of your home for the purposes of determining gain or loss on a later sale.

Q. I had an out-of-town assignment for three weeks. It cost more for me to come home each weekend than it would’ve to stay over, but my company only paid what the cost of room and meals to stay would’ve been. Will the Internal Revenue Service allow me to deduct the difference?

A. No.

Help from the IRS. For detailed information, go to irs.gov for Publication 463, “Travel, Entertainment, Gift and Car Expenses.” Publication 910, “Guide to Free Tax Services,” lists all of the agency’s publications.

Q. What are letter rulings and private letter rulings?

A. They are written statements by the IRS in response to taxpayers’ requests for guidance. They apply the tax laws to specific sets of facts.

Ronald W. Reagan on income taxes. President Reagan stood out for his ability to make complicated subjects understandable. Mr. Reagan particularly liked to poke fun at the shortcomings of our modern tax system.

For instance, he alerted future taxpayers to what awaited them in a talk to students at Northside High School in Atlanta, Georgia, on June 6, 1985: “If our current tax structure were a TV show, it would either be `Foul-ups, Bleeps and Blunders,’ or `Gimme a Break.’ If it were a record album, it would be `Gimme Shelter.’ If it were a movie, it would be `Revenge of the Nerds’ or maybe `Take the Money and Run.’ And if the IRS ever wants a theme song, maybe they'll get Sting to do `Every breath you take, every move you make, I'll be watching you.’ "

Four years earlier, Mr. Reagan stayed on message at a joint session of the Canadian Parliament in Ottawa on March 11, 1981: “The American taxing structure, the purpose of which was to serve the people, began instead to serve the insatiable appetite of government. If you will forgive me, you know someone has once likened government to a baby. It is an alimentary canal with an appetite at one end and no sense of responsibility at the other.”    

Health insurance deductions for self-employed individuals. Medical expenses aren’t entirely deductible. They’re usually allowable only to the extent that they exceed 7.5 percent of adjusted gross income. While that's a high hurdle that few healthy people can meet, the law allows self-employed individuals to deduct 100 percent of what they spend on medical insurance premiums (including qualifying long-term care coverage) for themselves and their spouses and dependents. This deduction doesn’t reduce self-employment income for the purposes of calculating self-employment taxes.

Subtractions that add up. When Form 1040 time rolls around, overlooked write-offs can cause you to pay more taxes than legally required. Even small deductions can add up to surprising savings. Yet, year in and year out, millions of Americans routinely fail to claim perfectly legal deductions, thereby needlessly enriching Uncle Sam. What is the main reason people miss deductions? Poor recordkeeping. Who trims their tax tab to the legal minimum? The folks who keep the best records.

Look for more tidbits in three subsequent columns.

Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 300 and counting). 

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