Most professionals can remember the experience of working with their first client. My first client felt that the large capital losses that I reported on her tax return must have been a gross mistake because I had no experience as a new accountant.
She exclaimed that the losses were impossible because her husband, who had recently started day-to-day business, had been telling her all year round how much money he made.
When I patiently checked the losses with them on the testimony of the agent, the husband had an explanation: “It's okay, honey. I only sell the losers. "
As history shows, tax time is also a financial settlement time for couples when they realize how much they actually made (or lost) and where all of the money was spent. Just last week, millions of married couples looked forward to stimulus payments that they didn't get because their income exceeded the threshold.
Some spouses were surprised to find that their combined gross adjusted income was over $ 150,000. They also asked each other, "Where did it go?"
Many couples also assumed that they had saved money last year by not physically going to the office and that they could deduct the cost of teleworking. Instead, they found that they were spending more on lunch delivered than they thought they would, and that setting up the home office and lunch were not deductible employee expenses under the new tax law.
Tax professionals often find married clients pretending to be two individuals who happen to submit on a form together. Once a year the spouses get together and combine their W-2, 1099 and their deductible expenses. The numbers are added up for a jointly submitted return. Not much thought is given to what they are doing to reduce their tax burden over the course of the year.
Instead of experiencing these surprises annually, what if you and your spouse became a tax cut team? Here is the truth about the challenges of lowering your taxes and an example of what you could possibly do to correct it.
The truth is that when you and your spouse are earning a wage or salary, and when you don't have investments or a small business, there aren't that many tax planning options. If your taxes are based on a couple of W-2's, some bank interest on a 1099 and a 1098 on your mortgage, please don't blame your tax program or your tax advisor if you owe something.
There is no particular trick or secret knowledge to lower your taxes. The government changed the withholding tax tables a few years ago so that you have more on your check each pay period in exchange for a lower or no tax time refund. Many who routinely expected refunds now owe it.
The standard deduction for married couples filing together. This is the amount that you can claim instead of adding and using your individual deductions is $ 24,800. As a result, fewer than 14% of taxpayers included deductions on their federal returns in 2019. So, if you haven't created tax planning opportunities by starting a small business or investing, there isn't much that even the best tax professional can do to reduce your tax returns.
But all is not lost. You can create tax planning opportunities with your spouse. Here is a good example.
Don, who is married to Melody, earns a decent salary at a real estate investment firm. Melodie was previously a dancer but decided to stay at home with her two young children. Since they were taking the standard deduction and their only income was Dons W-2 and some bank interest, there was no way of doing any tax planning.
They often argued over Melody's expensive passion for health and fitness activities, and Don expressed concern for her safety in the gym. Melody felt lonely when she was not working with others and showed an interest in providing personal training services. After much discussion and the necessary permits, they renovated their garage, in which Melody trains others. She also sells supplements and exercise equipment online.
Melodie's hobby turned into business. Her expenses became deductible expenses and she earned additional income. Together, the couple were able to support their endeavors and reduce their taxes.
In order to deduct expenses as a legitimate business rather than a hobby under the IRS Safe Harbor Rules, an activity must be making a profit in at least three out of five years ending in that tax year. In other words, you can deduct a loss for two out of five of your first few years in business. But there is still a benefit even if you or your spouse are only making net income of $ 1 each year. The cost of the hobby was paid from the business income, not the household budget.
There is also a chance that if you support your spouse's dreams you can make it big. Disney, Mattel, Amazon, and many other businesses started out in homes and garages.
The first step in becoming a tax cut and wealth creation team is to schedule an appointment with a tax planner (and your spouse). Look for someone who is interested in tax planning for individuals and small businesses, rather than just tax preparation or other services.
Seek recommendations from your other professionals or financially successful people you know and look at their website. Find someone you can relate to and who has time for you. And please don't be too worried if they are on the younger side.
By the way, my first customer, 30 years later, is still a customer and a dear friend. He no longer trades during the day.
Michelle C. Herting, CPA, ABV, AEP specializes in most things related to trust and estate taxes, gifting, and succession planning. It has three offices in Southern California.