Most professionals can remember the experience of working with their first client. My first client thought the large capital losses I reported on her tax return must have been a gross error due to my inexperience as a fresh-out-of-college accountant.
She exclaimed that the losses were impossible because her husband, who had recently started to day trade, had told her all year how much money he had made.
When I patiently reviewed with them the losses on the statements from the broker, the husband had an explanation, “It is OK, honey. I only sell the losers.”
As the story illustrates, tax time is also a financial reckoning time for couples when they realize how much they actually made (or lost) and where all the money was spent. Just last week, millions of married couples were looking forward to stimulus payments they didn’t receive because their income exceeded the threshold.
Some spouses were surprised to find their combined adjusted gross income was over $150,000. They also found themselves asking each other, “Where did it go?”
Many couples also assumed that last year they saved money by not physically going to the office and that they could deduct the expenses of telecommuting. Instead, they found out that they spent more than they had thought on delivered lunches and that the home office set up and lunches were not deductible employee expenses under the new tax law.
Tax professionals often find that married clients act as if they are two single individuals who just happen to file together on one form. Once a year, the spouses come together and combine their W-2s, 1099s and their deductible expenses. The numbers are added together on a jointly filed return. Not much thought is put into coordinating what they are doing to reduce their tax burden during the year.
Instead of experiencing these surprises annually, what if you and your spouse became a tax-cutting team? Here is the truth about the challenges of cutting your taxes and an example of what you might be able to do to remedy it.
The truth is, there is not that much opportunity for tax planning if you and your spouse earn a wage or salary and if you do not have investments or a small business. If your taxes are based on a couple of W-2s, some bank interest on a 1099 and a 1098 for your mortgage, please do not blame your tax program or preparer if you owe.
There is no special trick or secret knowledge to reduce your taxes. The government changed the withholding tables a couple of years ago, so you have more in your check every pay period in exchange for a smaller or no refund at tax time. Many who routinely anticipated refunds now owe.
The standard deduction for married couples filing jointly, which is the amount you can claim instead of adding up and using your itemized deductions, is $24,800. As a result, less than 14% of taxpayers itemized deductions on their federal returns in 2019. So, unless you created tax planning opportunities by opening a small business or by investing, there is not much even the best tax professional can do to reduce your tax bill.
But all is not lost. You can create opportunities for tax planning with your spouse. Here is a good example.
Don, who is married to Melodie, makes a decent salary at a real estate investment firm. Melodie previously was a dancer but decided to stay at home with their two young kids. Since they took the standard deduction and their only income was Don’s W-2 and some bank interest, there was no opportunity for tax planning.
They often argued about Melodie’s expensive passion for health and fitness activities, and Don voiced concern for her safety at the gym. Melodie felt lonely not working out with others and expressed interest in providing personal training services. After much discussion and the required permits, they renovated their garage, where Melodie trains others. She also sells supplements and workout gear online.
Melodie’s hobby became a business. Her costs became deductible expenses, and she earned some extra income. Working together, the couple was able to support her aspirations and reduce their taxes.
To deduct expenses under IRS safe harbor rules as a legitimate business and not as a hobby, an activity must generate a profit in at least three of five years ending with the tax year in question. In other words, you can deduct a loss for two of five of your first years in business. But there is still a benefit even if you or your spouse only net $1 in income each year. The costs of the hobby were paid out of the business revenue and not from the household budget.
There is also a chance that you can make it big if you support the dreams of your spouse. Disney, Mattel, Amazon and many other companies started in homes and garages.
The first step to becoming a tax-cutting, wealth-building team is to set an appointment with a tax planning professional (and your spouse). Look for someone interested in individual and small business tax planning vs. just tax preparation or other services.
Ask for referrals from your other professionals or financially successful people you know and look at their website’s content. Seek out someone you can build a relationship with who has time for you. And please, do not be too concerned if they are on the younger side.
By the way, my first client, 30 years later, is still a client and dear friend. He no longer day trades.
Michelle C. Herting, CPA, ABV, AEP, specializes in most things related to trust and estate taxes, gifting, and succession planning. She has three offices in Southern California.
from Irvine Business Signs https://ift.tt/3rp6KYY
via Irvine Sign Company
from Irvine Business Signs https://ift.tt/3ddnmhp
via Irvine Sign Company
Why married couples should be a tax-cutting team was originally posted by Local Sign Company Irvine, Ca. https://goo.gl/4NmUQV https://goo.gl/bQ1zHR http://www.pearltrees.com/anaheimsigns
No comments:
Post a Comment