Life in the accounting business can be difficult at times. Clients are as close to friends as you can get without actually being friends. You know all the details of their private lives. I know a divorce is imminent many times before the spouse does. I get details on illnesses in the family. I have to. Part of the tax preparation process is to know your client. When you ask about medical expenses you get the details too. In Wisconsin we have a deduction for certain private school tuition. When I ask about the kids I get the low-down on little Billy. And I don’t mind one bit. I care about my clients so I listen and interact. The line between client and friend is thin indeed.
That is why it bothers me when I can’t communicate a message to a client. Try as I may, some clients could care less about their taxes. They are willing to overpay their taxes to get out of all the reporting. They don’t understand the amount of money left on the table.
A few weeks ago I emailed a client reminding them to verify their retirement contributions and to provide a log for business miles and business overnight stays. To be honest, I didn’t expect a response. They are awesome clients and I love’em to death, but they just don’t engage at the level I would like and it bothers me because it is costing them dearly.
To my delight, the client did respond with a promise to begin building the logs and verified the retirement contributions for the year. I was still skeptical I would see logs. A few days ago I was sent the logs and they are in excellent order. Mrs. Accountant had to bring out the paddles and revive me; I was already walking into the light. The logs provided should save several thousand dollars in taxes. Life is good because I did my job well.
Anyone for a Game?
I come up with some pretty wild ideas to save taxes. Some of the ideas never see the light of day as research kills the poor sucker. But every so often I have a moment of brilliance (if I don’t say so myself) that endures the vetting process.
Many ideas I have outlined throughout this blog. I have a post in the queue on how to collect on the Earned Income Credit even if you make too much to qualify. The research is going really good so far. If the idea survives I will share it shortly.
I get giddy when ideas hit me. I lose myself as I think the idea through and write it down. The research is an addiction I have to satisfy. Sometimes the idea almost seems too good to be true; sometimes it is. Then there are times when all I need to do is make a few adjustments to put the tax reducing strategy into action. I can’t wait to write a blog post about it and tell affected clients the exciting news.
For me taxes are a game. The rules of this game are incredibly complex. Every so often they change the rules of the game just to keep it interesting and keep me on my toes. Taxes are NOT boring! This is the best, more enjoyable, game ever played. The government wants a percentage of your money. Your job: keep as much as possible within the rules of the game. (Cheating and ending up in jail means the government took their ball and went home—you can’t play anymore.)
The nice thing about the tax game is you can play as much or as little as you want. I like to play more often than average, hence my choice in career. You don’t have to be a tax game fanatic to enjoy a nice game of “pay the government less”. A small investment in time researching and talking with your tax advisor can yield significant rewards.
The rules of the game are long and complex, but anyone can play. In fact, the government insists you play! I have no reason why.
Collecting your information is the first step to playing the tax game. Excel spreadsheets (or Google Docs) are a great way to organize data. A log book is also important if you are in business and spend time on the road. My client above kept a record of his trips so overnights were easy to calculate. He also kept a log of his business trips so mileage was easy. I recommend a simple pocket calendar to record this type of information. You can transfer the data to a spreadsheet at a later time if desired. Many pocket calendars cover two years. Get a new calendar each year anyway. Keep each annual calendar with that year’s tax records.
Form over substance. I say it ad nauseam. If your forms are in order you win. If you don’t keep good records, no matter if you would otherwise qualify for a deduction, you lose. Remember: form over substance. Keep good records. The IRS only believes verifiable documentation. Me, too. There are ways to reconstruct a tax return without records, but it is not a preferred method and it leaves you open to serious IRS scrutiny.
The tax game can be fun at this most basic level too. A simple spreadsheet showing your overnights so I can deduct the per diem and the mileage makes it easy to see how much you have lowered your taxes as you go. Are you starting to see why this is a fun game? Let me point it out. You get paid to play the game! Just think of all the fun you will have keeping track of your finances. It will be easier than ever to reduce and eliminate debt, reach financial independence, achieve goals, and enjoy life. Good records helps you keep more of your money! What is more fun than that? (Put your hand down, John.)
Once you have good records you can get serious about playing this game. Using the data you produced it is easy to calculate your maximum retirement plan contributions. You can plan around the Affordable Care Act, Earned Income Credit, education credits, and the Saver’s Credit. All these credits are based upon income. You can use your records to know what steps to take to minimize your tax liability. Fun!
Give Your Accountant a Coronary
A small percentage of clients have records to die for. One client I have served for a few decades now brings in records so good he has details on every stock he has ever purchased. When the 1099-B is wrong he has records to back it up. It is so easy to fix on the tax return. But he and his wife are the exception. You can count on one hand the number of clients I have who know the basis in the stocks or mutual funds they hold. They just trust 1099-B which is usually correct. Usually.
Frequently people bring in records in a somewhat acceptable form. The problem stems from a lack of understanding of tax law. Things are mixed and jumbled. It has the feel of a weekend cram session gathering all the tax records. Not a good plan if you want to reduce your tax liability.
Recordkeeping is a year-round activity. Put all expenses on a credit card (and get cash-back or travel rewards) or debit card for easy recordkeeping. At least you have a record in one place and it’s convenient. Some receipts are required; others are not. Meals under $75 don’t need a receipt, but need a record (date, cost of meal, and business purpose) in your logbook or QuickBooks. Meals and incidentals for overnights can be handled with the per diem, currently $57 per overnight ($68 for high-cost localities). Hotel expense requires and actual receipt for business owners. Mileage is another great way to reduce the tax bill. Business miles are deducted at $.54 per mile as I write. It adds up fast.
Bringing clean records to the accountant will either bring a tear to her eye or cause heart palpitations, probably both. Clean records are the low hanging fruit in this game. When your tax professional asks for something, give it to her. She asked for a reason. I have said it before and I’ll say it again. It is a good idea to talk with your accountant outside tax season. It is also a good time to review your records year-to-date. A short consultation should save you many times what you pay your accountant. And besides, the accountant needs income in the summer too.
I like to tell a story and then come full circle at the end with something witty. Not today. Taxes don’t have a witty ending. They go on, and on, and on. And on. Periodically we file tax reports, but the process is ongoing. When you die there is a tax mess to still clean up. Consider it job security for Keith. Good thing I love my job.
My goal today was to convince you to keep good records so I can do my job well and to encourage you to turn taxes into a game. Everybody likes a good game. When you reframe your mindset on taxes it makes it easier to maximize the benefits and enjoy the process.
Paying taxes is the unfun part. The only way to reduce the unfun stuff is to turn the whole process into a game and work it to death. Literally. You, know, the estate tax. Work it to death. No. Not a witty enough end? Maybe next time.
Monday 28th of November 2016
Last year I looked over my fiancee's previous tax returns that I could still file a 1040-X - and was able to get here an additional $160 by changing an education tax credit to an education tax deduction (which is normally not the way to go), lowering her income enough to "double" deduct her 401k.
Monday 28th of November 2016
I love it, Joseph. Thinking in nontraditional ways can lead to some nice tax savings.