I have been getting several questions lately about tax write offs. In my inbox this morning I had a great question that made me take things back a few steps. It was

“I have been hearing all about tax write offs lately and I think I am missing something. I ended up paying a lot into my taxes this last year, mostly because I just started a new job as an engineer last year so I made a lot more money. How can I save more on my taxes and what exactly is a tax write off?”

This is a great question and I figured I would just create a post to answer it.

A tax write off can be a difficult parts of filing taxes for the average person because many do not understand exactly what it is and why they should take advantage of it. In definition, a tax write off equates to a deduction in your gross income that comes from an expense that you incurred. So the end result is the tax write off will reduce your total income, thus lowering your total tax liability.

So basically you pay less to the IRS and you get a bigger tax return.

Sometimes you may here the term tax deduction used in place of the words tax write off, these are the same thing.

Tax write offs are more of an incentive than anything put in by the federal government to encourage the action. The average major company regularly donates large sums of money to charities and different organizations just for the benefit of a tax write off, there might possible be some good nature in there as well. The government also puts in place numerous opportunities for businesses and individuals like you and me to lessen the amount we have to pay in taxes in the form of write offs.

These tax deductions are not only for the wealthy, they are for everyone. It is just that the wealthy can afford to pay for a lot more tax advice to help them save more than the average taxpayer; they also have a bigger incentive to do this. The process of tax write offs are there for every taxpayer including those in lower and middle class. There are hundreds of tax deductions in which you may be entitled to.

In order to find out exactly what tax deductions are available for you, I strongly recommended that you consult your attorney or any tax professional. You cannot just take your friends word on it, because a legitimate tax write off for one person may not work for you. Although talking with friends, colleagues, and others that may be in a similar place as you about taxes in general can be great. I have learned so much from just talking to people about taxes that I am then able to take and better to talk to my CPA about.

If you have a quick question on tax if a deduction would work for you or not you can always call a local CPA, most of the time for free. But if you are like the reader that I noted above and you are starting to pay a lot more in taxes it is probable time for you to sit down and really go over things with a CPA. This may cost you a bit, but I am sure you will end up saving more than you pay in the end. Some CPA’s will be more than happy to give you free advice in hopes of being able to then help you more with your taxes. You do not always need a CPA, but they do provide good advice.

The start of a year is the best time to familiarize yourself with deductions available to you. If you wait until the end of the year or worse yet until a few weeks before the tax deadline you will be most likely out of luck. If I tried talking to my account about in depth tax deductions at the end of March or beginning of April, I would probable hear back from her sometime in May.

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File Early

The IRS doesn’t begin processing tax returns until January 30th of each year. However, once the opening filing date arrives, the sooner you are able to submit your return to the IRS the sooner you will receive your tax refund.

As most taxpayers will procrastinate (more often than not I am one of these people), putting off filing their tax return until the last minute and swamping the IRS with millions of returns at once, the closer you come to the tax filing deadline before you file your tax return the longer it will take the IRS to process your return.

To get your tax return as quickly as possible, make out your return, and any required schedules, as soon as you are able to pull all the necessary documentation together. That way you will be ready to submit your tax return to the IRS on January 30th. Those who submit early when the Internal Revenue Service are not as busy end up getting their returns the quickest. But for the rest of us this is not a reality, there are just to many peaces to some returns that make filing on January 30th impossible.

Check for Accuracy

Go over your tax return with a fine-tooth comb before you submit it to the IRS. Double check every line on each form and schedule for accuracy, as any mistakes can slow down your refund. While the IRS reviewers will usually be able to correct small mistakes, such as math errors and copying dollar amounts from your W-2 or 1099 forms incorrectly, inaccuracies can slow down processing time. Larger mistakes, such as omitting Schedule C or forgetting to sign your return, will result in the IRS contacting you to have the mistake corrected before they can process your return and issue your tax refund.

Filing and Refund Methods

While many taxpayers still prefer going with the old-school filing method of mailing in the paper forms and having the IRS send a refund check, filing your tax return electronically can help you get your refund sooner. Additionally, taxpayers also have the option of having the IRS submit their tax refund electrically, via direct deposit, which can cut the time it takes to receive your refund by as much as 10 days. Some taxpayers are actually required by law to e-file. If you file paper forms you can send your return to the IRS before the January opening filing date, but the IRS will not begin processing it before January 30th. It can take up to 48 for the IRS to accept your tax return when filing your return electronically

According to the IRS, it generally takes about 3 weeks to receive your tax refund after you submit your tax return, but the wait can be as short as 10 days for early filers and as long as 12 weeks for those who wait until the last minute. Other delays can include technical difficulties at the IRS, such as computer issues, or an audit of your return. The quickest way to receive your tax refund is by e-filing your return and having the IRS issue your tax refund via direct deposit.

Tracking Your Return

Taxpayers can call the IRS Refund Hotline at 800-829-1954 to check the status of their tax refund. However, the IRS has created an easy-to-use online tool so you no longer have to wonder “Where is my tax refund?” Taxpayers only need to go the “Refund Status” page on the IRS Website and type their information into the “Where is My Refund” tool. Status updates are posted every 24 hours, so you will only need to check the status of your tax return once a day. The IRS also offers the option of checking your tax refund status with the IRS2GO smartphone app. You should keep in mind that it can take up to 5 business days after the IRS has processed your return to receive your refund through direct deposit, or longer if the IRS is sending you a refund check through the mail.

So don’t fret too much, you know the Government is good for it. So what is the longest you have ever had to weight for your tax return?

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There are your common tax deductions and then there are others. The ultimate goal when doing your taxes is trying to minimize  the amount of money that you give up to the government and with that in mind some people get pretty creative to say the least. Check out the article I wrote on some of the weirdest tax write offs for some good examples of people trying to go a little too far in minimizing there tax burden. Of course we would all hate to overlook a tax deduction. But then we come to those legitimate tax write offs that just sound crazy. I have several friends that I have talked tax strategies with and some of the deductions that have told me about are definitely more adventurous than I will ever be. But along those lines take a look at this list of the nine craziest tax deductions people were allowed to take.

1. Cat Food

2. Heated Swimming Pool

3. Gambling Losses

4. Clarinet

5. Huge Stash of Illegal Drugs and More

6. Very Large Breast Implants

7. Wrecked Car After Too Many Drinks

8. Sex Change Operation

9. NBA Fine

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Below are the most overlooked tax deductions.

1. Sales Tax: We begin with this strongly overlooked tax break, the state sales tax. A few states do not collect an income tax (Florida, Texas, and Washington to name a few). For people living in a state that does not collect income tax, it would be wise to claim a sales tax deduction. Most states allow the citizens the choice between the income state tax and the state sales tax. Without that choice, it would be smart to go with the sales tax over nothing. An income tax is likely higher, making room for a sensible write-off in the state sales tax for these key states.

2. Charity: Many do not write-off their charitable donations. For one, it may make them feel guilty as they are likely not donating because of any monetary benefit. But it is allowable by law, and a major money saver if you are a giver. Some people even give to charity out of their paychecks every week in an automated process they are largely unaware of. Throughout the course of the year these donations may seem small but they add up, so don’t overlook them.

3. Child Dependent: You would be surprised by how many people miss this obviously huge deduction. A child is expensive to care for, and the government offers relief for those who have one. This comes in the form of a $2,100 deduction, an amount that can substantially save you come tax season. Do not forget individual child related deductions. Summer camp is a big one that can be deducted, and forgotten often.

4. Tax Preparation Fees: You may have all your information gathered, and you are now prepared to get them filed. What many people do not realize is that, yes, you can write-off any expenses you pay in filing your taxes. This may seem counter-intuitive but make sure that as a professional is handling your paperwork, you or they check off the amount that it is costing you to have your paperwork handled!

5. Volunteer: When it comes to charity, many people will deduct physical costs, such as the slip of paper they get after donating to Goodwill. But they often overlook any amount spent while actually volunteering. A big ticket item here is the gas you spent volunteering. At 14 cents a mile, you have a great opportunity to write-off any expenses related to your trips to and from your volunteer work.

6. Unemployment: I am often asked, do you pay taxes on unemployment? Over the last few years it seems all we hear about unemployment in America every day in the news. Unemployment has touched all of us, whether it has been you personally, family, or a friend it seems we can all name at least one person who has had to deal with this. But when it comes to finding a new job you can deduct any expenses you procured while actually looking for a job. This includes gas expenses built up while driving to the job fair or paper expenses established while printing out resumes. Unemployment is tricky and precarious to manage in your home life, but there is that mild tax benefit to look forward to. But there are a few specifics you must understand. The expenses must exceed 2% of your gross income of that year, otherwise it is considered too marginal to actually qualify. The deduction only includes job expenses for finding a job that is already in your line of work, and the expenses are directly related to your job search. No writing off McDonald’s tax receipts or that smart phone you bought to download apps for, um, finding your new job.

7. Previous State Tax Liability: if you paid state tax liabilities last year, you are up to deduct these expenses in your new form. This could be a doubling up, and a substantial write-off for those who paid high liabilities last year.

8. Alimony: Unlike child support, alimony expenses are tax deductible. This means that there are ex-spouses out there missing out on a fantastic tax write-off each and every year.

9. Moving: Deducting you moving expenses can really add up. If your new job is at least 50 miles away from your previous location, you can deduct any expenses in dealing with this transport and move. Of course, the reason for the move has to be related to work. You cannot move to that amazing place you dreamed of just for the sake of moving. These expenses are overlooked and can be extremely beneficial and add up quick for those who went through this situation.

10. Gambling: If you went through a bad gambling streak last year, you can always counter those “expenses” against any winnings you had. If your gambling record breaks down to a $10,000 loss for the year, you have a deduction that is sizable. Of course, no one wants to promote gambling or lose any money doing so, but there is that little tax break quirk that very few know about beyond consistent and heavy gamblers.

Taxes are confusing, constantly changing, and can leave unaccustomed filers confused and frustrated. But with the above points, you may find yourself with a checklist of deductions you totally missed. Many individuals file their taxes, and totally miss substantial deductions that they were simply unaware of. Take advantage of the long list of tax deductions that the government allows, and honesty is the best policy in maximizing your tax write offs fairly and legitimately. You will find plenty of savings without resorting to cheating.

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You read that right, there is a provision in the Florida tax code that provides a significant tax break for people who want to rent a cow. This has got to be one of the strangest tax loopholes I have heard about. You may get excited about the prospect of saving a considerable amount of money this way, especially for all of you cow lovers out there, though you should know that it only applies to certain types of land such as commercial property. Anyone who owns commercial real estate can take advantage of this law, but unfortunately it does not apply to residential property.

When the law was created in the mid-twentieth century many new developments existed, and law makers where pressured to find ways to protect agricultural land from unscrupulous land owners. Of the many strange laws that where enacted, the rent-a-cow one is definitely on the bizarre side.

There are some pretty strange laws that exist, but in terms of the ones that effect someones ability to save money, this is high on the list. The state of Florida losses hundreds of millions of dollars a year because of law like this, and many famous people take advantage of that fact. Simply put, if cows are put on the land to graze, these individuals can save a considerable amount of money each year and do so in a way that is completely legal, as strange a that may be.

The law was put into place originally to help protect farm land from greedy real estate owners. Any purchase of this land by people who only intend to use it for buildings can hurt the local economy and damage property values. Many prominent individuals and corporations use it to save a large amount of money. Walt Disney is saving $1.5 million each year from utilizing this tax break. Senator Bill Nelson saves $43,000 by having six cows on his property. There are many others who take advantage of this as well, after all wouldn’t you save that kind of money if you could? But in the end this is hurting the government and the taxpayers of Florida who are not able to take advantage of this, which I bet is the majority. There are good tax deductions like the mortgage tax deduction, then there are the bad deductions that only the ultra rich can take advantage of, like this one. This is a tax loophole that the government needs to end.  If you are interested in learning more go here.

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1. A New York lawyer tried to write off over $110,000 he spent on porn and prostitutes, claiming it was part of the medial treatment he needed for his osteoarthritis. The IRS was neither aroused nor amused. They pointed out that prostitution was illegal in New York and his deductions were rejected.

2. A rock band listed over $100,000 in drug expenses as a travel and entertainment expense claiming that recreational drugs are an important part of their normal ‘ necessary and ordinary expense.’ However their accountant pointed out that illegal drugs are not a deductible expense. So neither illegal drugs nor sex with prostitutes is an acceptable deduction to the IRS.

3. Another tax payer who was losing money on his business paid an arsonist $10,000 to burn down his furniture store. After collecting a huge insurance settlement, the business owner attempted to write off the $10,000 as a business expense. The businessman was audited and he admitted what he had done. The company was fined $6,000 and both the business owner and the arsonist were arrested.

4. A businesswoman tried to write off the expenses associated with feeding and clothing her child. She had used the child in some of her advertising and claimed the $26,000 she had spent on taking care of the child was a business expense. The IRS disagreed. They allowed her to deduct only the cost of the photographer and the outfits the child wore in the ads.

5. Pole dancing isn’t a legitimate business expense unless you are a stripper. This is essentially what the IRS told a businessman who tried to write off the $800 his wife spent on pole-dancing classes as an entertainment expense. I am sure it was excellent entertainment for the businessman but the IRS did not see how this was tied to the business.

6. One businessman took his entire family to Hawaii to celebrate his daughter’s 16th birthday then tried to write it off as a business expense claiming it was a family owned business and this was employee entertainment. The IRS rejected this one pretty quick.

7. Another businessperson attempted to write off a Brazilian vacation as a business trip because he purchased some spatulas for his painting business while there. Although you can write off tools of the trade and business trips, the IRS did not seem to think that he really needed to go to Brazil for the spatulas. In the end he was able to deduct the spatulas he purchased, but not the trip.

8. Maybe he had been getting high on his own supply, but a marijuana dealer filed his tax return claiming the cost of running his marijuana business as a business expense. The IRS had not been smoking pot. They denied his deductions and the government arrested him and seized his assets.

9. Another businessman tried to write off the cost of his daughter’s wedding as entertainment for his clients because several of them were at the wedding. His claim was categorically denied.

10. One person claimed the cost of a new tattoo as a medical expense. Unfortunately the IRS did not view it the same way and denied it claiming that this form of self-expression was a completely optional procedure.

11. Another person claimed the cost of their fallout shelter as ‘preventative medicine’. The auditor did not see it the same way.

12. One man in Fresno, California attempted to claim his hair transplant as a medical expense. This was quickly denied, but I hope the auditor at least commented on his nice new hair.

13. And then there was a woman from Dallas who was furious when she was told that her $14,000 breast augmentation could not be listed as a business expense. Then later said that the only reason she spent that much was because she was sure it would be a tax deduction.

Ending on a Win, albeit an interesting one.

14. The IRS also denied the claim of a Massachusetts man who wanted a deduction for his sex reassignment surgery. However, the U.S. Tax Court ruled in 2010 that the man who had a sex change to become a woman should be allowed to deduct the $25,000 he paid for the sex-change operation.

Still every tax payer would be wise to heed the age old saying that goes,

‘Don’t mess with the IRS’

Nobody wants to get an IRS audit, but it does occasionally happen even for some non crazy stuff like when when Jeremy was audited by the IRS. There are a lot of good tax write offs that you should take advantage of, but I would consult with a tax professional and have them prepare you taxes for you to avoid the headache of dealing with the IRS, especially if you have some interesting things to write off.

H&R Block

TurboTax

Here is some more information on how to file your taxes online for free, as well as more on using H&R Block or TurboTax.

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You could take your tax refund and buy some of the newest electronic gadgets with it or put it towards your dream vacation to Aruba. Your other option is to do something smart with your money that will eventually allow you to do these things many times over in the future. After all, this isn’t free money. It’s simply extra money you paid the government that you’re finally getting back, so blowing it on something frivolous may not be the wisest decision. While it’s always nice to treat yourself, if your financial house isn’t completely in order, here are a few ideas for how to spend your tax refund this year.

Pay Down Debt

One of the reasons that you never seem to have cash when you want it is because you tie your money up by paying credit card bills each month. Just lowering the balances you owe on your credit cards will lower your monthly payments and free up more money. If you have enough of a tax refund to pay off some of your credit card debt, then do that first.

After that, you should apply the rest of your refund towards paying down the cards with the highest interest rates. Those high interest rates mean that you are paying more to finance your card than actually use it. Paying those cards down will put a big dent in your debt. Think of it this way. If you have a credit card with a $2,000 balance with a rate of 20% and you’re only making the minimum payment each month, paying that balance off with your tax return essentially gives you a 20 percent return on your money. Where else will you find that kind of return on your investments?

Put It Into Savings

When the car breaks down, most people reach for the credit card to get it fixed. The endless cycle of paying down debt and then running it back up costs you a lot of money in service charges and interest. To stop that cycle, you need an savings account you can access to pay for repairs and other things when your paycheck is not enough. It’s called an emergency fund for a reason.

Start a savings account with your tax return and then add a little to it each time you get paid. After a while, the money you save in lower monthly credit card payments allows you to buy more things in cash and keep you out of the debt loop. Plus, if you park your money in a high-yield online savings account you can actually make a little money.

Invest It

A tax refund of $2,000 can turn into $3,000 or $4,000 over time if you invest it properly. There are several investment vehicles you can use to turn this year’s tax refund into next year’s down payment on a new house. If you haven’t been maxing out your IRA, that’s an obvious first choice. If you don’t even have a retirement account, this is a perfect excuse to start one. In fact, the IRS encourages people to make retirement plan contributions with their tax refund by allowing you to have the refund directly deposited into an IRA.

Fix Up Your Home

Energy efficient windows and doors will save you money on your home energy bills and may even qualify you for tax breaks next year. Paying to have your home insulated by a professional will pay for itself in no time and start turning a profit for you for years to come. Instead of blowing your refund on a television that looks good in one room, you should spend that money on home improvements that will increase the value of your home and cut down on your utility bills. And if you have any other home improvement tasks on your to-do list, a tax refund is a good start. You’re adding value to your home and improving your quality of life.

Invest In Your Kids

Does your family really need a new television set? Could that brand new stereo system wait just a little while longer? For just one year, you should put your tax refund into a safe, long-term investment that you can use for your kids when they get older. It could help pay for college, braces or help you get your child that first car. For college, a 529 plan is a solid bet because it comes with additional tax benefits. But even setting some money aside in a separate account so that it’s available for your kids in the future is a good start.

When people get a huge tax refund, their first inclination is to go out and spend it on items that can be classified as frivolous. Rather than wasting that money, you could put it to good use for you and your family and improve your financial situation in the process.

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Taxes suck!

It feels like we are getting taxed on everything in life.

Ever think it would be cool to move to a state that does not have income tax? I sure have, especially as I was looking at check I had written to the government.  My wife and I really started thinking about moving, there was nothing tying me and my family down to any one location, except for one thing, but I will get to that at the end.

There are currently seven states that have no income tax. They are:

1. Alaska: What makes Alaska even cooler is there is no State Sales Tax either. The state depends primarily on petroleum revenue to pay for everything.

2. Florida: The costs for the local government are covered by property taxes.  Florida relies on sales tax for most everything else.

3. Nevada: Gambling! Pretty much everything in Nevada is covered by the tax collected from gaming.

4. South Dakota: To make up for no Income Tax South Dakota has a variety of other state taxes. Some of the taxes I found are cigarette excise, ban franchise, alcoholic beverages, and coin operated Laundromats.

5. Texas: The Lone Star State looks to state sales taxes and property taxes to pay the bills. Local jurisdictions can collect additional sales tax as well.

6. Washington: Sales tax foots the bill for Washington.  They also have some pretty hefty taxes on gasoline and cigarettes.

7. Wyoming: In addition to no income tax, Wyoming also does not have a corporate income tax. Wyoming gets most of its money from oil and coal mining.

But then there are two more states that you might find on other lists saying there is no income tax. They are New Hampshire and Tennessee. This is only partly true.  While it is true that they do not collect tax on your income from working, they do collect tax on your dividend and interest income. Keep that in mind, especially when it comes time to retire. Most of us, at least people reading from the best blog in the world, will be living off income derived from capital gains, dividends, and other interest income.

What it all boils down to is that the every state needs to make its money in order to function. Taxes in one form or another are a necessary evil in the world.  Since these states are not getting money from you in the form of income tax, they are going to get the money they need in other ways.

Now, onto that one dreaded thing that kept and continues to keep us in New York.

FAMILY!

Both my family and my wife’s family are within driving distance of us. Family has always been a very important part of our life and it sucked big time when we had to fly home with kids to see them.  So for now I will stay in New York, but as I am looking at my taxes and what I will be paying as the tax deadline approaches I cannot help but dream of moving.

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The W-4 form is simply the form your employer files so it can calculate how much to withhold from your pay for taxes. The reason this is important to keep up with is that as tax events in your life occur it can suddenly cause your previous exemptions to significantly withhold more or less than they should. Nobody likes surprises, and come February or March when you start doing your taxes, finding out that you owe $2,000 when you received a refund last year is a very nasty surprise.

If your income has not changed from last year and you haven’t done anything to significantly change your tax status it is likely you will be fine by keeping your same exemptions. But if you recently got married, had a child, purchased or sold a home, changed or lost a job, received a raise or pay cut, sent a child to college or had significant medical expenses you may need to change your exemptions. On the W-4 form they do have instructions for a worksheet to help you determine what you should select, but an even easier tool is the online IRS Withholding Calculator.

Back in 2007 after reviewing my own situation I discovered that if we did not change our exemptions for 2007 we would have ended up withholding nearly $3,500 less than the taxes we actually owed. That would have been a very nasty surprise come 2008. The reason for this big change from 2006 is because of a few job and pay changes that occurred late in the year. They had little effect on the 2006 tax situation but would have made a large impact over the course of 2007.

It pays to make the changes as soon as possible this year. If you will owe more in taxes this coming year, catching it soon will spread out the additional withholdings over a full year making it less noticeable in your paycheck. Just the opposite, if you were over-withholding, by starting early you will put additional current dollars into your pocket right away which can be saved or applied to debt now instead of letting the IRS hold your money for a year and giving it back to you after inflation has taken its toll on your hard-earned money.

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While there are no credit checks to receive these loans in the conventional manner, loan prepares must request information from the IRS to first see if there are any liens against the refund. Liens may be placed against the refund for back taxes, past due student loans, and unpaid child support. In this case, if there are liens against the tax refund, the loan may not be approved.

Why Refund Anticipation Loans Are a Bad Idea

People that are considering a tax refund anticipation loan should try to avoid the program. RAL loans have very high service fees and interest rates attached. Because these loans are short term financing they are not governed under the same laws for interest rates as are conventional loans. These loans are much like payday loans. You obtain quick short-term financing, but the annualized interest rates could amount to over 200 percent APR. To put it simply, you may end up paying hundreds of dollars just to get your tax refund just a week or so early.

Electronically filing your taxes can provide you with a refund in as little as two weeks, you wont even have time to check your income tax refund status. If you have a bank account you can have the money automatically deposited in even a shorter period of time. The need for these loans is no longer necessary. Consumers wishing to receive their money faster than two weeks may wish to consider a different financial option to avoid these high interest rates.

In fact, as shocking as it may seem, if you really needed the refund early, using a high-interest credit card for the source of the funds, and then paid off as soon as your tax return comes in, would cost you virtually nothing since you only carry that balance for a very short amount of time.

News From The IRS About Refund Anticipation Loans

The IRS has recently stated it will no longer provide consumer information to the refund processing companies. This information about tax liens is crucial to their ability to provide RAL loans. The IRS has stated that by providing this service to these companies they are infringing on the privacy of the tax payers to provide a profit for these private companies.

The IRS has further explained that the onset of free preparation through their site, electronic filing and the quickness that these refunds are being processed should eliminate the need for these types of loans.

Unfortunately, in recent years consumers spent almost 750 million dollars in fees on these types of loans. An incredible amount for only 8 million loans being processed. This is an average of 950 dollars in fees per loan that generally only lasts a week or two.

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