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I SPENT A GOOD portion of my early adult life in neighborhood taverns. Back then, I sold beer for a living. You can imagine that I saw and heard some crazy things. Remember the sitcom Cheers? I knew doppelgangers for each and every Cheers character.
But the things I heard in those bars didn’t come close to the things I heard later when I worked as an income-tax preparer. No doubt other tax preparers and CPAs can add to my list. Here are my top 12:
1. Years ago, I asked a friend why she hadn’t refinanced her home loan after mortgage rates dropped sharply. Her response? She said she needed the bigger tax deduction. Even after I explained that she only saved 15 cents in tax for every $1 spent on mortgage interest, she still didn’t get it.
2. A client received Form 1099-C for the cancellation of credit card debt. She couldn’t understand why it was taxable, saying, “Why do I have to pay tax? It’s not like I got anything for it.”
I asked her, “What about all the stuff you bought and never paid for?”
The tax-code rationale: If one party can take a deduction, such as the credit card company for cancelling the debt, then someone else—my client, in this case—has to claim it as income.
3. A client with a fully depreciated rental property had the notion that, by using a mortgage loan to remove his home equity from the property, he could eliminate the taxable gain. This wasn’t an easy conversation.
The good news is, the client had been able to deduct a fraction of the price paid for the property each year. The bad news is, this process had reduced his cost basis to $0, not including the cost of the lot. Upon selling the property, the IRS recaptures all of those prior depreciation deductions in the form of long-term capital gains. And, no, the IRS doesn’t care how much you owe on the house.
4. Multiple landlord clients wanted to deduct uncollected rent from deadbeat renters or vacant units, or deduct the value of their time spent working on the property. Sorry, there’s no line on the tax form for that.
5. A client pulled all his money from his retirement account in early 2009. He was shocked that the distribution pushed him into the next tax bracket and cost him the 10% early withdrawal penalty.
Asked why he took out the money, he said it was because his account was going down in value. The market turned around in 2009 and has, for the most part, been going up ever since. Did I mention that he bought a beautiful new pickup truck with the money?
6. “My friend at work gets a bigger refund than me.” I got this comment frequently. There are lots of reasons this could happen, and it often has to do with how much tax was withheld during the year.
“In your case, I don’t know why you got less because I don’t do your coworker’s taxes,” I’d explain. “And even if I did, the IRS has its own version of HIPAA, the rules that cover medical privacy, which would prevent me from talking about your coworker’s taxes.”
7. A typical question from someone with a casino-issued W-2G for gambling income: “Why do I have to put that on my tax return? They taxed me when I got it.” Yes, they withheld tax, just like your employer does from your wages. But you still have to report those earnings on your tax return.
This situation is one of my income tax pet peeves. Slot machines and lotteries are programmed to keep a percentage of the money put into them. I don’t believe that the occasional lucky soul should be taxed at all on his or her winnings. Side note: Learn how to count cards at the blackjack table or become a really good poker player. As long as you aren’t in a tournament, where they keep track of your winnings, there’s no way for the casino to know your precise good fortune and issue the dreaded W-2G. I say this tongue-in-cheek: The winnings are still taxable, even when no W-2G is issued.
8. “I turned down the overtime because it put me in a higher tax bracket.” Ever tried to explain progressive taxation to someone? There are good reasons to turn down overtime, such as wanting to spend more time with family. But please don’t turn it down because of taxes. We’ll sort out the details at tax time—but, yes, you’ll be dollars ahead.
9. “Can I deduct as a loss my investment in Iraqi dinars?” I had advised the client not to buy the dinars in the first place. In this client’s case, his income wasn’t high enough to trigger income taxes, making the capital loss worthless to him.
10. Instead of a wage increase, a company increased its contributions to the defined benefit pension, thereby decreasing its unfunded liability. An employee insisted that he should be able to take a tax deduction for the amount of wages lost.
It’s hard for a lot of people to connect the dots between the money they receive for wages and the value of fringe benefits, such as their pension and health insurance. I can only imagine the outrage if all of a sudden people had to pay tax on the cost their employer pays for their family’s health insurance, which can easily be worth $30,000 a year.
11. “If I won the lottery, I’d hide the money in the basement so the government wouldn’t tax me every year.” If you have the money in a savings account, you’d make a little interest and still be ahead after taxes, plus the money would be safer from folks who know you’ve got a pile of cash in your basement. Like your tax preparer, for instance.
12. “I’m filing as head of household,” a client told me.
“You can’t be head of household,” I explained. “You don’t have any dependents.”
“Yeah, but I’m still head of my household.”
Beam me up, Scotty.
Are these comments from stupid people? No, they’re from all sorts of people, many with advanced degrees and highly technical jobs. It’s just indicative of how opaque taxes can be.
I don’t want you to get the impression that, now that I’ve retired, I’m happy to be done with these misinformed souls. I’m not. By doing their taxes, I got to know these folks. When I run into former clients now, I get a vigorous handshake or a warm hug. I miss them.
I also miss the days when, if someone asked me about E.D., they were talking about elective deferrals to their 401(k).
For 30 years, Dan Smith was a driver-salesman and local union representative, before building a successful income-tax practice in Toledo, Ohio. He retired in 2022. Dan has two beautiful daughters, two loving sons-in-law and seven grandchildren. He and Chris, the love of his life, have been together for two great decades and counting. Dan’s previous article was Beer to Taxes.
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“5” is arguably the worst.
I wouldn’t argue with that.
I enjoyed that, and imagine most readers did too, although I’m guessing a few readers might not have understood why a few of your clients were wrong. For example in 4, it would be better to state that there is no deduction when there has been no cash income or expense involved. We can’t deduct the value of our time if we think it is worth more than we are being paid! On the other hand, maybe all the readers here are up to speed on those issues.
Point well taken Jack. Your 1 sentence explanation is very concise.
Reminds me of a colleague at work who is past age 70 and has not yet claimed Social Security because she doesn’t want to pay taxes on it.
Wow. Just wow.
You should compile these annecdotes into a book. I will gift it to my CPA.
Move to Fla and see how low an effective tax rate is; close to 400k it can be around 20%!
True, but they make up for it in home and auto insurance!
And RE taxes are higher too
I enjoyed your article. Since I’m retired, I can choose the amount of tax withheld from IRA distributions SSN, and pensions. So I choose to have very little withheld every “odd” year. The “even” year, I over pay my taxes by a thousand or so with a huge withholding in December. I think that this is a viable technique for avoiding quarterly dings and preventing our government from having the use of my money for most of the year.
You may want to check out IRS Pub 505 (2022) page 19 for both the general and special rules to avoid an underpayment penalty.
https://www.irs.gov/pub/irs-pdf/p505.pdf
The underpayment penalty rate is based on an interest rate that varies with applicable interest rate that the IRS publishes quarterly so the penalty rate will be much higher in 2023 than in recent years.
The general rule to avoid underpayment is the most common way to go to avoid penalty. It is based on having an amount of current year withholding and estimated taxes timely paid in equal to or greater than your prior year tax (if your prior year AGI is $150K or more the timely payments need to be 110% of PY tax).
You will likely spend more time and or money paid to your tax preparer to gather the necessary information to use the special rules. The exceptions are easier to plan for and meet in years when your AGI is increasing. Often when retirement occurs or other substantial decreases in taxable income occur in the current year additional tax planning and action may be necessary to avoid penalty. The get out of jail free card is that withholding, but not estimated tax payments, are deemed to be withheld equally throughout the year for the general exception.
Yes, it’s amazing the number of people who don’t know the difference between a tax deduction and a tax credit.
This was sure a fun read!
Great article and great comments. All of the thinking and maneuvering reminded me of the “flat tax” proposal that’s floated around for years. Instead of being caught in an obscure tax trap, just pay a percentage and live your life. Oh, that it would ever be that simple!
COOL Dan!
I’m sending the link to your article to my own tax guy.
DS, great article and thank you for sharing and also for the humor. I’ve encountered some of these situations and certainly thought the advantage was mine not the IRS, only to be informed by my accountant, “Nice try, but it doesn’t work that way.” Thank goodness I tend to ask first before I act. Nice reminders to continue to do so and believe the numbers!
Wonderful and amusing! You could probably do some stand-up comedy holding a beer in one hand and a 1040 in the other telling funny stories.
Well, my wife is always calling me a comedian….
Very fun and informative article. A common variation on #1 I’ve heard repeatedly over the years was don’t pay off your home so you can keep the tax deduction. My sister had a snappy comeback, that involved 2 facts. First, you’re only saving cents on the dollar and second, would you rather give your money to the bank or the government. At least the government spends it on things that benefit you such as military protection, national parks, etc.
I’d rather give the government a quarter than the bank a buck, right?
I’m a CPA and your article made me remember the one thing I enjoy about tax prep – the crazy stories from people. Unfortunately, they are proof how bad our school systems have become. Well, back to my Roth conversion…
I’ve had peeps who didn’t know how to write a check… let alone balance a checkbook.
Tell these people, “Last time I checked, the tax rate was less than 100%.”
Many people would be shocked at how low their effective tax rate is.
Excellent article, Dan. Tax cliffs are some of the most confusing items taxpayers face. And you are so correct about how confused people get around the progressive bracket system.
Keep writing! Humor and money go well together.
Great article, Dan. Several examples were quite familiar: my in-laws were audited decades ago when they tried to take a “loss” for reducing the rent they were charging their tenant, an elderly, nearly indigent woman, from $200/month to $50. I learned that we can give money to family, friends or strangers, but it’s not a charitable deduction or a business loss. I also know about the issues with gambling or lottery winnings. Often it’s the lowest income folks who buy lottery tickets then, at least in NY, government benefits previously taken will be recouped if the winnings are high enough to be reported (years since I heard this, so details may be a little off).
Your comment reminds me of my days delivering beer. The carry-outs in the poorest part of town always had the longest lines for lottery tickets when the jackpot grew large. Also yes, those winnings will impact certain tax credits as well as other govt. benefits.
Thank you! I enjoyed your article. I monitor my finances during the year so I end up having to pay a small amount of income tax. I smile when my friends brag about their big refunds.
Yup. They don’t understand that the government has been using their money all year when they could have been spending or saving it. I remember feeling a little angry at “someone” when we got an unusually large refund one year due to inadequate monitoring of what we were going to owe.
I know Amelia. I’ve given up trying to even explain.
Regarding #7. I am a casual gambler who primarily plays table games and video poker. We are also full-time travelers who own no real estate; our sole income is our social security. I also am a tither when it comes to charitable giving—every year I make 6-8K in donations to causes and organizations close to my heart (about 10% of our income).
The odds were in my favor this year and i have 9 W-2Gs totaling nearly $30K. One can only deduct losses from winnings if you itemize deductions. Also, gambling income can’t be used to fund a Roth. My solution? I established a donor advised fund at Schwab and funded it with a combination of stocks that had grown in value by 25-30% in my investment portfolio. I put $28,000 into it.
Now, I will have a deduction (larger than the standard deduction) that will allow me to itemize. And I’ve shielded the gain on those stocks from future taxes AND since I’ll be itemizing, I can deduct gambling losses from my reported winnings. AND I will make my charitable donations from the DAF in 2024, 25 and 26 (and maybe even longer if the stocks continue to appreciate). It looks like this will save me 4-5K in 2023 taxes. I’ll also have a vehicle for future windfalls if the odds should favor me again so dramatically.
There’s some food for thought. We also have taxable holdings that have grown significantly in value but the effect of a donation leading to the ability to itemize other things has never really crossed my mind. I’m not a gambler, so have no winnings to shield or deductible losses to claim. Also full time travelers with no real estate, so basically have nothing to itemize. Oh well, I still like the maneuver. Well done.
While I have no plans to take up gambling, and won’t regret harvesting some gains yesterday as I wrote about last week, I’ll have to think more about this next year, and possibly using an similar move to offset more CG harvesting, Roth conversion, etc.
Enjoyed the article Dan.
Thanks. . . As a former non-profit professional I am pretty pleased with myself AND am actually looking forward to doing my taxes!
Not only are your generous donations helping others, your well thought out and totally legal planning have slashed your taxes. Blackjack and video poker are my games of choice.
Thanks. Learning the correct strategies for BJ and VP are the smartest moves you can make in a casino if gambling is entertaining for you. And the pass line at craps, of course. Also, leaving when you’re ahead is always a smart move.
I’m laughing, Dan, because I can only assume you know the house will always take a cut–unless you gamble privately, of course. Still, when it comes to people we are some of them.
But Steve… I got a system! NOT!
I really enjoyed this. Thanks for sharing. I think I worked with a few of your clients. The guy who wouldn’t work OT because of taxes. The person who made fun of me for having a smaller refund.
Yep, I’ve always preached that the most important line on your tax return is “total taxes paid”. I couldn’t care less about the refund or balance due.
I know of a person whom said, “ I work so hard all year, and I never call in sick and I only got a 200 dollar refund from the federal taxes and I had to pay fifty to the state! That’s not fair!”.
Working overtime is a home run in my opinion. More money goes into the 401(k), more money goes into social security and more goes in my pocket.
A friend of mine also cashed out his 401, a few years prior at age 58, losing a lot of money, of course. He was too terrified to even leave it in a short term treasury fund!
He and his wife moved to Florida and also bought a house here in Massachusetts using a mortgage, and are thrilled at having a tremendous investment , even though it is 1500 miles away, and the house is 200 years old. They will maintain the property themselves and no property manager will be needed. It takes at least 11 hours to travel from door to door if you fly and it is a five day round trip if you drive . Bon voyage !
When you add in interest, taxes, and all those expenses you mention, often times there will be no profit in owning real-estate.
Good one Dan‼️.
I believe every word you said. I can relate as I have similar stories trying to deal with workers and their employee benefits.
I had the same issue with retirement account withdrawals back in 2008 and don’t get me started on trying to explain that the employee gave half their pension away in their divorce and didn’t know it.
Thanks Richard. It’s very dark where some people keep their heads.
Hi Dan,
I read the feature article here every week but have never commented before. Yours was very entertaining while also educational.
I was a small custom builder for about 30 years and I was always amazed at the comments from employees, subs, and helpers that centered around tax refunds. They don’t take one minute to understand withholding.
A lot of Americans use their refunds as their only savings tool…then spend it anyway.
Your client, who turned his retirement savings into cash during the recession, then put it into a new pick-up truck, wins the prize. I saw a close friend do nearly the same thing, buying an expensive sports car. The car is no longer in his garage and the cost of that transaction was immense.
Thanks very much!
CW
Thanks Chuck. I mentioned above that the most important line on the tax return is “total tax paid”, not refund or balance due.
I’m not a tax pro or do taxes. I’ve heard some of these comments during my career. It always amazed me how people didn’t want to earn more because they will get taxed more. The other concept that people don’t get is TVM. If they had learned TMV and the value of saving for retirement early…more would be in better shape when they wake up at age 50+ and start saving more.
Agreed, and with the decline in defined benefit pensions a persons TVM is more important than ever.
With respect to #8, I discovered an obvious flaw in the way the ACA subsidy worked. If your income is low, but high enough you can’t get medicaid you get a big subsidy. At a high enough income it goes away. At a certain income level, the rate at which the subsidy is removed is steeper. It’s so steep that you can earn more but end up with less.
If you’re a retiree, the same thing is true with IRMAA, even though it’s technically not a tax. Every retiree should be tracking IRMAA brackets throughout the year, because there’s no way to undo MAGI once you file a tax return.
You really have to be careful with the married filing separate filing status, as it is really easy to bust thru IRMAA. I learned this the hard way but was able to amend and fix my screw-up. I began using Drake tax software and it grabs me by the throat to tell me when not to use MFS.
You sure you’re not a pro? You are 100% correct, I should have added an asterisk. I had a hard working but low paid married couple who had been qualifying for the maximum premium subsidy through the ACA. One year Mary’s coworker was out sick so Mary had to pick up her hours. This pushed them over the cliff causing their tax return to show a balance due over $10k. You can imagine their reaction. I played around with the numbers and figured out that a $1500 contribution to a traditional IRA would lower their balance due to about $500. I had them go to their bank and open an IRA telling them to be certain the banker knew it was for the prior year.
So there are some “tax cliffs” you have to look out for. Yours was a great example.
Great article Dan. We had a very similar situation in the AARP VITA site I support. We were able to save the clients $1000s by having them make an IRA contribution.
Isn’t is a great feeling when you can make a difference for people?
I sold my tax business and have 1 more year left on my non-compete. I intend to become a volunteer preparer for AARP; can’t wait.
You will be a great asset to whatever site you support. My experience is the people who volunteer are uniformly competent, kind, and caring. Sounds like you will fit right in.
Does your non-compete actually prevent you from being a volunteeer tax preparer?
I think so, it specifically says I’m not to prepare any taxes in my and the surrounding counties.