Senate likely to accept smaller tax cuts – Better than nothing

House, Senate GOP at Odds Over Tax Cut – Those dim-bulb GOP Senators who sided with the Dims need some lessons in economics. 

The Dims Want No New Tax Cuts – No surprise here

Senate Rolls a Pork Barrel Into War Bill – Incurable Spendaholics are still in control in DC.  On a similar note, you can check on how your rulers have plundered the Treasury in this online version of the CAGW’s Pig Book and download a 49 page pdf summary of the Pig Book.

Simplifying Your Own taxes

The trite and true answer to anyone who asks how to eliminate his/her income tax has long been to stop working.  No income = no income tax.  Since our taxes are not at 100% level, and most of us appreciate the good things we can do with money, that is not a very realistic approach; so we are forced to deal with the income tax system.

This advice column on how to simplify your taxes from Jonathan Clements strikes me as similarly naive.  While his idea to have good records is obviously something I have always endorsed, his others ideas are not the most practical. 

While it is true that fewer stock trades would save time in preparing Schedule D, that is a crazy way to make investment decisions. If a stock has peaked and on the way down, it would be ridiculous to hold onto it just to reduce the tax return paperwork.

Likewise, the recommendation to avoid partnerships is overly naive.  There are plenty of very good reasons to use a partnership or LLC format for certain business endeavors.  With several clients, each having dozens of partnership investments, it is a bit of a hassle to integrate all of their data into a 1040.  Luckily, my Lacerte software does an excellent job of making that task as painless as possible.

The advice to refrain from claiming the home office deduction is extremely short sighted.  While it is true that the actual dollar amount of the deduction is often relatively small, that doesn’t account for the full range of benefits.  For example, having a home office allows all miles driven to be deductible, rather than have a lot of nondeductible commuting miles to an outside work location.  I have actually amended dozens of tax returns where we added in the home office and saved thousands of dollars in taxes just from the additional deductible miles, while the actual home office deduction was just a few hundred dollars.

KMK

Apples & Oranges

This comic is a perfect illustration of some very common misconceptions regarding tax returns and tax preparers.

 First is the cost of tax pros. Tax work is by no means a commodity that can be comparison shopped based on price. Anyone who chooses a tax preparer based on the lowest fee is, for lack of a better word, an idiot. As I have often reminded people, which is a better move: paying H&R Block $100 to have your tax returns prepared, or paying someone like me $1,000, when the total taxes on my returns are $10,000 less than on the Block returns?

No two tax returns are exactly the same. I get this one a lot. Why are the taxes higher for one person, while his/her co-worker or neighbor, who supposedly makes the same amount of money, has a completely different amount? Such comparisons are ridiculous. There are literally dozens of things that can make tax returns of co-workers completely different, such as expenses and dependents. In my 27+ years of tax work, I have never seen two tax returns exactly the same, even for the same people from year to year. Tax returns are like snow flakes. This also goes for the cost to prepare tax returns. We have never charged flat rates and have based everything we do on the amount of time it takes us because everyone has very different issues to deal with and different levels of organization of their records.

It’s also all too easy to criticize investment ideas after the fact, with 20/20 hindsight.  Of course, anyone who continues to follow the lead of someone who consistently picks losers is too stupid to feel sorry for.

KMK

Vehicle Costs

People are always asking which is better to use for tax deductions, the IRS’s standard mileage rate (36.0 cents for 2003) or the actual expenses, which are prorated based on the business miles driven compared to the total for the year.   My advice has always been to keep track of the actual expenses during the year.  Then, when preparing your tax return, use whichever results in the higher deduction.  Contrary to what many believe, if straight line depreciation is used, it is possible to switch back and forth between methods in different years.  It is also true that the calculation method used for each vehicle stands on its own.  You can have one vehicle using the standard rate method at the same time as another vehicle is using its actual expenses on the same tax return. 

I have seen every possible variation imaginable in regard to which is the higher deduction. For example, with many of our clients who are real estate agents with annual business mileage of 40,000 to 50,000, the standard rate now frequently gives a higher total deduction than the actual expenses.  This became more consistent a few years ago when IRS changed the standard rate to be the same for all business miles, rather than its previous policy of the maximum rate for the first 15,000 miles and a much lower rate for additional miles.

When calculating its official standard rate, the IRS has just one opinion of what the costs are to own and operate a vehicle.  AAA just released its study concluding that the average vehicle cost is 51.7 cents per mile to operate.  Every year, car rental companies, such as Hertz, put out press releases claiming that it costs well over a dollar per mile to operate.  Considering their obvious motivation for trying to justify their rental rates, I would have more faith in the AAA being a bit more objective in their calculations. 

There really is no universal cost that applies to all kinds of vehicles.  For example, our three Toyotas cost us almost nothing for repairs, while most clients pay thousands per year in maintenance costs.  That is why it is so important, as I have been stressing for so long, to use QuickBooks to capture all possible information on costs paid through checks, credit cards, and actual cash in order to do a valid comparison with the IRS standard rate.

KMK