Tax Loopholes: Like Candy To A Baby

Tax Loopholes: Like Candy To A Baby
by David Banyas

As children, there were wonderful treats whose very names, when spoken aloud, sent shivers of anticipation throughout our bodies. Mom knew the leverage she had just mentioning that ice cream might be in the near future of a child with a clean room. Today, as hard-working taxpayers, we have different ear-catching phrases that make us go out of our way to be good boys and girls. Up there among the words “free” and “promiscuous” is the seductive “tax loophole.” This is the time of year that many of us might decide to claim our houseplants as dependents, but there are plenty of very legal ways to receive what you’re due from the government and you may not know it … and the IRS hopes that you never will.

Most of the strategies below that can save you tax monies fall under the category of “Planning.” Seldom can you go the whole year slinging your money about like an oil tycoon, not keep track of any transaction, and still expect the government to return the money to which you have a right. You must follow the rules of each loophole or tax break, know what you can claim, and file according to the conditions. In his book, 101 Tax Loopholes for the Middle Class, D.C. tax accountant Sean Smith shows what criterian readers must meet in order to take advantage of the little-known tax strategies, tax breaks, credits, and loopholes.

Smith explains two tax credits available to taxpayers that borrow to pay for their children’s college education: the HOPE scholarship credit and the Lifetime Learning credit. With these credits and the deductible interest paid on the student loan, middle class parents can save $3000 or more each year. Single taxpayers can take advantage of a lower federal income tax by claiming themselves as Head of Household if their adult child lives with them and previous years can be amended if the child was a resident for more than half of any year. On the flip side, if your child or elderly parents own a home, you can make a tax-deductible gift to them by making a payment on their mortgage. Every little duck and dodge helps keep your money from being permanently lost once you spend it.

Smith lists many investments and retirement accounts strategies, which may result in a larger amount of paid taxes returned to you. He gives examples of how you can negotiate bigger write-offs with your landlord. If you entertain clients at home, 50% of the expenses are deductible and no receipt is necessary for anything under $75. Nor is a receipt required to write off deductible holiday gifts to business associates that cost $25 or less. Your home computer can be tax-deductible if you often must work overtime to complete work assignments and are denied access to the computers at your employer’s place of business. And if you do stay late, let your company buy you a deductible dinner. Your corporation can also reimburse your daily parking costs up to $170 per month and take a tax deduction. And that’s if you work for someone else.

Self-employment has a slew of strategic tax savers, too. Hire your spouse to write off 100% of health premiums or rent your home office from your spouse to save self-employment tax. If you can deduct your home office, you can deduct lawn maintenance, landscaping and driveway repairs. Even if you can’t deduct your home office, you can still deduct your telephone expense.

None of the examples given here are as simple as demonstrated — the red tape must be met, of course. But if you feel that you could benefit from any of these loopholes, you might want to consult a professional.

Leslie Jacobson, a seasoned attorney practicing in Central PA says, “One of the biggest mistakes people make is to claim more deductions like claiming ‘zero’ on their W-2s. You’re fooling yourself! The refund you get at the end of the year is not a reward — it’s already your money. You just let the IRS use your money all year for free!” Jacobson says the trick is to break even, not try to get a refund. “Make the money work for you instead of just getting by all year.”

Jacobson states that, in recent years, Congress has closed up many of the loopholes in the tax laws, which generally benefited the rich. However, Jacobson let me in on many little tactics still available to the middle class to help in getting back what may be owed — or even making a profit.

Many tax breaks are out there for property-owners. Most or all of your credit card debt should be covered by a home equity loan for two good reasons: 1) there is almost always less interest paid on a mortgage loan than a credit card debt — often between 10% and 15% less, and 2) all of the interest paid on the mortgage loan can be written off. Another example that Jacobson gave is if you owned a piece of land and were looking to sell it, you might want to make an exchange instead. That would defer the sales tax on the old property to the new property and could present a very large profit if the new property is a significant upgrade.

Jacobson admits that self-employed people have more tax breaks, but also are more likely to lack the discipline it takes to follow the rules well enough to gain from these breaks. If you don’t follow the rules, or make them up to suit you, you might be audited. That’s when the IRS notices you, sends a Man In Black who will never call you by your first name, and focus all of their attention on the nooks and crannies of your financial lifestyle. While most attention is nice, the IRS is one entity you’ll want to ignore you. The IRS, with all of its resources, may currently audit only about 1% of the returns filed each year, but why not do what you can to be in the 99th percentile? Those who claim to work out of the home send up “red flags” to the IRS and may find themselves audited if they aren’t careful.

Loopholes For Businesses

by David Banyas

There are a lot of ideas that can benefit the individual if he/she decides it’s worth the trouble to employ the tactical thinking required. It is the business world, however, that the government has given the most egregious tax leniency.

At www.foe.org, a liberal web site trying to out “The Man” and his way of dealing with the world, there is a list of the tax breaks given to major companies that are the most flagrant polluters of the world:

– Chemical companies, like Dow, can write off all of the costs of cleaning up their spilled hazardous substances, including legal fees. This is regardless of whether it was intentional or a result of gross negligence.

– Mining companies get outright tax subsidies for mining toxic substances like lead, mercury, and asbestos. Often these subsidies exceed the value of the owner’s investment in the mine.

– Oil and gas companies, the greatest contributors to environmental breakdown, enjoy the best tax treatment available to any industry. For instance, just one advantage is that investors can write off “passive” losses from oil and gas investments, but not from investments in other industries.

– Huge, chemical-intensive agriculture companies, like Hershey and Green Giant, which are among the largest polluters of the world’s fresh water resources, receive tax breaks, but not the small farmer who supports his family.

– Timber companies chalk up special tax benefits that encourage more profit, but do nothing to promote sustainable, renewable forestry. For example, timber companies can deduct capital costs immediately while other businesses cannot. Chop, chop, chop means money, money, money.

Where to go for your tax questions:

Harrisburg District Office PA Department of Revenue
Strawberry Square
Fourth and Walnut Streets, Lobby
Harrisburg, PA 17128-0101
Shirley M. Baughman, District Administrator
Phone: 717-783-1405
(serving Cumberland, Dauphin, and Perry Counties )

Collections Coordinator
Strawberry Square, 10th Floor
Harrisburg PA 17128-1210
George Byerly, Phone: 717-772-6991

Harrisburg Call Center
Strawberry Square, 6th Floor
Harrisburg, PA 17128-1210

Personal Income Tax Delinquency: 717-783-3000

Business Tax Delinquency: 717-783-8434

Carl Curchoe, Manger: 717-705-3500

Pre-recorded answers to commonly asked questions

(Toll-Free) 1-888-PA-TAXES

Personal Income Tax Questions: 717-787-8201

Business Tax Questions: 717-787-1064

Internet: www.revenue.state.pa.us

E-mail: parev@revenue.state.pa.us

(courtesy www.revenue.state.pa.us)

Other tax-related Internet websites of interest: