We’re down to just a few days for your extension or tax return. Do you know what you should deduct and what you’re better off just leaving alone?
Here are three common deductions that could cause you problems down the road.
Risky Deduction #1: Business Deduction when you have no business
Watch out for:
- No income showing on a business return or Schedule C.
- Thinly disguised personal expenses.
You have to first start a business to get business deductions. So…get started!
Risky Deduction #2: Accelerating depreciation for no good reason
One of my favorite real estate tax tricks is accelerating depreciation. It means you’re able to front-end load your depreciation to offset other income. BUT, and this is a big issue, remember that you’re creating a real estate loss and that means that you have to be able to do something with that loss. If your income is too high and you’re not a real estate professional, the loss just gets suspended.
Here’s a true life client story of how it can go badly without good planning:
A new client of mine had been following my real estate loopholes for years. The year before he became a client he was still a highly paid professional and did real estate on the side. His plan was to quit the day job in the next year and he did! That’s when he became a client.
The year before, though, he convinced his old tax preparer to do a cost segregation study so that he could accelerate depreciation. He did it, at a cost of thousands of dollars (our cost would have been a couple of hundred dollars, at the most) and then did catch-up depreciation. Again, he had to pay to have his preparer caught up to speed on how to do it. So the bill was even higher.
Now here’s the bad news. He created a suspended loss. There was no tax benefit.
Worse yet, in the next year, when he was a real estate professional, he couldn’t then accelerate the depreciation. He’d used up that card in a year when it didn’t count.
Just because you CAN take a deduction, doesn’t mean you should.
Risky Deduction #3: Taking charity deductions without back-up
All too often, individuals try to create deductions by cleaning out their garage. There are specific rules about donating used clothing and household goods. For example, the items have to be in good or better condition. Also you have to complete Form 8283 if you give more than $500.
There have also been changes with vehicle donation rules. Make sure you know the rules before you take the deduction. Get it wrong and you might be asking for an audit.
Be strategic with your tax return. File smart.