In the great Northeast, three quarters of the way through February, the snow piles are getting higher and higher in the mall parking lots and at that intersection you can’t see around that everyone hates. It didn’t happen all at once. Our first snow was in October this year. It didn’t stay, but it set the pace for five months of winter. As each storm leaves it’s trace, some melts away, some gets rained away, but overall it accumulates. We might get ten inches, but only three really ends up on the pile. Then another five inches, but this time all five end up on the pile, etc. Your tax burdens build up the exact same way. And there isn’t some magical button you can push to lower that tax burden. Instead, it’s a series of little things you can do to save $200 here and $500 there that really add up over the course of a year to a lower tax bill. Before the Trump tax code changes, many people relied on piling expenses onto their Schedule A to help lower the bill. Maybe they took a bag of clothes to the Salvation Army and saved the receipt, or donated to the local food bank. Many saved receipts for their unreimbursed work related expenses, mileage and/or meals. A lot of people counted on Schedule A as the place to chip away at the tax bill.
Under the new tax rules, most of those tax reduction opportunities are gone. Many people are now feeling a little bit helpless to fight back, struggling for strategies and realizing that their withholding has not been enough to cover this year’s tax bill. Many find themselves paying Uncle Sam more than they want to, often for the first time in a while. Here are a couple of strategies to get proactive with your tax planning so your 2019 tax year filing isn’t as bad as your 2018 might be for you.
At the bottom of the old Schedule A, money people spent for un-reimbursed work expenses like mileage, meals and clothes could create a fairly large write off against the tax bill. These deductions are no longer available on Schedule A. The strategy is to possibly change the business structure of that income generating activity so that it can be moved to a Schedule C. The difference between a Schedule C business deduction and an un-reimbursed work expense is the structure of the business requirements and the relationship between the payer and the payee of the income. Rearranging that relationship could possibly move that unreimbursed work expense item from Schedule A to Schedule C, legally and ethically.
First, let’s talk about the revenue that gets you there. The reason people usually have unreimbursed work expenses is because they receive a W-2 and work for somebody that simply requires a certain kind of clothing or other items to do the job. A good example is a nurse at a hospital who might be required to wear scrubs, but they are not provided by the hospital. They have unfortunately now lost a deduction if they’re a W-2 nurse with no “side gigs”. Hopefully, they benefited enough by the standard deduction growing that they’re not missing that extra deduction they used to put at the bottom of their Schedule A.
However, many people do have pay that allows them to move those same deductions from Schedule A onto a Schedule C. Many educators, professors and doctors, just to name a few, spend $20,000, $30,000, $40,000 a year going to conferences, going on sabbaticals, spending time learning to be better at what they do. They used to put those expenses on the bottom of Schedule A. Now, all they need to do is tweak the reason that they are performing the same task. A medical conference, for instance, could be to educate themselves and the expense might have gone on Schedule A, but it also could have been research for a book. They could be an author and claim that same expense on schedule C. Of course, we’re not talking about cheating the IRS, so in this example they would really have to then write a book. Publishing papers may not have been a for profit enterprise, whereas a little extra work in publishing a book gets them more than honorable mention in a medical magazine. It gets them the possibility of publisher income and all of the joys of taking deductions on the trip to get there. Professors could also be published authors after going on sabbaticals to do research. They could have many other reasons why they’re going where they’re going and spending what they spend that aren’t singularly justifiable on a Schedule A. There are other ways to categorize and legally spend many of the exact same expenses. The moral of the story here is that you need to investigate and plan to keep your deductions. You have to care about the loss enough to put in the extra effort, research and work with a tax planner to make sure that you can re-establish those deductions in other ways that, under the scrutiny of audits, would not cause a problem.
Not all strategies are complex, some are very simple;
The way to offset the fact that you’ve been “under withholding” can be very simple, open an IRA. More than one person has walked through our doors in the last few weeks and found out, instead of getting a $1,000 refund, they’re paying in $1,800, and asked, “what can we do?”. The answer can be simply opening a personal IRA on top of their 401(k) from work, which often does the trick of lowering the tax burden. We turned a sad face owing $1,800 into a happy face getting a $300 refund by simply opening an IRA. So there are many proactive things that can be done to chip away at the tax “snow pile”. A little tax savings here, a little there can get you back to a new normal, or even better off than you were before. You just have to grab your shovel (and a tax planner) and want it!