With the new year in full swing, it’s once again time to start preparing for tax season. This is a crucial time for many taxpayers as they attempt to find a balance between lowering their tax burden — while also avoiding anything remotely suspicious that could catch the watchful eye of the IRS.
Every year, there are people who try to get overly aggressive with tax strategies or try and skirt around certain corners to gain a tax advantage. As professionals, our advice is always: don’t attempt to cheat the government!
But that doesn’t mean don’t take the breaks and credits you’re entitled to. Working with a pro to find legal ways to lower your tax liability is a smart financial move to consider.
To help you make sense of it all, we’ve put together a few things you should know to maximize your return, while avoiding trouble with the IRS this tax season.
Little known tax breaks
Tax Deduction to Get in Shape
Although the IRS typically prohibits deducting the cost of a gym membership, if your doctor prescribes workouts requiring a gym membership as part of your therapy for an underlying condition, a portion of the membership could qualify as a deduction.
To be eligible, you must offer proof (letter of medical necessity) that your doctor has ordered you to perform a specific physical activity due to a diagnosed medical condition. Even then, you can typically only deduct the fees for the program that assists in the therapy of your specific condition, not your total membership fees.
Smoking Cessation Programs
If you’ve been actively working toward giving up smoking, you might be entitled to a tax break. Smoking cessation expenses are often tax deductible and there’s no requirement that you must be diagnosed as having a specific disease.
Although you won’t need your doctor’s approval to participate in a program that helps you stop smoking, you will need a doctor’s prescription in order to deduct any drugs that may help you overcome the effects of nicotine withdrawal. Unfortunately, this doesn’t include nicotine gum or patches since they are available without a prescription.
Saver’s Tax Credit
The Saver’s Credit is a tax credit that the IRS offers to incentivize low and moderate income taxpayers to make retirement contributions to an IRA, 401K, 403B, 457B, or any other IRS recognized retirement account.
What’s different about the Saver’s Credit is that it is an actual tax credit, and not a tax deduction like the previous examples. To give a brief explanation on how they differ: a tax deduction subtracts the value from your taxable income and you are responsible for paying taxes on the remaining taxable income.
On the other hand, a tax credit gives you the entire dollar value back or subtracts the value from the taxes you owe.
Don’t Make Frivolous Tax Arguments
On the spectrum of what is acceptable according to the IRS standards, frivolous tax arguments are nearly as bad as fraudulent tax procedures. Common examples of this are establishing bogus entities or claiming false deductions for the sole purpose of lowering taxes.
Just to show you how serious they are about this, if the IRS finds your argument or position frivolous, it could mean a 20% accuracy related penalty and up to 75% civil fraud penalties.
If you look at this from a risk/reward standpoint, independent of your moral obligation to pay taxes; the risk of how much it could potentially cost you to skip out on your taxes far outweighs the reward, if you got away with it.
Hire the Right Help
Many people hire professional tax preparers to process their returns, but unfortunately a large number of those people don’t know whether they have a good preparer or not. The tax system is always evolving and if your tax preparer is basing their calculations on information they found in a book from four years ago, it’s likely that the information is outdated.
When you visit with a tax preparer, they shouldn’t just rely on you to provide a shoebox-full-of-receipts to file your taxes. Instead, they should be asking you a lot of questions. The reason for this is for them to understand your unique situation and maximize your deductions.
Also keep in mind that just because you have a tax preparer that asks a lot of questions, that doesn’t necessarily mean that they are competent.
Since you are ultimately responsible for your taxes, you must learn what to look for in a preparer to make sure that you are not held responsible for someone else’s ineptitude.
To help you out, here are a few red flags that let you know that you might be dealing with a bad tax preparer:
- Your tax preparer does not have a Federal Tax Preparer ID number
- The tax preparer makes blanket claims or guarantees a specific return amount without knowing your financial situation.
- Your tax preparer has a questionable history
- You’re asked to sign a blank tax form
- You are not asked to review the tax file before it is submitted
This just goes to show that even if you hire someone that you deem to be a ‘professional’ to handle your tax related matters, you must still do your due diligence on who’s preparing your taxes and make sure that they’re asking the right questions about your lifestyle.
You want to be sure that nothing is missing and that everything lines up. While there’s nothing wrong with saving on taxes, just make sure you are operating within the legal parameters — or you could find yourself in the company of some pretty famous names like Richard Pryor and Willie Nelson, just to name a few.