(Read my other post “Taking Control of Your Taxes – Topic #35 – Best tax saving ideas”)
I have studied American U.S. tax system for many years. I have compiled a list of good and bad tax saving ideas. Here are top 5 list of bad tax saving ideas. Many of these have income limitations and credit/deduction limits. Go to IRS publications for details.
1. Real estate tax deduction – The worst tax saving ideas revolve around real estate purchases for tax purposes. Many people are told over and over again that owning a real estate can help reduce income tax. This is true ONLY if you are highly compensated AND own an expensive property. More than 70% of American taxpayers cannot itemize each year because the standard deduction threshold is so high. People who make $80,000 a year and own a mortgage for a real estate under $150,000 generally do not gain any tax advantage in owning a real estate.
For an example: You are married and own a house with a mortgage balance of $140,000 at 5% ($7,000 in interest). Your property tax is $3,500 a year. You donate $1,000 to your church each year. The total tax deduction is $11,500. The standard deduction amount for 2011 is $11,600, so you can’t itemize. What a bummer. Someone who pays $900 monthly rent and no property tax has the same exact deduction as you do. Real estate tax saving is often a myth.
2. Charitable giving – I believe in tithing, so I am not bashing charitable giving. But if you have any notion that you are receiving tax advantage in giving to your favorite charity, you could be mistaken. All of your deductions including charitable giving must exceed $11,600 for married filing jointly (or $5,800 for single) before it does any good taxwise. You also must have some income to claim deduction. If your family (of four) income is more than $26,400 or more than $10,800 (don’t include Social Security) for single older than 65, you owe no tax from the start. So don’t even think about itemized deduction under these income levels.
3. Home Office deduction and business expenses for MLM – This is one of the most abused area of income tax reduction used by multi-level marketing folks. IRS is clear on home office deduction: you must use the office and equipment SOLELY for the purpose of conducting your business. If you use your home office to entertain non-business friends or you use your computer to type up and print personal mail, you cannot deduct the stuff. Many people claim business expense for personal use, but if you are audited by IRS, my prayer goes out to you. Home Office deduction is always a red flag issue. For the measely few bucks you may save on taxes, it just is not worth it.
4. Giving – (this is not really a bad tax idea, but many forget to pay gift tax when giving to someone an item or property). Many people are not aware of the $13,000 gifting rule. Anyone can give up to $13,000 a year to anyone else without tax consequence (exception is a donation to non-profit organization). But if you give a penny more than $13,000 to an individual, you must file a federal gift tax return, using IRS Form 709, for any gift exceeding $13,000. A couple can give up to $26,000 to a child. If you gift a house or a large sum of money to a family member, talk to an estate lawyer before the transaction occurs. Also ask about the 3-year rule if a gifting occurs prior to the donor’s death. Just consult a tax attorney before gifting something expensive.
5. 1099-MISC form – this is one of the most aggregious issue at hand. Many companies are losing profit, and want to cut expenses. FICA expense (Social Security and Medicare taxes) is a large part of company expense. You, as a salaried or hourly employee, may be asked to become a 1099-MISC (self-employed contractor), and you may be liable for 15.2% in FICA tax every tax season, all at once. This is illegal, but is done every day. You may want to fight back on becoming a self-employed contractor, or perhaps look for another position elsewhere. So if you receive a 1099-MISC form, be prepared to pay some tax.
There are many more ways to save on your taxes. See my posts on income tax at http://mjs911.gather.com/income+tax?resultType=Articles