Tax time is not just about the refund

We are entering that time during tax season where we counsel the micro-corporations or individuals that usually just see us at tax time. For clients like these we are more of a service provider than a business consultant. With them, our success is measured by the size of their refund. If they get one, it’s a job well done and attributable to our tax skills. If not, there must be something else that can be done.

Refunds have become a be all and end all in tax preparation. Partly due to the non-stop H&R Block ads that seem to assert if you don’t get a refund someone must have screwed something up. Clients are always surprised when I tell them there is no magic bullet on taxes. If you make enough money, you will owe a nice chunk to the federal government.

Here’s a good example: A married couple’s income increased a decent amount this year and as a result, they owe taxes when in the past they were used to receiving refunds. For them, two things happened. First, they lost their deduction on their rental real estate property. Once a married couple moves over $150,000 income they can no longer take losses on real estate. Their increase in income also caused them to lose some education credits that they used to get for their children which had amounted to a $4,000 tax credit.

This is not to say nothing can be done on taxes, but the options are not as limitless as people would believe. Aside from cheating on taxes and claiming bogus deductions, there wasn’t a thing anyone, even us, could do. The couple asked if they bought another rental property if that would be helpful. Our response: Get another rental property based on its merits as a rental property and as an investment. It wouldn’t do them a bit of good on taxes. Bottom line: The increase in income not only cost them additional income taxes by having a higher income, but it also cost them about $6,000 in tax benefits they used to get.

The truth is, once a married couple’s income starts to move over $100,000, they start to lose some deductions. Child credits start to phase out. Losses on real estate are suspended. Education credits disappear. Student loan interest, which is already capped, goes away.

While we will always make sure that our clients don’t pay a nickel more in taxes than they should, we can’t perform the miracles that the advertising seems to suggest. But it still never hurts to sit down with a CPA before the tax season. They should ask you the right questions to make sure you are taking every deduction you can. In addition, CPAs can be a great sounding board for a number of other financial issues you may have.

Mike Bark, a principal at Edge Advisors, LLC, in West Allis, advises businesses on valuations, tax allocations and business transactions.

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