Every time we write a post that’s focused on how emotions affect how we handle our money, we get a few comments to the effect of “Why don’t you just look at the math?” To those of you who write (or think about saying) things like that, we admire you. We admire your ability to keep emotion out of it. But we’re just not wired that way. Money carries a lot of meaning to us, and virtually every money subject comes loaded with memories and baggage. Though we’re good at looking at the rational side of our finances, and are perfectly capable in the math department, we try to stay in tune with what our guts are telling us too.
When we feel the urge to shop, we now know to ask ourselves what stress we’re trying to cope with, or what void we’re trying to fill. When we (okay, I) start checking our investment balances too often, I now know that that’s a sign I’m feeling anxious about our plan, or am coping with the loss of control that comes with building our accounts up to a size where the markets have all the say. But there are lots of ways emotions and money are tied up for us. Like with our taxes.
Bearing the Scars of Audits Past
I have a super visceral memory related to taxes that I still carry around with me. My parents divorced when I was in high school. The divorce itself was fine, but what was not fine was watching them get audited post-divorce for a year in which they had been married. It was the worst I ever saw of my parents, but it was also an important lesson in dealing with accountants and the IRS.
I learned that the IRS does not give the benefit of the doubt. I learned that accountants aren’t liable (or at least my parents’ accountant wasn’t liable in their case), even if they make mistakes or exercise bad judgment in how to report something. I learned that their experience is not something I ever hope to repeat.
I do our taxes, but we discuss everything about them. And a few years ago, we realized that we had crossed into a higher audit risk category, based purely on income — for most people, the risk is about 1 audit in 119 returns, but we found ourselves in the 1 in 38 category, about three times higher risk. The very thought of being in a higher audit risk category was enough to make me lose sleep at night, so I set out to learn what we could do to lower our risk. Sadly, short of decreasing our income, there’s nothing we can do to reduce the base risk: the IRS randomly chooses a certain percent of returns every year to scrutinize, and higher income brackets get more of those audits. But there are things, mainly certain deductions, that serve as audit red flags, and raise your risk a lot.
The biggest one that pertains to us: the home office deduction.
We both work 100 percent from home, and have dedicated home office space that we don’t use for anything else but work. The offices are even self-contained spaces, making the square footage and percentage of our house calculation simple. TurboTax would be able to figure out our deduction in a matter of seconds. We have textbook grounds for claiming the home office deduction. But, as you’ve probably guessed, we don’t claim it. It’s simply not worth the risk to us. So many people abuse this deduction that the IRS audits a higher percentage of returns that claim it, and we have no desire to be on that list. (Note: the IRS has simplified the record-keeping rules for claiming the home office deduction, but using the space exclusively for work is still required.)
We do claim all of our charitable donations, so long as we have receipts, though we notice that the AMT starts kicking in after we’ve entered enough of them, and begins to offset the deduction anyway. And we do claim all of the documented expenses on our rental property, since that’s a separate schedule on which all the calculations are made together, and it just spits out one taxable income figure. We also claim our mortgage interest deduction, since we get an IRS form for it, and can’t ignore that, and we max our 401(k)s, which reduces our taxable income. But beyond those things, we don’t go looking for any extra deductions to reduce our tax bill.
The Philosophical Perspective
Knowing that we’ll be receiving a hefty subsidy for our ACA health insurance after we retire, there’s some aspect of this that we see as paying it forward. We’re going to be benefiting from taxes that others pay for many years, so we think it’s only fair that we overpay a little bit now (in addition to the hefty sum that we already pay by virtue of having two six figure incomes).
But we also believe generally in paying our fair share, and think far too many high net worth people pay too little in taxes. (Don’t take our word for it, take Warren Buffett’s.) I wonder from time to time how much of my belief that it’s good to pay our fair share comes from a philosophical place, and how much of it comes from a deathly fear of tax audits. Fortunately, though, Mr. ONL shares my view on paying taxes, so it doesn’t matter why I believe what I believe, only that we agree in our approach.
Looking Toward Future Tax Returns
After we quit our jobs, our income will plummet, putting us in a super low tax bracket. We’ll also lose our mortgage interest deduction because our house will be paid off. We’ll still have deductions from our rental property and charitable contributions and the opportunity to contribute to IRAs, which we’ve been priced out of for a while. But we’ll certainly be back in the realm of the standard deduction, which will make most potential deductions irrelevant anyway.
It will be interesting to see how it feels when we’re no longer paying what feels like our fair share. We’ll still be paying certain taxes, like gas taxes that pay for road repairs and construction, property tax and all the bonds tacked onto that bill that pay for schools and local services, and sales taxes when we buy things. But our income tax – and our audit risk – will go way, way down. On a basic financial level, this is fantastic news. And in terms of my fear of audits, it’s pretty much the best news ever. But will we feel like, in the words of Mr. Groovy, teat-sucking layabouts? We’ll let you know. ;-)
Do emotions play a role in how you do your taxes, or do you go by the book? Anyone else out there avoid certain deductions or exemptions to reduce your audit risk? Think we’re idiots for giving extra money to the federal government? ;-) Have you found any other ways that emotions impact how you manage your finances that you only recently became aware of? We’d love to hear from you!
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Categories: we've learned
We’ve never been audited on our taxes in 25+ years. We were with the tax lady this weekend (third of 3 meetings) and discussed using the home office deduction for 2016, for the new home office we just finished in January. We didn’t talk at all about the heightened risk of being audited, but I’m sure the tax savings could be substantial. We’ll have to look at the pro’s and con’s before next April 15th.
It’s worth reading up on the deduction, because we’ve found that it’s not a huge amount of money (it’s capped at a $1500 deduction, so save ~$500 at very most), and is a big red flag for audits. In our book, that’s a big “No thanks!” but it might be worth it to you guys. :-)
If anything, I think I would just take the standard $5/sqf.
Absolutely — the simplified rules are way easier. But everything we’ve read suggests that the audit red flag risk is the same whether you calculate your deduction the old way or the simplified way. Not to talk you out of it! :-)
I keep things very, very simple. If anything is questionable I don’t claim it. My father went through an audit and I will never forget the incredible stress it caused, even though the txt return was ultimately accepted as filed. I use an accountant even though our taxes are now relatively simply in retirement, and I consider it money well spent. Life is just too short! I keep great records and accept that we need to pay our fair share, and move on. Keeps life simple, just the way I like it.
So you’ve been there! How can this be our system, if audits are so disruptive and stressful to people who’ve done nothing wrong?? Oh well, as you said, we also try to keep things simple, and can’t wait to make them simpler still when our income goes way down!
This sounds like a lot of fear to avoid a little hassle. Your parents got audited at a horrible time and that sucks, but I don’t think that means you should not claim things you are entitled to claim. If you are on the up and up, and keep all your documentation, is it really that big of a deal to have them look at your stuff again?
This is all coming from someone who has been audited by mail by the State and Federal Government. (I’ve also been called for Jury Duty! I have the best luck!) We don’t have your high income or your home office deduction. So you could be leaving the deduction on the table and still get audited.
Your point is a good one, but I will say that my parents’ audit was not the friendly correspondence audit. It was a deep dive, horrific, soul-sucking audit. Completely different thing. But yeah, our odds of getting one of those are super low, especially because we are w-2 employees, and our stuff is actually pretty basic aside from the rental property. But I know you can understand the scars. :-) AND the home office deduction is not worth enough dollars in an absolute sense to be worth the added risk — it might be a different calculation if the deduction were some huge amount of money.
Do I ever know about scars. Most of mine are starting to heal now that I’m establishing myself financially, but the wounds are still there!
If $500 is the price to protect your heart (and your sanity), keep doing it.
I knew you would understand. :-)
At the Amber Tree house, it is me who does the tax fillings each year. So far, I needed to provide once the proof of a certain deduction we claimed. All went fine and never heard back from it. As from that point, I upload all proof documents, even if it is not strictly needed.
We maximize the deductions we can get, but we also maximize the income we need to declare. Let’s just say we declare honestly what we earn and honestly what we can have as a deduction.
I do understand the emotional side of the equation: you want to avoid an audit as it is a non pleasant thing to do. If you have the office space and it is 100 pct only home work office, then it is something you could declare.
I guess it comes down to the risk-return question as with investing asset allocation: DO I want to add X USD in tax advantages vs the risk of a difficult unpleasant IRS audit.
I *wish* we could upload supporting documents in the U.S., but our system doesn’t work that way — how great that you can do that! And well said on the risk-reward calculation — it is definitely not a big enough reward to be worth the risk!
I use an accountant (the same one that handles my business accounting/taxes), so my emotions don’t get involved. :)
It’s well understood that most people decide based on emotion and look for supporting facts (numbers, logic, etc.) to confirm their decision, the one they already made using their emotion. I don’t see emotion vs. logic as one being better than the other, in the end we are emotional and not Vulcans. :)
I think if we weren’t planning to quit our jobs in a few years, we’d definitely switch to an accountant! And well-said: we are not Vulcans! Not even half-Vulcan, like Spock. :-) I appreciate that we can look at both the rational and emotional sides in a clear-eyed way, instead of fooling ourselves into thinking we’re making decisions rationally when we’re really just not aware of the emotional piece. :-)
I’ve never been audited but I did receive a letter from the IRS that I owed them $2,500 back when I was about 23 and working my first job. I knew they were wrong because I had been doing my own taxes since I was 15 and was either a CPA at this point or studying to get my credentials. I did a little research of the credit I was taking, realized that the mistake was on their end not mine. I had to send them two letters with support over a couple of months to clear the issue, but it was nothing more than a little hassle.
If I were you guys (but I’m not) and I qualified for a deduction, I would 100% take it. You are both W2 employees from my understanding. There is nothing shady about your taxes most likely as they seem pretty simple. The worst that could happen is they could say not all your deduction qualifies and send you a bill with some interest. But the bill would not be MORE than what you would get by taking the deduction. But I understand totally the emotional part. Do what makes you feel best!
Thank goodness your IRS run-in was just a correspondence audit or even just a letter, not the deep dive audit I witnessed long ago! And good for you for researching it and making sure you didn’t overpay. And you know more about taxes than we do, for sure, but we’ve seen some pretty hefty penalties levied for people claiming deductions that the IRS later balked at, in one case the penalty more than the deduction itself. But again, we’re not looking to get out of paying our taxes, so on a basic philosophical level, we’re fine skipping a deduction or two. We’ll make it back with our Obamacare subsidies! :-)
Funny true story. The Canadian version of the IRS often gets the best government service award of all government agencies and they generally are not out to screw people over or to audit Republicans. About six years into my very messy, highly contested, second divorce I was absolutely astounded to get a letter from them with a cheque for about $500 from the Canadian IRS. The letter said I had made a mistake on my income tax five years before and after an audit they had found it. Two weeks later I got a second cheque, this one for about $350, for an error in the next year. I then got a third cheque for about $125 and curiosity overcame my concern of causing trouble and I called them. The lovely lady on the other end said they were doing an in depth five year audit that had revealed these errors. I asked her why. She replied by saying she could not state why due to confidentiality issues but that whenever they get a complaint by one ex spouse complaining of tax cheating by the other ex spouse, they have a general policy of auditing both spouses. I got two more cheques at $400 and $250 and then I got served with a court notice fro my ex. In the notice my ex stated he had been audited and now owed the government so much in back taxes he could not pay any child support and had been reduced to penury. He had taken a second job as a truck driver and had not reported income of $25,000 plus each year since starting the job. The judge threw out his petition telling him cheating on income tax was no excuse for not paying child support. Karma is such a nasty lady.
OF COURSE the Canadian tax agency gets awards for service. :-) And WOW, what a story regarding your taxes and divorce. We’re huge believers in karma, and it seems like it worked out in your case.
Fortunately, Mrs. SSC does the taxes so I don’t have to deal with much of this. We have the fortune or misfortune of not being eligible for most standard type deductions. Yeah, and boo… So, except for some claims of items donated, which I don’t even think is worth the hassle of keeping up with the slips, tracking what is donated, finding the reduced value online, etc.. etc… it seems not worth it to me. We don’t have any gray areas like home office that we could claim, so it’s pretty simple there too.
I would probably claim it, but if I didn’t “need” the deduction, then it probably wouldn’t be worth it. I’m sure an audit would suck if you got picked, but don’t you still have that risk for another 7 years after you FIRE? I mean, going from baller income to “no income”, and still having rental properties and the like, seems like it could raise red flags too, because nobody just “saves”‘ that amount of money. lol Hmmm, I hope I didn’t just give you 7 years of sleepless nights… :)
Hooray for ladies doing the taxes! :-) I tend to agree with you on charitable donations of stuff — I often don’t bother claiming it. Though the “It’s Deductible” site that’s an offshoot of Turbotax makes it a lot easier, FYI. In terms of future audit risk, most audits happen within three years of filing (and I think the Obama administration even told the IRS they had to do fewer audits and only do them on recent returns), so I’m not worried that we’ll have this seven year black cloud hanging over. :-) Plus, as far as we know, audits are only triggered based on single returns, not based on a comparison of year-to-year. But I guess we’ll find out — and so will you! :-)
FYI, you won’t be able to utilize IRA’s unless you have earned income.
I would absolutely take advantage of any deductions, but many say it is wise not to utilize the home office deduction anyway. You don’t want to split your primary residence between business and personal. It is in your best interest to use that office space for personal reasons to disqualify yourself from that..
The reason is that whenever you sell this house, the portion of the house that was used for business would not be eligible for the personal residence capital gain tax exclusion. For this reason, there are several people who will play with their kids in their “home office” so that there is no question about it.
We only plan to put money into IRAs in the years when we work, to help reduce our MAGI for Obamacare purposes, so we’ll have earned income then!
A good reminder on the capital gains front re: splitting your home for personal and office. Another good reason why we’ll stick to our guns and not claim it!
I don’t have an experience to back it up, but audits scare me to death too. Luckily, my FIL is our accountant, so I trust that if it ever happened, he would just take care of it. We have proof of our child tax credits (3 healthy kiddos), save our receipts for all donations, and I claim pretty much no expenses at all for work, so I think we’re pretty safe. But… you never know!
I’m not glad you’re scared of audits like I am, but I’m glad you can relate. :-) HOW GREAT that you have an accountant in the family. I wish… And sounds like your taxes are pretty uncomplicated, which helps too. Our last return was like 56 pages, even though I don’t think of our financial lives as complicated — mostly W-2 income, but the rental plus investment stuff makes it all a bit overwhelming!
Yes, ours are very simple, and luckily, thanks to not being in a high bracket and having three kids, our tax burden is quite low.
That’s terrific! I had a dream recently that we became eligible to file the 1040EZ again after retirement, and I was so happy. :-) But that’s not going to happen!
Ha ha ha – I love/hate that you dream about this stuff.
Tell me about it. ;-)
In preparing our records (and we do use an accountant), I do try to make sure that we get every deduction for which we are entitled. That being said, I have the receipt for every single item which is claimed as a business expense, and the spreadsheet record of how that item related to business pursuit. We both even keep separate calendar books, on which we record business mileage, where we went, and the purpose of the meeting. Someday, I figure we’ll be audited. If it happens, we’ll be ready.
Sounds like you’re very thorough, which is the right way to be on all things tax-related! We are also all about the solid records, and have skipped claiming things before if our records weren’t perfect. And once we retire and can claim things like mileage for volunteering, we’ll have to find a way to keep good track — your idea about the calendar book makes a ton of sense.
Others would call it a little bit anal! LOL. But the accountant turned me on to the notion that if the documentation is good, that’s all they’re looking for…If you just claim that trip to Belize, without the what, when, why, who – then you’ve got trouble!
You’re in good company here. We’ll never judge you for being over-prepared. :-)
I get paranoid every time I click the submit button in Turbotax. I’m always certain that there’s something goofy that’s going to get me audited. Never have been audited though.
I also stopped taking the home office exemption. Having read that it was a red flag, the benefit just didn’t seem worth it. Like you guys, we don’t mind paying our fair share so I’m not out to maximize my deductions.
You’re my soul brother on tax questions. :-) Thank you for sharing that you cut out the home office deduction — we thought we were the only ones!
I recognize your feelings here. Keep it simple and easy. If in doubt, throw it out :-) . If you ever get an audit, you’ll know you’re safe, even though it will cost you some time.
I like that rule — if in doubt, throw it out! :-) I’d always rather know we’re safe than to have doubts — that pretty much goes for everything in life!
We keep our taxes simple and don’t deduct anything that’s questionable. As our side businesses get more complicated, it might be worthwhile for us to get someone else to do our taxes.
*Knock on wood*
That pretty much sums up our approach, too. And yeah, the small business stuff is where things start to get crazy — I hope you can keep that simple, too!
I think it’s wise to recognize where your emotions impact you. It’s worse to deny it in favor of “pure math” and then not realize how they may affect your decision-making without your knowledge. I could certainly see why you don’t want to raise auditing flags like the home office deduction, even if you qualify. Though I’m not sure I’d made the same decision, I’ve never seen someone close to me go through an audit.
Amen, brother. Virtually all of us have emotions that play a part in our decision-making, so we prefer to acknowledge that and listen to it, instead of pretending it’s not true. :-) And yeah, the scars from seeing parents go through a deep dive audit are not a small thing. I’m sure anyone who went through that as a child couldn’t help but be impacted by that memory as an adult!
I agree, acknowledging and understanding how the emotions play a role seems very important. I think DH and I are often a little over-impressed at our own logic skills and just assume that we are operating from a position of reason, when there are undoubtedly emotions behind all the decisions. Put two type-A personalities in a marriage and you get way too much rationalization.
Taxes are certainly a prime example for us. We are an actuary and a lawyer, and if it our tax process wasn’t so crazy it would be laughable. But it is a really big chunk of money for us, as well as an area where we both have considerable expertise. We do try to find all the benefits we can, within reason. There are other areas where we are far less inclined to look for savings, probably for emotional reasons. Travel-hacking is one, where we have this perception that it is “cheap” so we just don’t try it, even though it would probably take less effort for us to save $500 there than the same time spent on our taxes at this point.
Haha — As a major type A person, I can definitely understand what you’re talking about. (I’m also an ENTJ, so I’m sure my younger self would read all this mushy feelings stuff and say, “What the hell happened to me?!”) ;-) I love your point, too, that it’s good to put these things in perspective. Just like you pass on travel hacking, we’re fine letting go of ~$500 for a home office exemption but we’ll haggle over $1 in other settings. :-S
Ha! You’re an NT, eh? I totally pegged you for an F of some sort; I’m an NF guided by my emotions much of the time. I guess NT’s have feelings too :)
NTs have feeling too, it’s true! I should put it on a t-shirt. :-) I am definitely a thinker by nature (or, truly, an overthinker), but have learned with time and age to get better at noticing the feelings as well. And the ENTJ description pretty much fits me perfectly. :-)
I mostly work from home, but I don’t take the home office deduction either. Our office double as Jr’s room so I can’t anyway… If I have a dedicate space, I would consider it. I don’t have any emotional attachment when it comes to tax. I just try to do it the best I can. It’s mostly straight forward so there aren’t much wiggle room.
At least the location of your home office makes it an easy decision. :-) And yeah, we prefer to stick to the areas where there is no wiggle room, as you said. Things like home office can be harder to prove (how do you prove a negative, that you never use the office for non-work?), so we stay away from that stuff and stick to the straightforward deductions.
I don’t do the home office deduction (though I work 100% from home) at the recommendation of my tax guy who said it’s just risky when you have it in a primary part of the house.
I do claim 100% of the internet as a deduction since it is a work required expense for which I’m not reimbursed. Starting later this year, we’ll have to figure out the percentage which is work or rental related and the percentage which is pleasure related. Yucky- that’s why we hire an accountant.
I think having a personal philosophy on paying taxes can be very important. Particularly if you are earning enough where tax avoidance strategies may pay off.
Glad to hear you’re in the same camp as us re: the home office! Our offices are even completely separate — a small loft and a small finished attic — but we still don’t want to claim them. TJ’s point was a good one here that claiming a home office also complicates capital gains on a future sale, so more ammo for not claiming it. In the future, when we’re blogging as our main “work,” we may reconsider and claim internet, as you do, but then we also use internet for TV and everything else, so that will be another “yuck” calculation. :-)
We go by the book, but not because of fears of audits. (We have actually been audited before on state taxes because of a mistake [combination of our mistake and the phone filing system] and it wasn’t a big deal, we ended up saying whoops and just paying the difference.)
We’re just rules followers, and I feel like we make enough money and marginal tax rates are low enough that if we mess up in the government’s favor that’s not the end of the world. (Not that we’re looking to pay more taxes, mind you, just that if we mess up or something is too much effort at least it’s going to somewhat of a good cause.)
We don’t take the home office deduction because it’s not a dedicated space and at this point we’d prefer not to have to go through the effort to make it a dedicated space.
We’re total rule followers, too, and have at times not claimed things just because our backup documentation was only 90% up to snuff, not 100%. Like you, we’d rather pay a little extra in the government’s favor than risk underpaying.
Forgetting the tax aspect of this, I think you bring up a fascinating point: emotion / childhoods / past experiences have such an impact on how we deal with our finances, and you would be crazy to ignore that. I think it’s valuable to look at (i.e. are we harming ourselves by our audit fear) but also valuable to respect the emotional weight behind your decisions (i.e. this just isn’t worth it to us for the peace of mind).
Kudos for bringing up such a fascinating topic on a Monday ;)
Thanks, Emma! Totally agree — we’re all influenced by past stuff, so we might as well take a look and be honest with ourselves about what that baggage is. And, to your point, question whether that baggage is helping or hurting us, while taking a look at what will give us the most peace of mind. :-)
I was audited during a year when I’d made $12,000. Good thing they took the trouble to check up on that one! :)
My dad is a CPA, and I’ve heard about these types of decisions — what to claim, what not to claim — from him a lot. It’s really important to him to do things ethically, but I gather there are a ton of situations when it’s truly not clear what the ethical choice is, and a call simply has to be made. (On a related note, I don’t even really know how to do my taxes because my dad still does them for me out of the kindness of his heart.)
I can see how you’d want to be on the safe side with things like home offices. Past experiences have a huge impact on how we feel about risk-taking in the present, as much as we would perhaps prefer for logic to prevail. What Emma said, basically.
How ridiculous — I hope your audit was just the letter in the mail variety! That’s one of those things that, as a taxpayer, I have a problem with, even if I generally believe in the role of government. (Though, I’ve heard that there is a lot of tax fraud at the lower end of the income spectrum — I have to imagine that’s what’s behind your audit.) How nice that your dad does your taxes — I wish! And yeah, lots of calls to be made, and it’s often completely debatable what’s ethical. Like with our rental, if we repair something, but make it slightly nicer than it was, it’s in this grey area between a repair (write-off in the current year) and an upgrade (subject to depreciation over many years). (This, by the way, is why most landlords won’t upgrade anything — because it’s much more advantageous from a tax perspective to repair than to upgrade!) And past experience does for sure affect our financial decisions. Not just the horrible deep dive audit I witnessed, but also a bad investment a parent made that cost us boatloads of money… it’s kind of a miracle I’m willing to invest at all! :-)
A few years back, my dad’s small business was audited. His accountant goofed up something in the paperwork that amounted to a clerical error, but it took a loooooooong time to straighten out – between my dad and the IRS, not the accountant. The hardest part was watching it happen at a time when the economy was really bad and he wasn’t even taking a salary so he could keep paying his few workers. The stress level was high in our house! There’s always a little voice in the back of my head doing our taxes, but so far, so good. Though, I did get my first IRS scam phone call this year about a week after I filed!
Yes, it’s always between the tax filer and the IRS, never the accountant who made the mistake! (I truly love accountants, so this is not an indictment of them. Just an indictment of the bad ones!) Sorry your dad went through that, and you had to witness it. I know that audits exist for very good reasons, but sometimes it’s hard to understand that when we see how much stress they bring to people we care about. And what was the scam call you received?? Just phishing, or trying to get your tax refund, or… ?
Emotions definitely impact me, I try to at least be aware of them. Like you, if I find myself checking obsessively it means emotions are taking over. Touch wood haven’t been audited yet.
I think being aware is key, and not fooling ourselves into thinking we’re purely rational beings. :-) Let’s hope that streak of audit avoidance continues for both of us!
This shows how little I really know about money – I had no idea that there were certain variables that made it more likely for you to be audited. I mean, it does make sense though. We don’t claim any kind of home office right now, but our income has been slowly increasing over the years. We really need to do a better job of keeping records. Thanks for this information.
This is not “finance 101” type info, so don’t beat yourself up about it. :-) And audit risk is still fairly low for all income categories — plus we keep hearing that most audits these days aren’t actually that bad. Chalk it up to my scarring as a kid, but I just don’t want to go anywhere near an audit. :-)
As an accountant (in Canada, not the U.S.), I always find it kind of disappointing when people miss opportunities for tax savings that they are entitled to. But then, I deal with CRA (our version of the IRS) probably at least once a week, and way more at this time of year. When our clients have an issue with a return that we prepared and filed for them, we do act on their behalf to help them defend their position and support their claim. Sometimes the client has to provide us with additional documentation or information, but we don’t just leave them to deal with it on their own. I can’t imagine how stressful that would be for someone without any kind of training or experience in taxation! I find it odd that, based on the comments, that isn’t the case in the U.S. It seems to stack the odds against the taxpayer.
Oh, it’s almost comical to read your description, only because OF COURSE every other country in the world does it better than we do in the U.S. :-) (And, for sure Canada does most things very well!) Yeah, it does seem that most interactions with the IRS are stacked against the taxpayer, based on what we’ve seen and heard, but then there have also been recent reforms to limit the hassle factor, and those seem to be working. I think it’s admirable that you stand by your clients when they get audited — I wish it was more that way here!
I actually do have dedicated space in my house for my home office, and do claim it every year. I have been doing that for almost 20 years. I can tell you that when I am done in Turbo Tax each year there is a screen that shows your Audit Risk, and mine always says low risk. Now with that said I did have the pleasure of getting audited one year, however the home office was not in question at all during the audit. I believe if you can prove it you should take the deduction.
That’s good to know! If you don’t mind my asking, are you guys in a high tax bracket? When we do Turbotax, we come in at a low-medium audit risk, but if we add home office, it goes up to high. So that’s what got us thinking about this in the first place!
We are in the 15% Tax Bracket, and it could be because my home based business is not much more than about 10% of my Adjusted Gross Income.
That makes sense, then. You’re in basically the lowest audit risk category based on income, so adding the home office deduction doesn’t raise you into the high risk category. It’s different for higher brackets, sadly. But enjoy that deduction! :-)
My fear of getting audited is what keeps me from doing my taxes. I figure that a professional would be able to keep us from paying the least amount possible! I’m such a financial nerd that I’m pretty sure I could figure out how to do our taxes right, but whenever tax time comes I chicken out :).
Haha — I understand! I sort of feel like TurboTax is a professional. It asks lots of questions, you give it answers, it doesn’t judge you, and then you hit submit. :-)
I nerd out with taxes since my Dad made me start filling them out as a teenager, a great life lesson for figuring out how to optimize them. We’ve actually had a big accounting firm handle ours the last few years since my wife was on a US contract from Germany so the foreign accts make things more complicated- paid for by the employer of course. Once we lose that benefit for 2019 taxes it should be easy enough to figure out with our previous year’s returns.
Our Fed + State returns were 56 pages long this year but they go into overkill mode with tons of supporting worksheets that aren’t necessary for filing. Should be able to get it much smaller when I’m doing it.
I never knew that 1-in-38 stat, we entered that arena too a few years ago but I’m always honest with the IRS and double-check the forms before they’re filed. I also run a few estimates of taxes owed during the year to adjust withholding so I’m not worried about an audit (not an invitation Mr. IRS!). I’ll bet you’re looking forward to a simpler 2018 return though!