Debunking End-of-year Tax Deduction Myths
Have you noticed how many sources give the same generic advice when it comes to end-of-year tax deductions? They usually say to give to charity and make a big purchase that counts as a business expense.
While this may seem like a quick fix, the reality is these deductions may not be all they are cracked up to be. In fact, according to Eric J. Nisall, a South Florida-based accountant who specializes in small business, it's never that simple.
Take giving to charity for example. Giving to charity is a bad idea if you're only doing it for tax purposes. "First of all, you can only take deductions that you itemize on a Form 1040, Schedule A. Second, it doesn't count if you're filing a Schedule C as a sole proprietor or a single member limited liability company," says Nisall.
The IRS echoes this statement and adds that in order to be deductible, charitable contributions must also be made to qualified organizations, not individuals.
Nisall further explains, "Even if you can deduct your charitable contributions the most you'll get back is $0.39 for every dollar you spend, so if your only intent is to relieve your tax burden, you're better off keeping the money to pay your tax bill."
What about business expenses? Can business owners get a nice tax break if they make a big business purchase at the end of the year? Only if you actually need the item you are purchasing.
"Anyone who tells you to spend money to get a tax write-off is giving bad advice," says Nisall. "If you have no use for the items, then you're just wasting money."
Bottom line: Tax planning is a year-long process and Nisall says there's almost nothing you can do to improve your situation if you wait until December.
However, some folks will tell you otherwise, so here are some scams to watch out for.