In this episode of Practical Tax, tax attorneys Steve Moskowitz and Liz Prehn discuss what you can legally deduct in your 2018 taxes. They’ll walk you through various tax planning details and calculations that you should consider in ensuring all of your deductions could pass the scrutiny of an IRS audit. Listen to the podcast to learn more!

Episode Transcript

Speaker 1: 00:00 My husband and I have a small business, and 2018 was our very best year. My husband does our books and our taxes. He’s a really smart man. Still, I wonder if all of our deductions would pass the scrutiny of an IRS audit. That’s what I think about in the middle of the night.

Speaker 2: 00:17 You’re listening to Practical Tax, with tax attorney Steve Moskowitz.

Steve Moskowitz: 00:21 Hi. I’m tax attorney, Steve Moskowitz with longtime Moskowitz tax attorney Liz Prehn. I get asked the question, “What can be legally deducted in the 2018 taxes?” My new favorite section in the Internal Revenue Code is section 199A. If you qualify, you get to pay tax on only 80% of your profit instead of 100%. But there’s limitations, but there’s a way around the limitations. So what we need to do is first see what you’ve done and how can we maximize this. There’s decisions to be made. For example, real estate. Is a real estate operation entitled to this or not? The answer? Yes if it’s a business, no if it’s an investment. What’s the difference between a real estate business and a real estate investment? There’s a laundry list of things that we would go over for you. Another thing is, a lot of people say, “Well, you know what? I meant to do tax planning in 2018, but here it is 2019 and I’m just too late for that.”

Steve Moskowitz: 01:19 In a lot of things that’s true, but not with certain pensions. There are certain pensions that you can open up in 2019 and still deduct them for 2018 which is a very nice deduction. There’s a lot of other things too. Basically, what happens is, when you come in with a tax attorney, you’re not a cookie cutter. We talk to you and say, “What are you doing?” We find out about your life. Then there’s a lot of things we take a look at. For example, suppose someone has their own business, do their kids help them in business? If the answer is yes, you know the parent can deduct the fair market value of the services actually performed by the kids. So many people overlook that. The bottom line is, we don’t just say, “Give me your papers.” We talk to you first and we learn about your life, your business. Then we say, “Well, since you’re doing that, you might want to consider this and this.” We start off with talking, and then we do the number crunching.

Liz Prehn: 02:18 I think here in California, I think taxpayers are going to be… we’re due for a wake up call. If you’re an employee making over X amount, you probably didn’t have enough withholdings withheld for 2018. You’re probably going to have a tax bill. There’s payment plans, things like that you can do. I’m happy to tell you over the phone how to do that. The number one tip I can give you is, if you’re an employee, you get your W-4 adjusted right away so that you don’t have this problem next year because the biggest problem I see in a lot of cases, it really shouldn’t have ever went that way, which is it just happened one year and then it snowballed. The other thing is, yeah, maybe it’s time to get a little more aggressive on your tax planning.

Steve Moskowitz 02:52 Snowballs is something we see here all the time in California. It happens all the time. Somebody does something in year one, and they’re not quite sure about it, or they don’t do something, like not file the return. And then year two comes along and they say, “Well, how can they file year two? They didn’t file year one.” Or they owed money from year one, and now they owe more for year two. So they make mistakes. They don’t file the return because they owe the money. That’s very, very common, that the people will start off with a relatively small problem, like a medical problem and make it a bigger and a bigger problem. We’re here to help you. As tax attorneys, as defense attorneys, we’re not judgmental. Whatever you did, was it, “How could you have done that?” We’re not going to say that to you. We’ll say, “Okay, look, here’s your position and here’s what we need to do to make the best of it.”

Steve Moskowitz: 03:34 We know the divorce rate is so high that a lot of the listeners got divorced in 2019 rather than 2018. The divorce law changed the taxes, polar opposites. This law took effect 1/1/19 unlike most of the other things that were 1/1/18. Prior to the new law, if you were the recipient of spousal support, oftentimes called alimony, you reported it on your return and if you’re the payor of spousal support, you deducted it. That’s flipped on its head, but only for divorces that were signed on 1/1/19 and thereafter. Before that, it’s still the old rules. But for the new ones, what’s so very important, it’s no longer income to the recipient, but it’s no longer deductible to the payor. So if you’re in the process of a divorce, and you’re going to be either a payee or a payor of spousal support, this tax will vastly change what you’re going to receive and keep or pay.

Steve Moskowitz: 04:36 That’s something… it’s so important to factor that in to the divorce proceedings. What’s the right number? Bottom line, that’s why it’s so very important to do these calculations before you sign on the dotted line. One of the things we do as tax attorneys is give you our opinions on things. What that means is oftentimes a taxpayer will say, “What would happen if I did X?” We’ll tell you so you can plan because sometimes you want to do X just a little differently than you thought. It can make a huge result. What you never want to hear from whomever does your taxes, whether it’s us or somebody else, “Too bad you did it that way.” That’s what we’re here to prevent. Say, “Look, do it this way and get the maximum tax benefit.”