Ridiculous tax rules

Surprises in the tax code

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Donna H. Laubscher, CPA

Although some parts of our tax law make sense, many do not or lead to abuses. When it was formed back in 1913, our whole tax law was 27 pages. Today, the tax code is more than four million words and 9,000 pages. Compliance can cost a lot of time and money. It’s estimated that individuals spend 6.1 billion hours a year doing their filings – the equivalent of a year’s worth of work for three million full-time workers. So, while this complexity can create what we fondly call The CPA Full Employment Act, there are some strange items that would appear ridiculous to the lay person.

Alternative Minimum Tax

The Alternative Minimum Tax (AMT) is a complex parallel tax system that just continues to grow. Its results are hard to predict and can be perverse. There is absolutely no way to simply look at a taxpayer’s situation and know if they are going to be subject to AMT or not without doing a full projection. The back of the envelope tax calculations are no longer a reliable predictive test for AMT. (Note: After passage of the Tax Cuts and Job Act in December 2017, the number of taxpayers subject to AMT is projected to decrease, but that won’t be until the 2018 filings in 2019.)

Ridiculous deductions

Going from the complicated more into the sublime, there have been items tested in Tax Court where certain deductions have been allowed. For example, special oils used by professional bodybuilders can be a tax deduction. However, a bodybuilder’s diet supplements are not deductible.

You may also be able to donate your house to your local fire department so that they can burn it down to practice putting out the fire. But in order for this deduction to work, you can’t do it with the intention of rebuilding a nicer, newer, bigger house. You have to donate the land as well.

How about the adolescent who had an overbite so her doctor recommended that she take up the clarinet to correct it. Since it was prescribed by a doctor, it was allowed as a medical deduction.

Here’s a different item that can be used as a business expense. Prostitution is illegal almost everywhere except in certain counties in the State of Nevada. Some workers there may be able to claim business deductions for breast implants and costumes. Certain strippers may also avail themselves of these similar business expenses.

While on the subject of illegal activities, everybody has heard about Al Capone who went to prison for tax evasion. The reason is because tax evasion is frequently easier to prove than the illicit activity. So, just a reminder, even if your income is from ill-gotten gains such as illegal drug sales, you should include the income in your tax return. You can also have a business expense with that because the cost that you paid to obtain your illegal drugs, for example, can be written off as cost of goods sold.

Something that’s a little more mundane and not quite as titillating – if you rent space, such as a room in your house, for less than 15 days, that income is completely tax free. Once you rent for 15 days or more, it becomes taxable income. It is possible that you may be able to take some expenses against that taxable income. You do need to allocate between the space you’re renting and the space you’re using personally.

Marriage Penalty

The final item that would seem to be the most ridiculous is if you have two high income earning individuals who meet, fall in love and get married. Yes, the marriage penalty is a real thing. The couple’s filing status of married filing jointly will almost always be higher than if they were just living together and had each remained in a single filing status. There have been instances where couples have gotten married and then do what’s called a tax divorce – they divorce, but are still living together solely to save on the tax bill.

Don’t be fooled

As always, to avoid any surprises from the regulatory authorities, consult your professional tax advisor so that the research and documentation can be gathered BEFORE you need it – not after!

Donna H. Laubscher, CPA, Partner, specializes in tax planning and compliance for closely held businesses. She can be reached at DonnaL@hhcpa.com or (480) 483-1170.