Originally Aired: May 28, 2014
Topic: Tips for Reducing Taxes with Sandy Botkin, CPA and Attorney
The Lange Money Hour: Where Smart Money Talks
James Lange, CPA/Attorney
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- Introduction of CPA, Attorney and Former IRS Agent, Sandy Botkin
- Two Tax Systems: One for Business Owners, One for Working Stiffs
- Many Small Steps Can Add Up to Big Tax Savings
- Not Claiming Kids as Deductions Can Save on College
- Students Who Pay Their Own Expenses Become State Residents
- Home Repairs Are Not Deductible, Home Improvements Are
- File Taxes Early as Possible If You’re Getting a Refund
- Taxpayers Who Prepare Their Own Returns Make Twice the Mistakes
- Increased Withholding Can Eliminate Having to Estimate Taxes
- Transfer Equipment Titles into an Irrevocable Trust, Then Lease It Back
- To Avoid Problems With IRS, You Have to Do Things Right
- Structure Your Business Like a Business, Not a Hobby
Welcome to The Lange Money Hour: Where Smart Money Talks with expert advice from Jim Lange, Pittsburgh-based CPA, attorney, and retirement and estate planning expert. Jim is also the author of Retire Secure! Pay Taxes Later. To find out more about his book, his practice, Lange Financial Group, and how to secure Jim as a speaker for your next event, visit his website at paytaxeslater.com. Now get ready to talk smart money.
Hana Haatainen-Caye: Hello, and welcome to The Lange Money Hour. I’m your host, Hana Haatainen-Caye, and of course I’m here with Jim Lange, CPA, attorney and best-selling author of the first and second edition of Retire Secure! and The Roth Revolution: Pay Taxes Once and Never Again. Jim’s guest tonight is Sandy Botkin, president of the Tax Reduction Institute. Sandy is an attorney, CPA and a former trainer of IRS attorneys nationwide, and now, he is on our side. His most recent book, Lower Your Taxes – Big Time!, the completely updated 2011-2012 edition, is the ultimate guide to saving on your taxes. Last year, Sandy was on the show and gave a series of great tips that could save listeners thousands of dollars in taxes. On tonight’s show, Sandy will again share with you the top five things you can do to maximize your tax return this year. We are also going to discuss why tax planning is so important, and why people of all incomes should care about tax planning. In addition, he will tell you about what he considers tax payer freedom day and what it means. But before I turn it over to Jim, I want to remind our listeners that the show is live, so please feel free to call in with your questions for Sandy. The number is (412) 333-9385. Good evening, Jim, and welcome to the show, Sandy.
Sandy Botkin: Thank you.
Jim Lange: Sandy, thanks for coming on the show. You know, as I was preparing for the show, and I was reading quite a bit of your book Lower Your Taxes, I was pretty astounded by the amount of potential savings that listeners could have by either buying your book or listening to some of the advice that we’re going to talk about now, but let me tell you what one of my concerns is. One of my concerns is, I don’t want to get anybody in trouble by doing anything that is wrong. So, it might be OK to go up to the line of what is acceptable and what isn’t, but not over the line. In fact, I was involved in a TV program one time. By the way, nothing to do with KQV or even my show, where there was a guy named Irwin Schiff, and Irwin also wrote a book, and he basically said, “File an income tax return and put zero on it because the whole system was unconstitutional.” Now, he was obviously a little bit of a nut. How do we know that what you’re telling us is sound information, and if people go out and do some of these things, that they’re not going to get in trouble?
Sandy Botkin: Well, first of all, I can tell you that Irwin Schiff does not look good in prison orange.
Jim Lange: Hopefully, you’ll never visit him there!
Sandy Botkin: I am a lawyer, I’m a CPA and I’m also a best-selling author, but more important, I was a former trainer of IRS attorneys nationwide, so I guess if you think of an IRS agent as a rat, I guess that makes me the head rodent, and if you do a Google search, which is kind of interesting, if you do a Google search for a lot of different famous people, you’ll see a lot of pro and a lot of negative. You will see thousands of hits on me and you will rarely see anything negative, and we’re talking of all the thousands and thousands of hits on me. So, I must be doing something right, and by the way, speaking of that book Lower Your Taxes – Big Time!, one reason that you know you’re not going over the line is because, if you noticed, every single thing I say in that book is footnoted. It’s annotated to the Internal Revenue Code, regulations, ruling and case law. I don’t say anything that I can’t prove.
Jim Lange: Well, I actually kind of knew that because, frankly, if you didn’t have those kinds of credentials, you wouldn’t be on the show, and if you didn’t do such a fine job last year, but I just wanted to have the listeners hear it directly from you, hey, you have some serious credentials, because some of the things that you talk about are really pretty significant in terms of tax savings. So, let’s just say, now I know you love to have people start their own businesses, don’t you?
Sandy Botkin: That is correct, and there’s a reason for that. The reason is is that we have two tax systems in this country, and when I first say that, most people think, “Sure, one for rich and one for poor.”
Jim Lange: And you don’t mean alternative minimum tax system either, do you?
Sandy Botkin: No. If you own your own business, you can take those deductions for the alternative minimum tax, too. The problem is if you’re an employee. If you’re an employee, if you’re one of the working stiffs, then you’re really hit the worst because you’re taxed on dollar one, you have very few deductions, you can possibly be hit with the alternative minimum tax if you don’t do things correctly, but if you are self-employed, first of all, you get a lot more deductions. You can deduct part of your house, your spouse, the equivalent of your kid’s education and weddings, and I’m not kidding — I’ll get into that — you can set up a pension plan that makes any government plan small by comparison. I agree with you, by the way, about the Roth situation. And it’s just enormous benefits being self-employed, and people really need to understand how critical that is.
Jim Lange: Well, I think, particularly in today’s economy, even if people wanted to have their traditional 9-to-5 job and work it for 20 or 30 years or even more and then retire on a pension, that’s not so much an economic reality these days.
Sandy Botkin: Oh, not only is it not an economic reality, but I’ll tell you some really startling statistics. First of all, there was a study done by Harvard, they wanted to know what percentage of people at age 65 — you probably read about this — could retire at the same standard of living they had before retirement, and the answer was a shocking 4 percent, which means 96 percent of most Americans — with the exceptions of the ones listening to this show because they’re getting smarter — either have to continue working, live on some form of charity or reduce their standard of living, and we’ve been reading about how older people are working longer, which is why there’s not a lot of jobs available for the younger group. I was just reading, in fact, about the post office where they said there are three people working at age 98. 98! And part of that is they don’t have the money to work their retirement and have a sufficient retirement, so they have to work longer or they have to work harder. A good example of that was my uncle. My uncle was a principal in a public school. He wanted to make some extra money, so what did he do? He got a second job and he became a principal in a private school. He was putting in 70-hour work weeks and he died penniless because he was subject to that system that’s designed to take your wealth instead of creating wealth.
Jim Lange: Well, I think there’s a lot of great things in your book about small businesses. We probably won’t spend most of our time there because I don’t think that’s the majority of our listeners, but I do like the idea of … first of all, and partly it’s because I am a small business myself, I like small business. I would prefer, and frankly, I would prefer for my daughter, for example, that she figure out some way not to be beholden to the man, but could go out and stake her own claim, but the tax motivations of a lot of the things that you have in there for small businesses, and particularly, and I don’t even mean five, 10, 20 employee businesses, but even a lot of your strategies will work with, I call it a “man and a desk” business.
Sandy Botkin: That’s right! One person. That’s exactly right. It is shocking to me that people who want to make extra money will work overtime for their boss or overtime for their work, when frankly, they should work as little as possible to avoid getting laid off and putting that extra time into developing a side business. They have tremendous tax benefits there. They may be able to make enough money where they don’t have to keep working for that boss, which, by the way, is spelled backwards double-s-o-b, and they don’t have to put up with the commute and put up with all that other stuff. I’m a strong, strong business proponent, and when you look at the tax laws, so are the tax laws, too.
Jim Lange: Well, yeah. In fact, the one argument that I could say about, boy, you know, he has so many tax deductions for small business owners, is that when you deduct everything, you don’t end up showing much profit, so you can’t put all that much money into a retirement plan.
Sandy Botkin: Well, the deduction includes the retirement plan.
Jim Lange: Well, that’s right. I mean, I would rather not pay the tax and then invest a little differently, although again, I know that we’re on the same page with Roths. But let’s get away from small businesses for a minute because we do have a lot of listeners who have maybe a cabin or a second home, and interestingly enough, as an estate attorney who prepares wills, I would say we spend as much time or more on the $50,000 or $100,000 or maybe $200,000, but often not a huge value, on what to do with that after a husband and wife dies than we do on maybe $1 million or $2 million. So, if you could tell us a little bit about what people who already have some type of vacation home, a cabin, a little place in the country or whatever it is,
because I know that you have some opinions on that, and frankly, I think they can save people a lot of money.
Sandy Botkin: Oh sure! I mean, if you’re talking about the average American who doesn’t necessarily have a small business, the first thing I would say is to get a small business.
Jim Lange: Right, right.
Sandy Botkin: But there’s an awful lot of things that people should be doing. I’ll give you a couple things just off the top of my head here. First of all, I’ll give you one thing that I will bet 90 percent of your listeners didn’t know and are doing. It’s a small thing but it adds up. IRS has ruled that not only is your dry-cleaning deductible when you go away on an employee business trip or even an out-of-town seminar, but as long as the clothing got soiled there, you may clean them anywhere. So, your first dry-cleaning bill you incur when you get home is 100 percent deductible.
Jim Lange: I like that. I didn’t know that.
Sandy Botkin: See? And it doesn’t sound like much, and that includes the shoe shine, by the way, that you might get at the airport. So, if you add all that up and you multiply that by 20, 30, 40 years, that can be thousands.
Jim Lange: I did not know that. I always just kind of figured well, you know, clothes are one of those things that, unless you’re some type of a workman wearing specialized clothing, that you couldn’t deduct. In fact, I always resented that a little bit because I’m a proper CPA and an attorney and I can’t buy $100 suits off the rack, so I get the custom with the label and all that, and they’re not cheap, and I’m not allowed to deduct it. But I didn’t know that I could deduct my dry-cleaning when I go away.
Sandy Botkin: That’s absolutely right. In fact, by the way, talk about the suits off the rack, you’re right. Normally, the clothing that you normally wear, the suits, the dresses, the coats, things like that, are not deductible, but is there a way to write those off? There’s an old saying where I live in Washington, D.C., “Where there’s a will, there’s a lawyer.”
Sandy Botkin: Did you think I was going to say relative? Now, what you do, if you’re willing to do this, is you put a stitched-on logo on the front of your suit or shirt or whatever it is, showing what business or company you work for. By doing that, that no longer becomes a normal outfit. That becomes a costume. Costumes are fully deductible and so is the dry-cleaning of that.
Jim Lange: Now, what about a little “JL” that’s kind of …
Sandy Botkin: No, I don’t think that’ll work. It’s got to be big enough to show what you’re doing.
Jim Lange: I have the little “JL” on the pocket that frankly is covered by the suitcoat.
Sandy Botkin: Somebody asked me a question at one of my seminars when I said that. “Does the logo have to be viewable?” And I asked, “What do you mean?” He said, “What about underwear?” No, it has to be viewable, that’s correct!
Jim Lange: All right, well, in a way, I wish I had a show that just was nothing but to small business people because some of the things that you have are really just wonderful for that. But probably most of the listeners here, and we want to make this relevant for …
Sandy Botkin: OK, let’s keep going.
Jim Lange: Oh, by the way, the truth is, and I’ll tell this to the audience, I’ve read good chunks of your books and we spoke for an hour a year ago, the truth of the matter is, I could walk away right now and you could talk for four, five, six hours without interruption. So, running out of topics for you to tell people how to save money is not one of my concerns tonight.
Sandy Botkin: No. Plus, I have a new financial book coming out, so I’m going to have a lot of things to say.
Jim Lange: All right. So, why don’t we keep going with some ideas for people who are employees?
Sandy Botkin: All right, let’s talk about this.
Jim Lange: The other thing is, we do have a lot of retirees, too.
Sandy Botkin: All right, and I want to talk about the second home also. Don’t let me forget that.
Jim Lange: OK. I’m happy to talk about that, too.
Sandy Botkin: Yeah. Right now, we’re in an economy where some people have lost their jobs, although more people are being hired than maybe two or three years ago, but still, there’s a lot of unemployed people. A lot of people, when you’re unemployed and you’re looking for that job, you can deduct, as an employee, all of those expenses of looking for a job, and that gets really missed, and that includes things like if you hire a professional headhunter or you hire a professional coach to teach you what you need to do for the interviews, resume preparation, travel to the interviews, and that includes if you have to stay in a hotel, the mileage to go to an employer, things like that. Anything to get that job is fully tax deductible as a job-hunting expense.
Jim Lange: All right, now, help me out for a minute because, when I was in law school, we had a professor, and he used to say, “If you don’t know where it belongs on the 1040, you don’t really understand the concept.”
Sandy Botkin: Itemized deduction if you’re an employee.
Jim Lange: All right, and is that subject to the 2 percent floor?
Sandy Botkin: That is subject to the 2 percent floor. That’s correct.
Jim Lange: It is, OK. All right, but by the way, you know, that’s one of those things, and, I mean, I actually told my CPAs that they should really take a look at your book, and I don’t know if you’ve reduced some of the ideas in your book to a checklist, but there’s a lot of stuff on here that even the CPAs didn’t know.
Sandy Botkin: Oh yeah. I’ve had a lot of accountants call me up and say, “Gee, I really didn’t know this information,” and they’re using it now for tax planning. I’ve had coaching companies start whole coaching businesses based on my material.
Jim Lange: Yeah, I didn’t know about the dry-cleaning, and I also didn’t know about the job-hunting expenses being deductible.
Sandy Botkin: Well, let’s keep going. Here’s an interesting thing: Something you did know, but there’s a little twist that I bet you didn’t know, is the fact that when you send your kids to college, you have a choice. You could get a tax credit, which is a yummy dollar-for-dollar reduction in your taxes of up to $2,500. It’s called the American Opportunity Credit, and that’s per kid. Or you can get what’s called a Lifetime Learning Credit where you can get up to $2,000, which is not as good as the American Opportunity, for any education, undergrad or graduate. It’s one or the other. The problem with both of those credits, however, is that there are severe income limitations. You have to make under a certain amount of money, and if you’re asking me what that number is, I’m not quite sure exactly. It’s about a hundred and some odd thousand. I just don’t remember which it is. But what do you do if you do make more than that amount so you can’t take the college credits? What you do is you stop claiming your kids as dependents. If you stop claiming them as dependents and you give them the money and let them pay for the tuition, they can take the child-care credit against their income, and that includes their earned income, dividends, things like that. So, that’s a way around that income limitation.
Jim Lange: Yeah, by the way, if you are a parent with children in college or a grandparent who wants to reduce the tax burden of their children, you should be taking notes right now because that’s a really valuable tip, and the other thing that you talked about, and you were pretty bold about it, you said … and I forget what state you’re a resident in …
Sandy Botkin: I’m a resident of Maryland.
Jim Lange: All right, you’re a resident of Maryland. But if I remember right, your daughter did not attend a Maryland school.
Sandy Botkin: That is correct.
Jim Lange: And wherever she did attend, the in-state tuition was significantly lower than an out-of-state. Now, had she stayed a Maryland resident, then she would’ve been paying out-of-state tuition that would have been quite high. But I believe that you had a different idea for her, so maybe you could share that idea with our listeners.
Sandy Botkin: That’s correct. In fact, in my new book, I’m going to be including this, by the way. It’s an article that I wrote on how to get in-state tuition for an out-of-state kid, and there are a number of things you can do. A lot of times, your state doesn’t have the major that your kids may want, or maybe another school has a better major in terms of what they’re offering. What state are you in, by the way?
Jim Lange: We’re in Pennsylvania, or I was going to say you might do what my wife did, which is she grew up in New Jersey and she went to school in Pittsburgh at Carnegie Mellon. Ready for this? Which is obviously one of the fine computer science schools …
Sandy Botkin: Understood.
Jim Lange: … because her boyfriend was going to school nearby.
Sandy Botkin: That’s an interesting reason!
Jim Lange: True story, by the way, she bumbled and stumbled her way to Carnegie Mellon, where she ended up getting a master’s in electrical engineering to be near her high school boyfriend.
Sandy Botkin: When we’re younger, we’re dumb. I could’ve gotten into a lot of different law schools. I did very well on the LSAT. But what did I do? I was a New York boy. I went down to Florida during one of the worst winters in New York and I see these beautiful palm trees. I see these beautiful skimpily-clad girls and I said to myself, “I’m going to the University of Miami Law School because that’s where I want to go!” What was my reason? Skimpily-clad women! That’s a dumb kid!
Jim Lange: Well, I might be a little dumb but I’m not a kid, and that sounds pretty good to me!
Sandy Botkin: Well, my reasoning wasn’t always so smart.
Hana Haatainen-Caye: OK, with that, I’m going to cut in right here and we’re going to go to a break. We will come back and continue this enlightening conversation about taxes and other things. I want to remind our listeners out there that we are live tonight, so if you have any questions, you can give us a call at (412) 333-9385. We’ll be right back with Sandy Botkin and Jim Lange on The Lange Money Hour.
Hana Haatainen-Caye: Welcome back to The Lange Money Hour. This is Hana Haatainen-Caye, and I’m here with Jim Lange and Sandy Botkin, president of the Tax Reduction Institute.
Jim Lange: Now, Sandy, where we left off was you were starting to tell us how your daughter was able to pay in-state tuition even though she grew up with you, and at least before she went to college, was a resident of Maryland.
Sandy Botkin: OK. There are a number of ways to do it, and as I mentioned, I’m going to get a whole chapter on this, including a chapter on trusts and all kinds of stuff that we were talking about. But here’s what she did. I used my legal background. In many states, there is an exception where you can get in-state tuition. You don’t always have to be in the military, which is one way, or have your parents move there. There’s another exception. If the kids pay their own expenses, they become a resident of that state and they are truly independent of the parents and pay their own tuition, then they get independent status, even though you don’t have to go for a trial and you don’t have to have a court determination. All you have to do is have them pay their own expenses, and if they’re independent, they can get in-state tuition in a lot of schools, and that’s what it said in the Ohio regulations for the school that she went to. So, what we did was, we saved up money over the years and we put it in her name, and that’s been something we’ve done, and I’ve always been a firm believer in saving for long-term types of deals, like tuition, weddings, things like that, in advance in their name for doing things like this.
Jim Lange: Now, I hate to interrupt, but are we talking about savings in a 529 plan, savings in a uniform gift to minors …?
Sandy Botkin: Some of the savings were in a 529 plan and some of them were just in her name.
Jim Lange: All right, and her name, was that a unified gift to minors trust or just her name?
Sandy Botkin: That is correct.
Jim Lange: OK.
Sandy Botkin: And actually, the 529 plan was a prepaid tuition plan for the University of Maryland. Little did I know, she wouldn’t be going to Maryland.
Jim Lange: OK.
Sandy Botkin: But a lot of these prepaid tuition plans have an interesting deal, especially the Maryland one. If you don’t go to a university in that state, if you go to a different university, they will pay out what the tuition would have been.
Jim Lange: OK, I like that.
Sandy Botkin: Which is kind of interesting. So, what we did was, for one year, we stopped claiming her as a dependent. We then had her pay all of her own expenses out of her own money. She paid her own car, she changed her driver’s license, she changed her voter’s registration, she filed an Ohio tax return to show that she really intended to become a domicile, she paid her own tuition, she paid her own rent, she paid for her own books, her own gas, everything, and she kept records as to what she was paying, and sure enough, when the school wanted to know if she was truly independent, she showed that she paid for everything and that we weren’t paying for anything. By doing that, she established independent status and she got in-state tuition from thereon in. To give you an idea of how valuable that was, in-state tuition was $9,000 a year; out-of-state tuition was $24,000 a year. We saved $15,000 a year for 2½ years.
Jim Lange: And I would imagine that today, there might even be a bigger differential?
Sandy Botkin: That is correct.
Jim Lange: So, again, for people who have kids in college, between what you said there and the credits and having the credits on your daughter’s or your son’s return is really some great stuff. I wish we had more time. You also said that there were some fun ways that people could deduct their vacation home.
Sandy Botkin: Let me get into that. Yes, there’s some very important concepts on the vacation homes. First of all, you can deduct up to the interest, up to a million dollars’ worth of total debt on your primary residence and/or your vacation home. That’s the maximum, plus you get what is known as a home equity loan of $100,000 on your principal residence. But there’s something else that’s very important, and that is when you’ve got repairs, and this applies to vacation homes and your principal residence, if it’s a repair, if you’re fixing something, you get no benefit from that. You can’t add it to your basis to reduce your gain, you can’t deduct it, you can’t do anything! Repairs are lost money. You might as well have taken that money and burned it in a fireplace because you get no benefit from it.
Jim Lange: By the way, I hate to interrupt again, but this does not apply to rental property where the repair is an ordinary necessary business expense?
Sandy Botkin: This does not apply to rental property. We’re talking vacation home and principal residence.
Jim Lange: Right, I just wanted to clarify.
Sandy Botkin: That’s correct. We’re not talking about rental property. If you want to talk about rental property, I’ll switch the subject. That’s not what we’re talking about.
Jim Lange: No, let’s keep going with not rental property.
Sandy Botkin: Now, if, however, it’s an improvement, improvements are different. Improvements add to your basis, which means it reduces the gain when you sell that property, and, even better, if you decide to rent the property out, improvements increase your basis, which increases your depreciation. So, improvements are what you want when it comes to both your principal residence and your vacation home, and not repairs. So, what’s the difference? Well, the key is to classify them correctly by structuring them correctly. A repair, for example, is something that simply fixes something. It’s not new. An improvement would be new. For example, if I fixed the compressor in an air-conditioning system, that’s a repair. If I put in a whole new air-conditioning system, it’s an improvement. A repair fixes a hole or fixes a part of something. An improvement might fix the whole wall. An improvement is designed to make it better, design it to a new condition and increase the value. Repairs don’t do that. A repair brings it to the same condition. So, whenever possible, you always want to try and structure it as an improvement and not a repair because you can add that money to your basis. You don’t lose it.
Jim Lange: Yeah, you know, I love some of your strategies. The other one that I liked …
Sandy Botkin: Hello?
Jim Lange: Yeah, are you still with me? Can you hear me?
Sandy Botkin: You’re breaking up.
Jim Lange: All right, can you hear me now? I hope you can.
Sandy Botkin: Can you hear me?
Jim Lange: I can. We have a little problem here.
Sandy Botkin: I think we’re having a phone problem here.
Engineer: He can try to call back, maybe?
Jim Lange: All right.
Engineer: We hear him fine, so…
Jim Lange: We hear you. You don’t hear us?
Sandy Botkin: I can hardly hear you, Jim. Maybe instead you should have a new call. I can call in or you can call me.
Jim Lange: Yeah, can you call us back? OK. All right, anyway, Sandy is going to call us back. The thing that’s very interesting about what he does is he knows what the law is and he is willing to go right up to the line. Now, the one thing that I should mention, let’s say, as a conservative CPA is he probably has more fun talking about the concepts than talking about the documentation that you must keep in order to have these deductions and have these expenses stand up in the event of a challenge. So, I will also just take a moment to caution people, and I would say that, in general, the IRS is getting tougher about certain things, and particularly if you’re going to be doing some aggressive planning, then it’s even better to have a paper trail. So, for example, some of the things that we do … are you back on, Sandy?
Sandy Botkin: I am back on. We just completely lost the communication. I don’t know how that happened.
Jim Lange: OK, good. I don’t know.
Sandy Botkin: I think the IRS got excited and they wanted to pull the plug.
Jim Lange: I don’t blame them! If I were them, I would hate you!
Sandy Botkin: Actually, they’re very good about it. They like someone giving out good information, and sadly, there’s so many people like Irwin Schiff and others, that when somebody comes out with good information, they’re more than willing to help them.
Jim Lange: Yeah, he was a character. By the way, what he did, at first, he told people not to file tax returns, then the people that listened to him got into a lot of trouble. So, then he changed his tune and he said, “No, put down ‘zero’ on your tax return,” and he got into trouble with that.
Sandy Botkin: Actually, when he got into court and people complained about how much they lost and how much penalties they had, he looked at them and said, “Well, you were stupid. Who told you to listen to me?” Anyway, let me give you a few other things.
Jim Lange: All right.
Sandy Botkin: In most cases, you want to file your tax return early, as early as possible. Maybe January, if you can.
Jim Lange: Oh, don’t tell that to people! We like extensions!
Sandy Botkin: No!
Jim Lange: No?!?
Sandy Botkin: You’re going to get a refund, you want to file early.
Jim Lange: Yeah, but what about the poor CPA? Our office is crushed right now!
Sandy Botkin: I get it!
Jim Lange: We want to tell people, “Hey, there’s no problem with extensions!”
Sandy Botkin: Here’s the advantage of filing early: You’re losing interest on the money, whereas if you get it early, you can have the use of that money. That’s why you want to file early, particularly if you’re going to get a refund. Now, I understand the problems of the CPA. I do feel for them, believe me. By the way, let’s talk about that for a moment. There’s a lot of people, I was asked when I was on Fox News, what tax software I would recommend for people to use, and here’s the answer: None! Zero!
Jim Lange: Oooh! Uh-oh.
Sandy Botkin: Here’s the reason: there was a study done in 2006 by the IRS which was confirmed by the Canada Revenue Agency for their people, and here’s what they found: that people who do their own tax return have double the error rate of that of a professional accountant, like a CPA or enrolled agent or an attorney. Double the error rate, which means if you do your own return, you are increasing your chances of an audit. First of all, you’re increasing your chances of making a mistake, both for or against yourself, and if you get into a problem, who’s going to represent you? The box? That’s why I rarely, if ever, recommend doing your own tax return, and I’m not saying this because I’m a CPA. I feel very strongly about that.
Jim Lange: All right, well, that one I appreciate because we do have a task preparation. In fact, that’s how I got started. But actually, you mentioned something very interesting, which is not having to pay the IRS early, and you might have this one in your book too, but this one I learned from Natalie Choate and I wanted to ask your opinion on this. So, let’s say, for discussion’s sake, that you are older than 70 and you are taking a minimum required distribution from your IRA. And let’s just say, for discussion’s sake, that the IRA is roughly a million dollars and that your minimum required distribution is, say, $40,000. And let’s also just say that that is roughly what your tax liability is for the whole year. What Natalie tells people to do, and obviously this is going to work for wealthier taxpayers, is if you have the money to live during the year with money from outside your IRA, hang on, wait until, let’s say, late November or early December, then when you would take your minimum required distribution, have them withhold the entire $40,000, or, if you don’t need that much, maybe withhold half of it, or something like that, and don’t pay any estimates throughout the year, and that that money, even though it was held in December, is treated as if it was withheld throughout the whole year.
Sandy Botkin: That’s interesting. I don’t know if it works with IRA distributions, but it definitely works — and it’s in my book, in fact — with employment.
Jim Lange: Right.
Sandy Botkin: One of the things that I get all the time is someone saying, “Gee, I didn’t pay enough estimated taxes and I made all this money, and what do I do?” And my answer is, “Do you or your spouse have a job?” And if the answer’s yes, I say, “Then you’re in great shape.” Take increased withholding. You can actually have more money put away than you normally would require. Any amount withheld, no matter when it’s withheld, I don’t care if it’s all done in December as a result of a bonus, is treated as if it were done equally throughout the year, and that’s true of any withholding that you have.
Jim Lange: Yeah, I think that’s a great tip, whether it’s withholding or whether it’s the IRA, and plus, the other thing is, it reduces the paperwork burden because you don’t have to file all those estimates.
Sandy Botkin: Absolutely. I like that idea very much. It’s in my book, by the way.
Jim Lange: Yeah, floating the IRS, in effect getting an interest-free loan from Uncle Sam.
Sandy Botkin: That is correct.
Jim Lange: Well, speaking of interesting ideas, one of the things that I found kind of interesting, and plus, it had kind of a catchy name, which allows a double deduction for equipment and has been approved in numerous Supreme Court cases, is the Botkin Trust. Can you tell us about the Botkin Trust?
Sandy Botkin: OK. You know, wouldn’t it be great if you could deduct all the equipment you use in your rental property, for example, or in your business, twice? And when I first say that, people give me a double look. And here’s the answer: What you do is, you depreciate the equipment, whether it be equipment in your business or equipment in your rental property. Now, I want to emphasize something here. Equipment used in rental or commercial property is depreciated separately from the building. The building is one sort of depreciation and equipment is another. Now, we’re talking about equipment such as washer, dryer, refrigerator, stove, things like that. Commercial property is other equipment.
Jim Lange: Right, because obviously that would have a much shorter depreciation base.
Sandy Botkin: Absolutely.
Jim Lange: And not even to mention the accelerated depreciation methods.
Sandy Botkin: Absolutely.
Jim Lange: And what is it? Section 179?
Sandy Botkin: Well, 179 applies only to business if you want to make an election.
Jim Lange: Oh, all right, you got me. Go ahead.
Sandy Botkin: OK? I know this stuff, believe me! Anyway, so, you depreciated the equipment and now it’s gone. You no longer have any more depreciation.
Jim Lange: Your basis is zero.
Sandy Botkin: Your basis is zero.
Jim Lange: But the equipment’s still there, the refrigerator’s still there, the stove’s there and it’s still fine.
Sandy Botkin: You’re still using it in your business, you’re still using it in your rental property and so on.
Jim Lange: Right.
Sandy Botkin: So, what you do is you give away title to the equipment to a relative that you want to support. It could be your children, your grandchildren, your niece, your nephew, your significant other, whoever.
Jim Lange: OK.
Sandy Botkin: And you transfer that title into an irrevocable trust, and the trust leases the equipment back from you. What’s happening is, you have depreciated the equipment, you are now deducting the lease payments you’re paying the trust and you’re deducting that equipment twice.
Jim Lange: Very interesting.
Sandy Botkin: You’re getting a double deduction.
Jim Lange: And presumably, the person that you are doing this has a lower income tax bracket than you do?
Sandy Botkin: That is correct, and then you get the money out of the trust because trusts have a very high tax rate, and we put it into the person’s account. It’s absolutely golden if you do it correctly. Again, it’s got to be done correctly. I do want to mention a couple of other things about that that’s very beneficial. First of all, if you get into a lawsuit and somebody sues you for a couple million dollars, what happens to the equipment that you placed in trust? And the answer is, nothing! You just asset-protected yourself.
Jim Lange: Well, that’s becoming more and more important these days.
Sandy Botkin: That’s absolutely more and more important, especially with the amount of law schools they’re building. There’s a lot of lawsuits going on these days. The third thing is, you probably learned, I’m sure, when you went to law school as well as a lot of other people have learned, is when you buy investment property, you have to make an allocation between the land and the building. The reason is, the building is depreciable and the land is not, and if you don’t make that allocation, then the government makes an allocation for you using the state tax assessor, who’s always producing as much as possible for the land, which is a bad allocation. By using this gift lease-back technique, here’s what you can do: You own the building. The land, the title to the land, you actually divide the title and give it to your children and lease it back in the form of ground rent. What’s happening is, now you’re depreciating the building, you can deduct the lease payment you’re paying the trust in the ground rent, you’re effectively deducting 100 percent of the cost of that property. Whereas otherwise, the land is not depreciable and you can’t do a darn thing.
Jim Lange: All right, now if I’m one of our listeners, I’m thinking, “Boy, that sounds aggressive. If I do that, am I really going to get in hot water?”
Sandy Botkin: Not only will you not get into hot water, but you’re even going to be better off upon an audit. Let me give you an example: I did that with some of my properties, and I had an IRS agent audit me and say, “Oh, you allocated too much to the land!” So, my answer to them was, “Well, first of all, the land is owned in trust, it’s not owned by me. I had an irrevocable trust. I did everything correctly. If you want to change the allocation, I’d be glad to accept that, but if you change the allocation, I’m going to pay more rent and I get a higher deduction. So, whatever you want to do is fine with me.” The agent left it alone because of that.
Jim Lange: So, how did you do? Were you nailed, or …?
Sandy Botkin: No, the agent walked away with no change.
Jim Lange: No change on the whole audit?
Sandy Botkin: That’s correct!
Jim Lange: Well, I’ll tell you what. If you did one-tenth of the things that you recommend, and you walked away with a no-change audit, you saved a ton of money.
Sandy Botkin: Oh, I’m going to tell you how I save money.
Jim Lange: The other thing that I love is your courage. You’re practically saying, “Come on, IRS!” It’s kind of like the guy who does the identity theft commercial. He says, “My Social Security number is …” You’re just, like, out there. “Hey, there’s all these great techniques! I’m using them myself.” But if you stood up to that scrutiny, that’s up to you.
Sandy Botkin: Well, you got to do it right. And again, everything’s got to be done right. You’ve got to dot your i’s and cross your t’s, so you want to use somebody like you to make sure that you’re doing it right. You’re not going to do your own tax return. Turbo Tax will never tell you this stuff. You know, you want to do it right. If you need plumbing, you hire a plumber. You want to hire an expert to do what they’re doing. That’s why, when it comes to taxes, you want an expert. But I’ll give you a really good tip for everybody here that you’re going to really like, and I’ve been saying this for many, many years and hopefully it’ll come through. One of the great benefits of being in business, as I said, you get a lot of extra benefits that employees don’t get. Well, I have a website that needed designing and I wanted a pretty sophisticated site. So, what I did was, I went to a web company to give me a price as to what it would be to design the website the way I wanted, and it was a fairly high price, I got to tell you.
Well, my daughter was in a five-year program in digital design, which is essentially web design plus motion. So, I said to my daughter, “Let me ask you: Can you do my website and what I want?” She said, “Yeah.” I paid her a little bit less than what the other company quoted me. So, they can’t say it’s not reasonable because the other company guy gave me a higher quote. The amount I was able to pay my daughter and deduct covered four years of tuition. I was able to deduct the equivalent of four years of tuition a number of years ago.
Jim Lange: Well, like I said, you do have a lot of courage!
Sandy Botkin: It’s not a question of courage. You know, you talk about courage. Let me ask you a question. Do you ever drive down the highway and you see a state trooper with a radar gun?
Jim Lange: Sure.
Sandy Botkin: If you’re going within the speed limit, what’s going to happen, assuming he’s honest? What’s going to happen?
Jim Lange: Well, nothing.
Sandy Botkin: Nothing! It’s only if you’re speeding is when they pull you over. All of these things are legit, but you’ve got to do them right. If you’re going to pay a wage, it’s got to be a reasonable wage. You’ve got to document the fact that they really worked for you and what they did. If you’re going to deduct interest, you’ve got to have a 1098 showing the interest. You know, you’ve just got to do these things right. If you do it right, you will save tens of thousands of dollars, but the problem is, you’ve got to know about it. If you don’t know about it, you don’t know what you don’t know.
Jim Lange: And by the way, when we were off the air for a minute, I did tell people that documentation was very important.
Sandy Botkin: Oh, absolutely.
Hana Haatainen-Caye: OK, Sandy, I’m sorry, we have to take another quick break, and when we come back, we’ll continue this conversation. I want to remind our listeners out there that we are live tonight. There are a few more minutes that you can get a call in at (412) 333-9385, and we’ll be right back with Sandy Botkin and Jim Lange on The Lange Money Hour.
Hana Haatainen-Caye: Welcome back to The Lange Money Hour. This is Hana Haatainen-Caye and I’m here with Jim Lange and Sandy Botkin, president of the Tax Redemption Institute.
Jim Lange: Sandy, you talked about the, let’s say, self-employed person, or somebody who has not really considered themselves self-employed, and you’re trying to get them to do some things that they can generate some income. But obviously, people have various interests and hobbies, if you like, and there might be some people who are saying, “Hey, you know something? Maybe my hobby could be my business?” So, you actually have a chapter on this, and by the way, I don’t know if we have specifically mentioned your book, or maybe we did but I want to do it again because I genuinely believe that this is a smart thing for people to buy, and I will make a personal guarantee to anybody listening, that includes both our Pittsburgh audience and our national audience, because we do have a lot of people nationally that listen online, if you buy Sandy’s book, which is called Lower Your Taxes – Big Time! and get the completely updated 2011-2012 edition, and I don’t know what it retails for, let’s say about 20 bucks.
If you don’t think that you got $20 of value, you write to me and I will personally refund that check, because I think it’s almost impossible not to get that, but you might very well get an idea that saves a lot of money. Your ideas with your daughter, boy, it sounds like you paid the low tuition, you deducted a ton of money when she did the website and everything else. But if you could talk for a minute about the distinction between a hobby and a hobby loss and classifying what you might enjoy doing as a business? I think that that might be beneficial for a lot of our listeners.
Sandy Botkin: Absolutely. By the way, some of those people from Lower Your Taxes – Big Time!, I’ve gotten all kinds of testimonials of people saving thousands, and it’s been an amazing book for people.
Jim Lange: Well, that doesn’t surprise me, and I guess this is like a staple and you do an update every year?
Sandy Botkin: That’s correct. It’s amazing how many people have never heard of it. We sold a good number of them, but we didn’t sell as much as the Harry Potter books, for example.
Jim Lange: Not too many of us authors have!
Sandy Botkin: No! Which, by the way, tells you why only 4 percent can retire at age 65 with the same standard of living.
Jim Lange: Right, so what we have to do is, we have to start having our kids read tax books, not Harry Potter.
Sandy Botkin: Well, tax and financial books. That’s why I’m writing a financial book, for that reason. I think there’s a lack of information.
Jim Lange: Well, I think there is, and for whatever it’s worth though, in defense of Harry Potter, my daughter loves Harry Potter and she was one of those that just couldn’t wait for it to come out, and she was reading, let’s say, way beyond her grade level, so I will have to give Harry Potter credit for teaching a lot of kids.
Sandy Botkin: Hey, I was reading it, so maybe I read below my grade level!
Jim Lange: Hey, fun is fun, right?
Sandy Botkin: That’s correct.
Jim Lange: So, that’s what you’re going to do now? You’re going to tell us how we can deduct our fun.
Sandy Botkin: That’s correct. Hey, let me tell you, there’s an old saying among us tax lawyers and accountants: Everything is cheap, but when you get a deduction, cha-cha-cha! Now, a couple things. In fact, it’s much cheaper. I’m going to emphasize something here. I’m sure you have a rebate card? I don’t know how much your rebate card pays you, 1 percent back or 2 percent, maybe 5 percent?
Jim Lange: Closer to 1 or 2, I think.
Sandy Botkin: All right, how would you like a rebate card that gives you 20 percent to 45 percent?
Jim Lange: Well, that sounds a lot better.
Sandy Botkin: On everything you buy and almost everything you do. Well, believe it or not, you already have that card, and that’s why I’ve been emphasizing small business, because business people can deduct that amount on any legitimate deduction, and that’s what it’s worth to them. It’s about a 20 percent to 45 percent rebate.
Now, anyway, I want to talk about hobbies versus business, which you raised a very good point. If you run a business and that business generates a loss, that loss can be used against any form of income you have: interest, dividends, wages, rent, pensions, anything. So, let’s say that you make $50,000 a year, you have a little side business that makes a $10,000 loss, you only pay taxes on $40,000, and if the loss exceeds your income for the year, you can even carry it back two years and actually get a refund from the federal and state government for the last two years of taxes that you pay. You get a check. Or you can carry forward all business losses up to 20 years and offset the next 20 years of earnings, which is why the tax planning is so important for everyone. The income you made is immaterial because even if it’s a loss, you can use it. But there’s a catch, there’s an assumption there, and that is you’re running your business like a business and not like a hobby, because if you are a hobby, and this is one of the biggest weapons the IRS uses, all those losses get disallowed, your deductions are no longer business deductions, they’re itemized deductions, which are not as good. So, you really want to structure your business like a business, and there’s a lot of factors to that.
For example, you want to have good documentation, like a good tax diary. We have something that we developed for the iPhone and for the Droid. It’s called Taxbot. If they want to find out about it, they can go to www.taxbot.com. Businesses have good documentation; hobbies do not. If businesses don’t make money, then what do they do? They consult with experts to find out what they need to do to change and try to make money. They just don’t do the same thing year after year and lose money. Businesses might meet with an accountant to develop a financial statement to see where they can cut. Hobbies, they don’t care. Businesses work their business regularly. It’s very important to work a hobby or whatever it is, if you want to treat it like a business, at least 45 minutes a day, four to five days a week, week in, week out versus, say, once every two weeks for eight hours. Regularity is very important in structuring whether something is a business versus a hobby. Business people try to make money. They don’t make statements saying, “Well, I’m only doing this for fun.” They don’t say that!
Jim Lange: Fair warning: you have about a minute left.
Sandy Botkin: OK. Anyway, that’s basically a summary, and there’s a lot more to it in the chapter in Lower Your Taxes – Big Time! But that’s a good summary.
Jim Lange: And there’s a discussion about the presumption about two out of five years, but you’re going to tell us it is a rebuttable presumption.
Sandy Botkin: That is correct, as long as you run your business correctly. There’s a case called Allen where a guy had losses for 12 years in a row. So, the key is, you just got to run it correctly and follow what I say in the book.
Jim Lange: All right. Again, the book is Lower Your Taxes – Big Time! by Sandy Botkin, who is a CPA and an attorney and a former trainer of the IRS who left the dark side and came to the side of light to help us taxpayers.
Hana Haatainen-Caye: Sandy, do you want to give us your website quickly?
Hana Haatainen-Caye: OK, thank you, and I want to thank you for your invaluable advice tonight. I also want to thank our listeners for joining us for another Lange Money Hour, Where Smart Money Talks. You can access our vast library of past shows on our website at www.paytaxeslater.com, and, as always, you can catch a rebroadcast of this show at 9:05 am on Sunday morning right here on KQV. Join us at 7:05 p.m. on March 21st when our special guest will be P.J. DiNuzzo, president of DiNuzzo Investment Advisors.