Stupid Things People Do To Increase Their Tax Refund
The IRS is not comparable to ISIS, of course, but they are certainly the most hated government agency. Even if taxes are necessary for a functioning society, yet the loss we experience as taxpayers when separated from our income
often evokes an emotional response from deep in our cortex that we experience as pain. Behavioral psychology shows us that losing our wealth via taxes or from short-term investment declines hurt us twice as much as the gains make us feel good. So the desire to reduce or defer paying income tax is very strong.
I’ve seen people do some really, really dumb stuff to reduce or mitigate that pain, and I thought that I’d share some of them with you today.
To be clear: do NOT try any of these.
- Make Less Money
This is the king of stupid tax moves. The tax rate is never 100%, so you as a taxpayer are always – ALWAYS – better off if you go out and produce additional income. Even if that results in additional income tax.
- Hide Your Income
This is the second stupidest thing that people do. We know it happens because we live in the real world. We know that some people want to get paid in cash for a reason.
- Make Up Expenses & Deductions
Just like hiding income, making up false deductions for charities and business expenses is illegal and definitely not a good idea. Effectively it’s the same thing.
- Move To Another State Without Thinking It Through
High-income taxpayers have a compelling reason to move from a high-tax state to a low-tax state. Highly-compensated executives or sports athletes are a good example.
Yet middle-class taxpayers often have significant in-state tax advantages, even in the northeast. New York and New Jersey allow for a $20,000 pension & IRA exclusion for seniors, while Pennsylvania doesn’t tax them at all. If the cost of moving and travel back and forth to visit the kids exceeds the tax savings, you just made a mistake.
- File Separately
When I get someone ask me to file separately it is usually because they suspect the other couple’s actions are somehow leading to lower refund, such as an adjustment in one spouse’s tax withholding. It does make sense at times to file separately, but it is rare.
In conclusion, report all of your income, document all of your deductions (for a minimum of three years), and don’t make decisions without examining the secondary and tertiary effects.
Original Story at Ritholtz.