By Rachel Ochman
Wouldn’t it be nice to write off that flight to Hawaii? Or what about the champagne-and-caviar-adorned soirée at Carnegie Hall? Maybe you can, says Doug Stives, a CPA from Red Bank, N.J., who re-engineered his life in 2006 to become the Most Tax-Efficient Man in America, as Tax Report columnist Laura Saunders writes. Stives shared a couple of practical, tax-saving suggestions with SmartMoney.com.
Get on someone’s payroll. Stives had been a partner at an accounting group for nearly four decades when he decided to take on a role as a tax and accounting professor at Monmouth University in central New Jersey. He also started his own consulting business on the side. While his paycheck is now 25% lower than it had been, his take home is nearly 90% as much, says Saunders. Stives estimates that the fringe benefits from working at the university – health insurance, disability insurance, life insurance, pension-plan coverage, unemployment coverage and workmen’s compensation coverage, among others – add up to about $40,000 a year.
Mix business and pleasure. Usually it’s a No. 1 professional no-no. But combining your work life with your personal life can slim the price tag of otherwise expensive vacations. As a part-time consultant and full-time teacher, Stives travels a considerable amount for seminars and teaching gigs, often to alluring vacation spots like Hawaii and Lake Tahoe. To deduct airfare, you need to spend more than half your working days on business, says Stives. Weekends don’t count, nor do travel days. If Stives leaves for Hawaii on a Friday, works three days mid-week and returns home the following Monday, he’s squeezed a mostly tax deductible 11-day trip out of three working days. (Hotels, meals, and rental cars are only partly deductible.) But make sure you don’t get carried away, he says. It’s a good idea to pay in full for at least some trips you take to show the IRS you don’t deduct everything.
Keep a diary. The best way to equip yourself for an IRS audit is to present “bulletproof documentation,” says Stives. Keep track of where you’ve been, what you did, who accompanied you, what you talked about and how it’s all related to business. As the IRS likes “contemporaneous recordkeeping,” Stives constantly updates his Outlook calendar to reflect his business-related activities. And just because you keep contemporaneous records doesn’t mean you can’t go back and add detail if you’re audited. It’s also helpful to keep all of your business expenses on a separate credit card. Those credit-card statements will back up your diary. (You need to keep receipts for any expense more than $75.)
Hire a spouse. This is perhaps the trickiest tip of the bunch. You have to be very careful because there are “many rules and several traps,” says Stives. One benefit: If you’re a self-employed individual who employs his spouse, you can qualify for a Health Reimbursement Arrangement, which covers out-of-pocket medical expenses with pretax dollars, says Saunders. Such expenses include eye glasses, co-payments, deductibles and dental costs, to name a few. But remember, it’s not a free ride: As an employer you have to pay payroll tax. Likewise your spouse has to (actually) work and be able to prove it. Make sure you write up an employment contract and keep impeccable time records. If you do choose to follow this route, seek professional guidance from a CPA, says Stives. Payroll tax mistakes can be $100 a pop.
Stives’s take-home lesson: “Just because it’s tax deductible doesn’t mean it’s free,” he says. That’s one of the biggest mistakes people make. Let’s say you pony up $2,000 to woo some very wealthy clients: You pick them up in a limo and treat them to a cocktails and a show. Even though your evening could be partially subsidized, you still have to pay for it. (Only 50% of meals and entertainment costs are deductible.)
Readers, what are some of the ways you currently try to maximize your tax efficiency?