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Lowering Your Tax
How to double, even triple,
your tax refund
- Here's a technique for doubling or tripling your tax refund that so
impressed John Cunniff, an Associated Press reporter, that he did a story
on it that appeared in hundreds of newspapers all over the country. Following
is a copy of that story.
THE PROVIDENCE JOURNAL-BULLETIN
Thursday, December 14, 1995
Over-withholding on income tax wastes money instead of saving
Tax consultant advises taxpayers to stop lending money to Uncle Sam,
and start putting it into an IRA account or 401(k) plan.
Associated Press
- NEW YORK - One of the saddest laments Dan Pilla
hears is from the taxpayer who allows Uncle Sam to over-withhold income
tax because "it's the only way I can save."
- "This is the world's worst way to save money,"
says Pilla, a tax litigation consultant who dissects page after page of
Internal Revenue Service laws, rules and regulations, and studies all its
(bad) habits.
- While his work - writing books on taxes, conducting
seminars and advising lawyers and tax experts - has involved defining and
defending almost every kind of deduction - there is one that especially
bothers him.
- That is the one in which the taxpayer treats over-withholding
casually.
- Let's illustrate what happens, he says. "Suppose
the individual gets a $1,000 refund. That means $83 a month was loaned
interest free to the IRS."
- By the time that individual receives the refund
in May or June, he or she has paid another five or six months of $83 payments,
or $415.
- "Here's what you do: Adjust your W-4 to stop
the $83 a month withholding and put the money into an Individual Retirement
Account or a 401(k) plan.
- "By doing this for a full year you will have
put $1,000 into your plan, thereby obtaining a $350 tax break.
- "Let's add it up. You have $1,000 cash in your
tax-deferred plan, you've probably earned $50 on your savings, and you've
protected $415 cash from further withholding.
- "That makes your total benefit around $1,815,
or more that three times the real value of your refund." In short,
the over-withholder is wasting rather than saving.
- The Smart Tax Pack recommended by the Associated Press in this release,
includes dozens of money saving, tax saving and tax managing tips.
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How to use affidavits to pay
less tax
- An affidavit is nothing more than a detailed letter of explanation
that is notarized and includes a declaration that the statements are made
under penalty of perjury.
- The significance of the affidavit with respect to taxes is that it
can substitute for receipts or canceled checks in the event other records
are unavailable. It is well settled that oral testimony can be accepted
as proof of a claim made on a return. The affidavit is nothing more than
oral testimony presented in the form of a written statement.
- A good example of how one may use an affidavit is in the case of cash
contributions made to a church or other charity. Bike-a-thons, walk-a-thons,
candy drives, cookie sales, church donations, Salvation Army bell ringer
donations are all examples of cash contributions that often go unrecorded.
A simple log of these contributions along with an affidavit can capture
hundreds of dollars in deductions you thought you could not claim.
- Affidavits are also the key to being able to conduct an audit through
the mail. You simply convert your letters of explanation to affidavits
which can eliminate the need to be present during an examination. Of course
the main advantage of a correspondence audit is that you are never caught
off guard and never in a position to respond to questions irrelevant in
determining the correct of amount of tax you owe.
- Dozens of uses of affidavits are discussed in my books The IRS Problem Solver and
IRS, TAXES and the BEAST.
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Three Tips to lowering your
tax
- Lowering your tax can be quite easy, fun and certainly rewarding when
you learn a couple of tricks. Following are five techniques I discovered
in my search for creative ways to lower my own taxes.
- No. 1 - Double Your Property Tax Deduction
- This trick is especially useful if and when we get a flat tax and lose
our remaining deductions. In most states, property taxes are paid a year
behind the year they are assessed. For example, property taxes in Minnesota
payable in 1997 are really for taxes incurred through 1996 assessments
and valuations. (Keep in mind some states have no property tax and therefore
this technique would not apply.)
- In order to double your property tax deduction for this year, be sure
to pay this year's taxes before December 31. Now obviously, some people
cannot afford to pay property taxes twice in one year. If you can't, remember
that funds are usually escrowed with your mortgage payment specifically
to pay taxes. At such time you decide to pay additional property taxes,
check with your mortgage company to see what your escrow balance for taxes
is at that time. Then when you pay the taxes at year end, take the receipt
issued by your department of property taxation and submit it to your mortgage
company for reimbursement. They must refund your balance when you show
proof of payment of the taxes.
- If you can pay additional property taxes, do it. Since there is talk
of eliminating that deduction, paying now means you could secure at least
an extra deduction that others won't.
- This technique is effective for salesmen who find themselves closing
that big deal at year-end, thus experiencing a bit of a windfall. It lowers
your tax in the year of plenty, and at the same time lowers expenses for
the next year which may not hold such good fortune. Pre-paid tax deductible
expenses provide a good way to manage taxes for anyone who has up and down
trends in their income.
- For other examples of how to use this deduction in managing your tax
liability order my Double Your Tax Refund.
-
- No. 2 - Increasing your state income tax by 25%
- This one is just too easy for anyone who pays estimated taxes. Generally,
the final payment for estimated state income taxes is due just after year-end.
In Minnesota, they are due January 15th.
- Here's the catch. While estimated taxes paid on January 15th are applied
toward the previous year's tax liability, they are not deductible on your
federal return until the next year.
- Let's say estimated state income tax payments due on January 15, 1997
are $800. This $800 tax is for a 1996 tax liability. However, it is not
a deduction to your income on your 1996 federal tax return. It was paid
in 1997.
- Now, if you pay this estimated payment on December 31, 1996, just two
weeks earlier than the law requires, you get an extra $800 deduction in
1996. Because all tax deductions seem to be on the endangered species list,
claim what you can while you can before they are all gone. Be sure to repeat
the process next year, to avoid losing an $800 deduction.
- This is just one of my many tax saving tricks found in my Double
Your Tax Refund.
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- No. 3 - Turn your attic into a bank vault... Then Rob It!
- One of the great myths about non-cash charitable contributions is that
the deductions are limited to $250. The truth of the matter is, there is
no practical limit to non-cash contributions one can make. Once you understand
this, the possibilities are endless as to how much you can increase your
tax deductions by raiding your attic or your garage.
- The best part about non-cash charitable contributions is that there
are hundreds of IRS approved charities that need and want donations other
than cash. It's much easier to give someone a lamp you valued at $30 than
it is to raise $60 in cash to buy a new one. Both give off the same amount
of light and both serve their purpose equally well.
- The IRS has valuation standards you can apply to your gift giving.
When you use special forms also made available by the IRS, you can increase
your deductions, lower your tax and help someone in the process. Why sell
something at a garage sale for $3 when you can donate it and get a $10
deduction.
- For dozens of examples of how you can increase your non-cash charitable
contributions, order my Double Your Tax Refund.
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