Michael H. Karu, CPA/CFF, of Levine, Jacobs & Company, discusses strategies to help maximize a tax refund.
Michael H. Karu, CPA/CFF, is a member of Levine, Jacobs & Company, LLC, a Livingston-based accounting and consulting firm. He is qualified by the Superior Court of New Jersey, Family Part, as an expert witness and as an authority on business valuations, specifically for closely held or family-owned businesses. Additionally, he is a Certified Divorce Mediator and is Certified in Financial Forensics. Karu received his B.S. degree in Business Administration from The Ohio State University and holds professional memberships in the American Institute of Certified Public Accountants, the AICPA Tax Division and the AICPA Business Valuation, Forensics and Litigation Services Section, as well as the NJ State Society of CPAs. Karu is a published author of numerous articles seen in trade and consumer publications and has been a guest on radio and television shows.
Neal Howard: Hello and welcome to Business Radio talkers.fm. I’m your host Neal Howard, thank you for joining us here on the program. Our guest this morning is Mr. Michael Karu and he’s going to talk with us about maximizing our tax refunds. We all usually have big plans for that tax refund, that anticipation, but he’s going to teach us how to save money in April by things that we do now. Welcome to the program Michael, how are you?
Michael Karu: Thank you Neal, I’m doing well.
Neal: Great. Are you a tax expert or a financial analyst? What is a bit of your background?
Michael: Well I’m a certified public accountant in the state of New Jersey. Additionally, I’m a certified in financial forensics and a chartered global management accountant. A lot of fancy titles but a lot of what we do is tax.
Neal: When you say ‘A lot of what we do is tax,’ are we talking helping people with loopholes, things of that nature or great ways to maximize a refund other than if you have millions and millions of dollars?
Michael: Well it’s a little bit of everything. When we talk about tax, obviously everybody understands that there’s an income tax but there’s also taxes on corporations, on pass-through entities have tax returns such as partnerships, it’s limited liability companies, fiduciaries, there’s also a state’s inheritance taxes – all kinds that we get involved with. However, a large percentage of the work we do is for personal income taxes and at the same time, trying to minimize that. Where one of the great quotes and I’m just going to paraphrase it, came from a former supreme court justice learn at hand who said that ‘It’s every American’s duty to pay the least amount of taxes as possible.’
Neal: That’s a great philosophy. Don’t the tax codes include all of these deductions? We’re always hearing about the deductions and changing the tax codes and you can do this when you couldn’t do it last year oh and now you’re going to get more money back. Isn’t the IRS helping us save taxes?
Michael: Well the IRS does not save taxes or cause taxes. They’re simply the arm that monitors everything. Congress passes the tax laws, not the IRS. The IRS is simply there as the enforcement arm so to speak. So when we look at taxes, there is this that says “Oh this is what the IRS did.”To them, it doesn’t matter. All they want is accuracy and again for us as tax preparers, that’s what we want. Now there you mentioned earlier loopholes, it’s not so much loopholes but there are areas within the law that every taxpayer should understand and be able to take advantage of those little savings areas. So we’ll start with something that’s now the new tax code made huge changes. We’re still waiting for some of the technical corrections but there’s a lot of changes. One that’s going to affect most taxpayers will be the loss of personal exemptions. So for example you have a family of four, in 2017 and years before that, they could take a standard deduction or itemize their deductions. Itemizing meaning taking medical expenses, interest taxes, charitable deductions and miscellaneous things and then they get personal exemptions. Well for 2018, that standard deduction pretty much doubled so it’s now $24,000 for married couple but there’s no more personal exemptions. So the example that I’ve used where I feel that it will hurt people, you take a family of six, husband and wife, both working, they earn 100-150,00 thousand dollars in that range, they’re renting and they really don’t have enough in itemized deductions in order to exceed the current $24,000 limitation so they’re going to get a twenty four thousand dollar deduction. That’s great. Well what happened in 2017, they got a $12,000 deduction but they got $4,050 per person as a personal exemption so for six people they got another twenty four thousand dollars so they would have been deducting thirty six thousand dollars right off the top and then pay tax on the balance. So if they earned a hundred thousand dollars, they would have only paid tax on thirty six thousand dollars. So they say “Okay.” I’m sorry that’s $64,000 a little reverse math so what’s happened is now they’ll get a twenty four thousand dollar deduction and they’ll pay tax on seventy six thousand dollars. Now granted the rates are a little bit lower, but still they’re not going to be in an overly positive situation.
Neal: I would say not by a longshot but at least not as good as well we’ve had it before. Are there are other areas? I mean people use healthcare to try and get a tax break here and a tax break there. Is there anything that we can do because we’re all involved in healthcare one way or another?
Michael: With healthcare it’s a very interesting category. First of all there’s a floor, meaning you have to exceed a certain percentage of your adjusted gross income even to be able to take one dollar as an itemized expense. But of course if you’re an employee and you’re paying in to your employer, that portion has already been deducted upfront through what’s called a 125 plan. So you’re not going to see that again, you’ve already gotten that deduction. However, if you have private coverage, if you’re older and you’re paying it to Medicare, that would count. So we look at little things like that. Now you want to try to bundle your expenses so if you’ve had a stretch of bad luck, you had some surgery or any other major issues during 2018 and you say “You know, I really could use another pair of eyeglasses.” Do it in 2018. Or if you have problems hearing, you might want to get a hearing aid, do it in 2018. Bundle those expenses together. So now things that people don’t recognize, prescriptions are allowed, right, not vitamins and things like that but prescription drugs plus medical transportation. So if you have to see two doctors a week and you’re driving ten miles each way, that forty dollars per week adds up and you get to take a deduction for that, I believe right now it’s 17 cents a mile, so take that. But you want to try to bundle them together. Now depending on the state in which you live, you can also get medical Expenses. So for example in New Jersey, there’s a 2% floor. So 2% of your adjusted gross income would reduce your medical expenses but it’s one of those few expenses you can take.
Neal: Say a couple is divorcing, they’ve got a substantial amount of net worth. Can you maximize taxation when you’re say in the process of a divorce in the same way that you can kind of maximize by bundling your healthcare? Can you bundle some of the things that are taken away from you in a divorce or added to your situation in that same divorce? The rules for divorce have changed dramatically. Starting January 1, any new divorce, alimony is no longer deductible nor is it taxable to the recipient. So if you’re in the process of getting a divorce and you anticipate paying alimony and getting a deduction for that alimony, you better get that divorce decree signed by the court before December 31 or it’s not happening. So now the other side to that is a lot of times married filing jointly as savings over filing single so you have to look at it and say “Well how much am I going to save through alimony and how much am I going to save in taxes?” Especially if it’s a really short term marriage and maybe you’re only going to pay some rehabilitative alimony for a couple years. So you may want to look at and well “Maybe I’d rather file a joint return this year and then get divorced in January.” Equitable distribution has no bearing at all because that’s not a taxable event, it’s just a sharing of assets.
Neal: Is there someplace where our listeners can go or a good resource that you can suggest in wrapping up that we can go and kind of peruse this code and decode it to our advantage and figure out how to save some money this coming April by doing what we need to do now?
Michael: Anytime you go onto the internet, you can google almost anything. So whatever the categories are, there’s hundreds and hundreds of articles. There are several that are on our website which is www.ljcpa.com but the overwhelming number of things to do are just common sense. If I can leave you with two or three more just easy things. For people who are invested in the stock market, know what your gains and losses are. If you have short term gains, try to get those match with losses. Short term gains are ordinary income, long term gains are at a lower capital gains tax rate so you want to offset your gains with losses. And conversely, if you have a lot of losses maybe it’s time to take gains. The others all deal with charitable contributions. The ones that I preach is ‘Go clean out your closet. Give those clothing to whichever organization.’ Whether it’s Good Will, Vietnam Vets, Salvation Army, United War Veterans, there’s a multitude that will take clothing and make sure you get a receipt and that you detail out exactly what you gave them – three pairs of pants, two suits, nine pairs of socks, etc. That has value, that non-cash contribution gets reported and you can take it as if you’re writing a check to your favorite charity. And if you decide that you do want to write cheques, so assuming that you give money every year to your favorite charity, well when we talk about bundling with medical, do the same thing with charitable. Instead of giving them your cheque once a year, give them a second one this year and maybe you skip next year. So the idea is to bundle your expenses, I encourage people to continue their philanthropic giving. The new tax code anticipates a thirteen billion dollar reduction in charitable giving, so all those organizations that do amazing work for the people of the United States and around the world may wind up being hurt by it. Absolutely.
Neal: Well I thank you for for talking with us today. Some eye-opening information Michael and once again and give us that website where we can get some more information about your firm.
Michael: My firm, it’s www.ljcpa.com
Neal: Great. Michael Karu, it has been a pleasure, thank you so much.
Michael: You’re welcome, bye Neal.
Neal: You’ve been listening to Business Radio talkers.fm, I’m your host Neal Howard. Transcripts and audio of this program are available at talkers.fm