How to Beat Uncle Sam

Noel:                Raise your hand if you know Uncle Sam.

Audience:        (Silent)

Female:           Personally, my uncle?

Noel:                (Laughs)

Audience:        (Laughs)

Noel:                Great!  Now, raise your hand if you know Uncle Sam is not really your uncle?

Audience:        (Laughs)

Noel:                Great!  You see, a real uncle usually gives you money, this particular uncle takes away your money.

Audience:        (Laughs)

Noel:                So, today I will discuss with you, three tricky tax expenses. It’s called the 3 M’s.

I will show you how Uncle Sam takes away your money and I will also show you how to   get it back. Are you guys ready?

Audience:        Yep. Yes.

Noel:                Let’s do it.

Mortgage Interest

The first M stands for, mortgage interest.

I had a client. His name is Johnny. I gotta tell you he’s very extreme when it comes to minimizing his taxes. I was reviewing his return and guess what I saw on the mortgage interest? $50,000 of mortgage interest.

I ask him, “Why is this too high?” He said, “Well, I put zero down so I can get a huge mortgage interest deduction. Noel, it’s called, tax strategy.” I said, “Johnny, let me tell you something.”

This is what I told him.

See, this fifty thousand? That’s your mortgage interest. If I multiply that by 30 percent, which is your tax rate, your tax savings is $15,000. That’s the good part.

Here’s the bad part. The difference between the 50,000 that came out less the tax savings of 15,000 is how much? 35,000.

I ask him, “Do you know where that goes?” He said, “No.” It goes down the drain. That’s where it goes.

Audience:        (Laughing.)

Noel:                And, I told him that imagine you had it for ten years. So, you multiply $35,000 times 10, that’s $350,000 that you paid for nothing. It’s non-deductible expenses. So he said, “Really? Oh, I’m looking at it differently.” I said, “Yeah.” So, he said, “What can I do? That’s a lot of money.”

I said three things. Number one, do a by weekly payment instead of paying once-a-month – do every two weeks.  He said, “Why?” Cause you want to shave off 4-6 years off the mortgage payoff.

Number two is, why don’t you try to convert it to 15-year fixed. Why? You will save a tons of mortgage interest. You’ll probably shave – it’s gonna be close – 15 years – half.

And, then number three, If you have the chance, convert a fixed loan to a line of credit.  Why? If you convert a fixed loan to a line of credit – a line of credit is like a credit card expense. If you pay it down, they will base the interest off the balance. The sooner you can pay that off, the sooner you can be debt free.

Medical Expenses

Noel:                Number two – the second M– medical expenses.

Alright, medical expenses – have a 10 percent income limitation. That means you can only deduct 10 percent – in excess of 10 percent of your income.

So, let me give you an example. Johnny, for example, makes $100,000  and I multiply by 10 percent. So, his limit is $10,000. If his medical expenses is $11,000, how much can he deduct on his return?

Audience:        $1,000?

Noel:                One thousand dollars – it’s in excess. So, as you can see the first 10 percent is like a non-deductible expense.

So, guess – guess what happened to Johnny? Johnny had a kidney surgery but he cannot deduct his expenses so he asks, “Noel, what can we do? I want to deduct these medical expenses.” I said, “I don’t know. Have another surgery?”

Audience:        (Laughing)

Noel:                He looked at me and said, “Okay.”

Audience:        (Laughing.)

Noel:                Here are three things that you can do to have – have medical expense deduction.

Number one, you have to bunch the expenses together in one tax year. So, if you have a major surgery, plan accordingly and do it in one year.

Number two and number three is about reducing your income. One way to do that is to maximize your 401K or retirement plan and, number two, if you have a sideline business maximize the expense.

 Miscellaneous Expenses

Noel:                Third M – miscellaneous expenses.

This, miscellaneous expenses, can be broken down into three parts. The first part is what they call, unreimbursed employee expenses. So, if you’re a salesperson, commission people, you can deduct a lot of unreimbursed employee expenses.

The other one is, other expenses, and the other one that I want to talk about later is toastmaster’s expenses, okay? There’s a limit though. There’s a 2 percent income limit. It means that you can only deduct in excess of 2 percent of your income.

So, let me go back again to Johnny. A hundred thousand dollars times 2 percent is two grand. The first two grand you cannot deduct. The only thing you can deduct is above it.

So, if it’s a reimbursed medical expenses – I mean, a reimbursed employee expenses, is $2,001. How much can he deduct? One dollar. I told him the rules.

He got pissed off…

Audience:        (Muffled laughter)

Noel:                He said, “What can we do?” I said, “Well, the way we can probably do this is, to work on this.

Have you guys seen this before?  Who’s doing their taxes?  Raise your hand.

There you go. Are you guys familiar with this? This, my friend got 50 deductions.

If you’re not familiar with this, I can e-mail this to you.

Audience:        (Inaudible, muffled. Some light laughter.)

Noel:                Is that something of interest?

Audience:        (Inaudible, in agreeance)

Noel:                Okay. So, here’s how we break it down. I already told you about the reimbursement employee expenses.  Anything that’s necessary for your job performance or to do your job is deductible if it’s on unreimbursed.

The other one is other expenses. There’s a lot a bunch here. What I want to talk about is toastmaster’s expenses. Very important if you’re not deducting.

If this is something – here’s the rule – that’s the minimum rule. If this is something to improve your skills for your job, it’s deductible. So, from work to here and back, you should be deducting it.

Female:           Mileage.

Noel:                Yes, mileage. It’s huge. Here’s another thing. If you’re attending conference, conventions, if you go to Vancouver…

Audience:        (Light laughter.)

Noel:                You can deduct it.

Female:           Really?

 Noel:                As long as you can document it. How? Travel expenses got to be more than 50 percent of your time. So, if you went to Vancouver for more than 50 percent, meaning you did a lot of – you know – starting Wednesday  – to that  – it’s all business, it’s all deductible. You just have to document it. Got it?

 Alright. (Still holding paper.) This – so, I’ll e-mail you everything.  That’s all I have.

So, in closing, the 3 Ms is a perfect example of how Uncle Sam takes away your money. Mortgage interest, medical expenses and miscellaneous expenses. Try to apply what I told you today so you can take more money back.

So, here’s the last thing I have to say – behind every successful man stands a woman and Uncle Sam.

Audience:        (Laughing.)

Noel:                One takes the credit, the other takes the cash.

Audience:        (Laughing/ clapping.)

Noel:                If you like to learn more, click the link, and subscribe to my weekly blog. Until then, this is Noel Dalmacio, your ultimate CPA of Lower My Tax Now.

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Noel Dalmacio, CPA, CFP, MS TAX
30 Corporate Park, Suite 102.
Irvine, CA 92606

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