Playing Income Tax Games Will Leave You With Your Own Version Of The Hunger Games

So there I was, pacing around the office, the block, the neighborhood, Brooklyn. Trying to figure out why the heck I suddenly found myself unable to complete an income tax return which made sense. I mean, I’ve only been doing this for, what, about 20 years? Then, a propitious conversation with an honest young lady awakened me to the latest version of “Income Tax Games.”

When you’ve prepared someone’s income taxes for a while, you tend to learn “how they roll.” Some of my clients are homeowners who know exactly how many therms they use each month. With many, I’m just glad they put their bills and receipts in the envelope.

Too few contribute to 529’s and Roth IRA’s. Again, far too many fail to contribute the maximum to their employer-sponsored 401k’s. It always cracks me up when they say how hard it is to save now. Just wait until it’s time to retire, they’ll wish they’d done with less now to have more then.

So, when several of my clients suddenly owed amounts to the taxing authorities far and above what I’m accustomed to them owing, I wondered, (foolishly, in hindsight) what did I do wrong?

So, after dodging the aforementioned honest young lady for several days, (“Mr. Greaves, is my return done yet?”), I finally admitted that while I’d completed her return, I felt I was making an error somewhere. I just couldn’t understand why she suddenly owed an amount in the thousands when she usually only owed no more than $300.00. And that was a bad year.

After much conversation, she finally became very quiet. I just knew I’d lose her as a client. And then, the clouds of doubt and gloom parted when she said, “Mr. Greaves, I think I know why I owe so much.”

My only response was “Huh?”

“Mr. Greaves, a friend of mine on my job told me if I wanted to increase the amount of take-home pay each paycheck, all I had to do was increase the number of exemptions I claim for several months, and then go back to, in my particular case, Single, with one exemption.”

DING! DING! DING!

“Youngster, how many extra exemptions did you claim, when did you start claiming them, and, when did you stop claiming them?” I asked.

“I claimed Single, with 20 exemptions, starting in July, ending in November. Then I went back to Single, with one exemption.”

Thank the Maker I don’t have high blood pressure.

“And was the extra money good to you?”

“Man, yeah! I was getting paid!”

“And now?” I asked.

“I have to pay most of it back?”

“Sorry, I didn’t quite hear you.”

“I have to pay most of it back. But why?”

Then we got into a discussion about how the U. S. system of taxation is a pay-as-you-go system. As long as you’re making the necessary payments during the year, you shouldn’t end up owing at the end of the tax year.

She understands that now.

Then she mentioned how this young man, the financial genius who played the exemption game every year, still got a huge refund when he filed his taxes. Their pay was similar, they are both single, and give modest amounts to their churches. Neither one owns real estate, or has any entries for unreimbursed employee expenses. Just two young people with some interest, some stocks sold, and not much else.

I told her his preparer may be one of the biggest crooks out there, and it was probably just a matter of time before the IRS caught him for preparing fraudulent returns. And, when the preparer is caught preparing fraudulent returns, all of their clients will end up in IRS Examinations, and wind up owing a ton of money. With penalties and interest tacked on. 

“So what have we learned today?” I asked.

“To pay a bit each payday as I go along, and at the end of the year I won’t sing a sad song.”

“And will we be playing income tax games any longer?”

“Only if I have a death wish.”

I am revived. Income taxes make sense again. Back to the numbers.