As you might recall, nearly two years ago I wrote that I was having a midlife crisis and dusting off my old Metallica CDs from high school.
Well, the crisis passed. I have since come to grips with being over the hill, even if I curse under my breath every morning from creaky knees and a sore back.
But I got an email this week from our editorial director Dave Dittman that made me laugh. (You might recall that Dave happened to go to the same high school as Metallica’s front man, James Hetfield.)
It was an article from the satire site The Onion with the headline: “Metallica Board Of Directors Debates Whether New Riff Will Have Negative Impact On Shareholder Value.”
This brings up the eternal question of whether art imitates life or life imitates art… or The Onion.
As I mentioned in my midlife crisis article, most of Metallica’s band members were typical ne’er-do-well rock stars with no interest in the actual workings of the business. But drummer Lars Ulrich was known to regularly show up to meetings with spreadsheets and a list of probing questions.
At any rate, I saw another headline this past week that I initially thought was in jest, or was originally published on The Onion, but turned out to be real news: “Americans lost $1.7 billion trading bitcoin in 2018 — and more than half don’t know they can claim a deduction.”
Maybe I’m just a little more ideological about tax avoidance, but I can’t imagine having a legitimate tax deduction available to me and not take taking advantage of it.
But then I got to thinking about it. The tax code is notoriously complicated and intimidating. There are probably quite a few deductions that readers aren’t properly utilizing.
So, today let’s go through a list.
I’ll start with the subject of the last headline, cryptocurrencies. If you traded bitcoin or other cryptos last year, there is a good chance you lost money. And if so, you can write it off as a capital loss on Schedule D. You’ll need to make sure you kept good records. You’ll need your cost basis, the sale proceeds and the dates of sales and purchase.
Oh, and given the fly-by-night nature of many crypto sites, I’d make sure you print out hard copies or save the statements as PDFs. In the rare chance you get audited, you don’t want to depend on a web-based brokerage or exchange that may very well be out of business by the time the paperwork is useful to you.
It’s probably a little snarky of me to include gambling losses immediately after crypto losses (aren’t they the same thing?), but this is a legitimate tax write off that a lot of people don’t know about. But if you had gambling losses in 2018 – anything from sports betting to online poker – you can potentially write them off. (Of course, the flipside is also true. If you had gambling winnings, you need to report that as income.)
Gambling losses might be hard to substantiate, particularly since its legal status is a little murky in much of the country. You might think twice about writing off gambling losses if the gambling activity in question was (ahem) of questionable legal status in your state. But if you had gambling losses and kept good records, why not have Uncle Sam subsidize your bad habit? If I could get him to pick up my bar tab, I certainly would.
If you blew your nest egg trading cryptos or in smoky backroom poker games, your wife might have left you, leaving you with alimony payments to make.
But in all seriousness, if you paid alimony under the terms of a divorce finalized in 2018 or earlier, you can write it off.
This is changing, however. Under the new tax reforms, alimony will no longer be deductible for divorces finalized in 2019 or later.
Penalties for early IRA or 401k withdrawals
If you had to raid your IRA or 401k early… well, please don’t tell me. It might make me cry. That’s the one cardinal rule of investing you just don’t break.
But let’s say that life intervened and you did it. You took cash out of your retirement plan and got zinged with the 10% penalty. You can write that off!
But please, do not make a habit of this. The penalty still represents a net loss for you, and worse, it reduces the capital you have at your disposal for wealth accumulation.
Entertainment expenses: Not deductible
I’m going to go in reverse here and now list something that used to be deductible but is now, regrettably, not: business entertainment.
This is a tricky area, but under the new rules, business meals are still at least partly deductible. But entertainment expenses – such as a football game, golf tournament, concert, etc. – are not.
Here’s where it gets interesting though: Sponsorships are still deductible. So, while you can’t write off the costs of tickets to an event, if you paid to make your company a sponsor you can definitely write off those expenses.
And finally, this wouldn’t be a proper tax article if I didn’t nag you to max out your retirement plans for the year. It’s too late to contribute to a corporate 401k for 2018, but you can definitely still contribute to an Individual 401k or SEP IRA if you have self-employment income. And a regular, good old-fashioned IRA or Roth IRA might be an option for you as well. For tax year 2018, you can contribute $5,500 to an IRA or Roth IRA or $6,500 if you’re 50 or older.
I also have to remind you that these are basic suggestions. You’re definitely want to do a little more research or, even better, ask your CPA before implementing any of these.
Best of luck this tax season. Don’t be afraid to take deductions so long as you’re being honest and following the rules. There is nothing wrong with doing everything legally possible to lower your tax bill. This is the government, not a charity.
Oh, and if you gave to charity, be sure to write that off too!