H. Gregory Mermel, C.P.A., P.C.
2835 N. Sheffield Ave, Suite 311
Chicago, Illinois 60657
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"Don't Shoot the Messenger"

by Greg Mermel

Published in the "Money and Taxes" column in PerformInk on March 14, 2008

It happens about once a year in my office. A client of mine wanted to pick up his income tax returns rather than having us mail them, so I had my assistant call him when they were ready. The client asked how much money he was getting back. My assistant naively opened the package and told the client that, actually, he owed money.

The client erupted and started ripping my assistant apart. Now, this assistant is not a CPA or a tax return preparer. He is a college student whom we hired as seasonal clerical help. He had absolutely no idea how to respond to the client's barrage of "what about this?" and "how about that?" and "why didn't this other thing wipe out my taxes?" -- all mingled with wild accusations of incompetence and deliberate malfeasance.

My name is on the door -- the buck stops here -- add a few more clichés -- so I took over the conversation with the client. I told him that facts are facts. I gave him a brief outline of why he owed, and told him that more details should be discussed face-to-face.

The client arrived at my office the next day red-faced and pouty. Even after I explained all the facts, and made sure he disagreed with none of them, his body language and tone clearly indicated that he thought it our fault he owed money.

Why did he owe money? First, he had gone from not participating in his employer's 401k plan in 2006 to making the maximum contribution in 2007. That cut his W-2 income by $15,500, so less taxes were withheld. Second, he had received an inheritance in 2006, which he invested. This made his 2007 investment income double, increasing by just about $15,000. Let's see, same income but less taxes withheld. You think that might be a sign of trouble?

You, Too, Could Be Surprised

What made this meltdown unusual is that the client is not an actor. First, you are dramatic; you express outrage, rather than suffer it silently. OK, maybe not you personally, but just look around the lobby at your next audition.

More important, actors tend to have W-2s from many employers, which makes them far more prone to owing money on April 15 even if taxes were withheld by every single source of their income. Each employer is calculating the tax on only the income he/she/it pays you, which by itself may be poverty level. Add enough of those jobs together, though, and you have an adult income.

An example. A single person, claiming one exemption, works all year at one job, earning $50,000, will have $7,474 in federal income tax withheld. That same person working ten jobs at $10,000 each could have as little as $3,950 withheld.

That's all the subtext you need to improvise a grand scene in my office.

Use the Right Ruler

The size of your tax refund is never an appropriate yardstick: not when you are structuring a business deal, not when you are doing tax planning, not when you are evaluating your tax return preparer. Never.

The size of the refund depends on both the total amount of your tax, and the amount you have paid towards it. If you want a bigger refund, the easiest way to do it is to have more taxes withheld every paycheck. It works, but I think it's stupid.

To me, a big refund is a sign of poor tax planning. Do you really want to make an interest-free loan to the government? I don't just mean the current pack of warmongering bozos, though their presence reinforces my point. Why give up the use of your money?

And to those of you who say, "well, I'd just spend it each week," verily I say unto you: crap. If you have a civilian job where your paychecks can be direct-deposited into your bank account, then you can cut your withholding and have the difference direct-deposited into savings, or an IRA, or an investment account.

A purely rational person would actually plan on owing taxes April 15, one dollar less than the amount where he would be subject to a penalty. Few people do, because owing taxes is outside most people's psychological comfort zone. I agree that being able to sleep at night matters more than the foregone interest.

The total amount of your tax -- not the refund -- is the appropriate metric to apply to your tax return preparer's work. Did he keep your taxes as low as possible while staying on the right side of the law? No ethical preparer will guarantee the size, or even the existence, of a refund. If someone guarantees a bigger refund without first reviewing all of the facts, run the other way. He's a crook.

Change of Rant

Since I'm in a Lewis Black kind of mood, I want to change topics and scream about the stupidity of the Bush Administration's so-called tax rebate. Rebate, my (vulgarity) hairy (body part). It's just another bloody random tax cut, which together with war seems to be all they can do. And they are incompetent at both. At least this tax cut is not targeting the rich, which may explain why it is a one-time-only tax deal.

The illusion of economic boom times during most of the Bush years was created by debt-fueled consumer spending and a massive devaluation of the U.S. dollar. The fuel supply was cut off because everyone lost confidence in the credit markets; government supervision there was as ineffective (perhaps deliberately) as with military contractors in Iraq. Instead of fixing the credit markets, they just want to give people more money to spend.

Don't do it! Don't give them what they want! When you get the "rebate," don't spend it. Pay down debt. Put it in an IRA. Or endorse it over to the ACLU. They'll need all the help they can get reversing the last eight years' damage.

Free Offer

Every year during the income tax season, I offer free copies of my “Checklist of Potential Deductions...” for those in the arts. Just call my office, or send an email to checklist@gregmermel.com.

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