What Your Tax Return Says About You

Are you a generous person? Unlucky in love? A raging day-trader? A Type A personality? A seasoned CPA can tell these things and more about you with just a quick glance at your tax return. 

During this episode of our new Motley Fool Answers podcast, special guest CPA Megan Brinsfield teaches us how to read tax return tea leaves like a pro. Plus, we play a rousing game of "Is It Deductible?!" (where you'll learn the ins and outs of donating your house to the local fire department so they can burn it down for practice).

Listen to this episode -- 22 minutes of unbridled excitement and information -- and other Motley Fool Answers episodes on iTunes or Stitcher, or savor it more slowly by reading the transcript that follows. 

Transcript

Alison Southwick: This is Motley Fool Answers. I'm Alison Southwick and, as always, I'm joined by Dayana Yochim and Robert Brokamp. We also have a special guest, so we're going to get to that later. It's everyone's favorite time of year...

T-A-X T-I-M-E! Quick. Everyone name your favorite song about doing taxes. I'll go first. "Taxman" by the Beatles. Bro?

Robert Brokamp: Um, T-A-X-Y? I don't know.

Southwick: Right? See, there's not a lot of songs about doing taxes...

Dayana Yochim: "All my 'Axes' Are from Taxes"?

Southwick: So cool. That was a good one.

Yochim: I just totally stole that from our producer, Rick.

Southwick: You don't even have to 'fess up to that. 

Yochim: Hey, Rick.. Can you cut that?

Southwick: So today, we're going to have some fun with taxes. It's not a guarantee, but we're going to try. We have a special guest today who is going to show us what your tax return says about you. Not only that, we're going to play a rousing game of "Is ... It ... Deductible"?

By the end of the show, you'll be able to look at your tax return and say, "I'm so good-looking," and you'll also know if you can write off that swimming pool. Now the challenge for today is to keep Dayana awake, so this should be fun. Clonk!

Brokamp: [Snores]

Southwick: Let me introduce our special guest, Megan Brinsfield. She is a CFP, a certified financial planner, with Motley Fool Wealth Management, and she is an expert at reading the tea leaves of your tax return. She's like Miss Cleo, but not a phony. Right?

Megan Brinsfield: That's what I like to think, yeah.

Southwick: So, today we're going to talk about what your tax return says about you, because often, with a financial planner, starting with your tax return is a good way to get a whole picture of your financial situation.

Yochim: All your secrets are in there.

Southwick: So let's start off with one of the first things you see when you're looking at a tax return -- what it says about someone -- and that is... whether or not they are on the path to wealth.

Brinsfield: Yes, and this is certainly more of an anecdotal sort of statistic than an actual one, but over my 10 years of preparing tax returns, I really noticed that high-net-worth individuals tend to own businesses and property.

Your business ownership can show up in several different places. You could have a sole proprietorship on a Schedule C. Something that a lot of people don't think of as business ownership off the top of their heads, but it actually is, is just investments. You're investing in businesses, especially if you're a follower of The Motley Fool. That shows up on your Schedule D and through dividends and things like that. So, definitely owning a business is one of those markers that I look for on the tax return.

Yochim: But also property?

Brinsfield: Also property, yes.

Brokamp: So this says, Dayana, the landlord. Landlord-ess? I don't know. What's the female version?

Yochim: Land queen.

Southwick: Your tax return will also tell you what type of investor a person is.

Brinsfield: Definitely. So if on Schedule D, you're selling a lot, then you know you could have a high turnover rate in your portfolio versus, like, a buy-and-hold strategy. You might not see as much activity annually on a Schedule D, but maybe collecting more in dividends.

Brokamp: Right. And that's all for investments that are in taxable accounts, not in an IRA or a 401(k), but that shows up on the tax return, too, whether you're contributing to those accounts, which also indicates you're on the path to wealth, or at least saving enough to retire when you want.

Southwick: Another thing is also whether or not you're a jerk -- by which I mean, whether you're generous.

Brinsfield: Exactly. And this is for folks that itemize. You could be generous and not itemize -- that's a particular subset of the population -- but if you itemize your deductions, you can take a look at your charitable amount and determine how average or generous you are.

The IRS looks at these statistics, over time, and the average charitable deduction is about 6.9% of your income. Even though a lot of people go by, "I have to give 10% of my income," the actual averages are from 2%-6%. It varies wildly, so if you're above that range, congratulations. Give yourself a pat on the back -- and I want to be your friend.

Brokamp: And if you're below that range ... shame on you!

Southwick: I actually don't know where we are. Now I'm going to have to look at my Schedule C.

Brokamp: Now I'm curious, too.

Southwick: I have no idea. And we probably don't itemize, either. I don't know. Ron does the taxes.

Brokamp: Do you own a house?

Southwick: Yes. Yes.

Brokamp: Then you probably do. Megan, you might know this, but I think it's like 80% of people don't itemize. The vast majority of people don't. So that means even most homeowners don't deduct their mortgage interest because they don't itemize.

Southwick: All right. Another thing that you can see in someone's tax return is if they are a sugar mommy or daddy, by which we mean if they're paying alimony. Spousal support.

Brokamp: Right. And if they're getting it -- right, Megan? -- you have to report that on your return...

Brinsfield: Absolutely.

Brokamp: ...so they can see who's getting that income. And the size of it, I'm sure in some cases... It's quite extraordinary to see how much some people get in alimony, and how much some people don't get in alimony.

Southwick: So your tax return can tell other people if you're a failure in love.

Brokamp: Could be.

Southwick: That's another way to look at it.

Brokamp: So, Megan, let's say you're getting alimony from three ex-spouses. Do you have to report that separately on your return, or do you amalgamate all that?

Brinsfield: I would be interested to see how that works. Usually, alimony stops when the spouse remarries... so to collect from three different ex-spouses would be quite a feat.

Yochim: But wait. In some states where you can marry...

Brinsfield: If you divorce everyone at the same time...

Yochim: Or be married to multiple spouses?

Southwick: Are there states where you can have multiple spouses? I don't think there are.

Yochim: What about on the show Big Love? They've never delved into the tax situation there.

Southwick: I think he's only legally married to one of them, and the rest just kind of hang around.

Brinsfield: Their estate planning is...

Brokamp: ...very complicated.

Yochim: What a nightmare.

Brokamp: All 50 kids, or whatever it is.

Southwick: All right. Another thing that people can see in the tea leaves of your tax return is if you are a Type A person.

Brinsfield: Right. So a lot of times, as a tax professional, you get someone's tax information and they just make a list of estimates. They go, "Sure I gave $500 this year. I spent $60 on gas." Those round numbers indicate you're probably not really keeping track of all of your expenses. Whereas people who are Type A track everything. They'll list everything down to the penny, and so round numbers is definitely an audit red flag.

Southwick: And then finally -- Bro, this is yours. I have to say that. Of course, you know who suggested this one. Another thing that you can find out in someone's tax return is if they're a lousy gambler or a stripper.

Brokamp: That's true. Or both at the same time.

Brokamp: So you can deduct gambling losses, if I am correct, right?

Brinsfield: To the extent of gambling income.

Brokamp: That's right.

Brinsfield: Unless you're a professional.

Brokamp: Yes. And then there are all kinds of bizarre business expenses that you can deduct. So the one you always hear about is someone who is an exotic dancer gets certain surgical enhancements as part of the job and can deduct it. Megan, is that one of those things that's just apocryphal? I researched this, and found it all over the Internet. And I assume if it's on the Internet it's true; but, is that the case?

Brinsfield: There is one case where it's true, and it's the very often referred-to case of Chesty Love.

Brokamp: That's the name of the person.

Brinsfield: Yes.

Southwick: Of course it is.

Yochim: Is that his or her stage name?

Brinsfield: Yes.

Southwick: Baby Chesty Love. Do you think her mom named her Chesty Love?

Brokamp: Her full name is Chesturious. Chesty is just a short...

Yochim: Chestica.

Yochim: Yes, Megan, this is what happens at the Motley Fool Answers. Welcome!

Brinsfield: Who knew what I was getting into?

Brokamp: Right.

Brinsfield: But yes, that is a true case, and it's very often referred to; but I don't think people have used that as a precedent, necessarily. And things didn't really work out for her. She ended up having like a complication after [surgery]...

Southwick: Yeah. To be fair, I think she was, like, a cup size N, as in Nancy.

Brokamp: What?

Brinsfield: I don't know the exact size, but they said they were so large that they couldn't possibly be for any sort of personal pleasure.

Brokamp: [Laughs]

Brinsfield: Sorry. Personal "use."

Southwick: [Laughs]

Brinsfield: Can we cut all of that? I'm going to go now.

Yochim: Nope. That's staying in.

Southwick: So... as long as it's not for personal pleasure, it can go in your tax return.

Brinsfield: There you go. I'm going to stop talking now.

Southwick: You can't stop talking. You're our special guest. Then if someone does come to you, what is the first thing that you look at on their tax return? Is it their income?

Brinsfield: It's actually not their income. It's just their overall situation. So do they have kids? And things that can prompt additional questions for me. So where they live. If they changed jobs. If they've had a big change. Usually I don't just look at one tax return. I'll look at two to sort of determine a trend. So if they've had a big change from one year to the next, that's something that I can scope in on and ask more questions about.

Brokamp: Yes, that's a big thing that we talk about, life events or financial events. And one of the first places any big life event affects your finances is your taxes. You should reevaluate that. Change your withholdings, maybe. If you're moving to a different state, you'll have different state taxes. Certainly a time to look at all that stuff.

Yochim: Married. Divorced. Have kids...

Brokamp: Kids leave the house. All kinds of stuff like that. Megan, curious about this year's taxes. Like 2015. People are doing their 2014 taxes. They're going to figure out, "Okay, I paid this much, I'm getting this refund." Compared to 2015, should people expect to pay roughly the same amount of taxes, or have there been any significant changes where people should expect, "Oh, yeah, now I'm going to owe more this year or less this year." Anything significant in 2015 that's changing?

Brinsfield: A lot of what's changing is with the healthcare law, so if you're covered, if you have healthcare coverage throughout the year, you're really not going to see a change in your taxes, at least in a significant way. It's really for folks that are uninsured that will start having to pay a penalty associated with not having insurance, and that shows up on your tax return now.

Brokamp: Got it.

Southwick: Now that you've heard from Megan about what she looks for and what it says about people and their tax return, what does your tax return say about you? Do you like what it says?

Yochim: Do I want to change something in my life? [My tax return reveals that] I am not a Type A when it comes to keeping track of expenses. And in fact, usually with all contributions -- charitable contributions in particular -- I'm kind of a round number person. I should probably stop doing that, right?

Brinsfield: For noncash. People most of the time give cash donations in round numbers. That's not unusual, but for every household item to be exactly $100 is [unusual].

Yochim: Right. So. I did this one year -- I went through and I actually kept track of all of the stuff that I donated from physical goods, and boy was it a pain in the butt. There's several sites you can go to, to find out exactly what they're worth, in donation dollars, because everybody overestimates what that handbag is worth nowadays. And the total just wasn't...

Brinsfield: Wasn't appealing to you?

Yochim: No! And I thought, "Eh, if they're going to audit me, do I want to have to do this every year?"

Brinsfield: It's interesting. I had a client that got audited in a past life for their charitable deductions, and the auditor asked for pictures.

So not just what did you donate? This individual was writing off like one of those big screen TVs that takes up your whole living room and said it was worth thousands of dollars and, of course, the auditor said, "Prove it." Luckily she had pictures, the owner's manual, and everything, else to prove it. But taking pictures is something that is undervalued, I think, from a tax preparation standpoint. The IRS always says whatever you donate has to be in good condition. How are you going to prove that without having some sort of photo?

Yochim: I'm just going to walk down to my basement and take a picture of the big mess of stuff down there.

Brinsfield: Take a bunch of selfies with your donations.

Yochim: [Laughs]

Southwick: [Laughs] Take a tax selfie.

Yochim: Put the lampshade on my head. Pull the base in front of me...

Southwick: Adorable.

Yochim: You'll see it on Twitter.

Southwick: So Megan, for those people who have filed their tax returns, or maybe haven't but are looking forward to next year, what's your best piece of advice for people in the coming year so that they'll be better prepared to file their tax return next year? To make it easier?

Brinsfield: One thing that I actually did for my mom is I gave her an accordion folder that was already sectioned out for the things that she would need to save for me -- as a gift but also as a request -- because I do her taxes every year, and it really helped her to have that just sitting right by whatever door stand or whatever you have where mail comes. If you see something that is tax-related, just put it in that accordion file, and you'll have it at the end of the year.

Southwick: Cool.

Yochim: That's a great piece of advice.

Brokamp: People also find out now whether they're getting money back or whether they owe money... and if you owe money, now is the time to change your withholding rather than finding out a year from now that you once again owe money.

You want to start having that taken out gradually. Now, some people like to pay at the end because they want the use of that money. But what are you going to do? Keep it in the bank and earn nothing? It really doesn't do much for you.

But certainly if it's a big surprise, change your withholding now.

Brinsfield: So you have your pride.

Brokamp: You do have your pride.

Brinsfield: No interest, but pride.

Brokamp: That's true.

Southwick: Now it's time to play a rousing game of "Is It Deductible?"

Brokamp: Dah da dah dah!

Southwick: Megan Brinsfield is joining us. She is going to offer some options of whether it's deductible or not, and Dayana and Robert are going to guess. And then everybody wins.

Yochim: Yeah! The tables have turned.

Southwick: Yes, they have.

Yochim: Oh, dear.

Brinsfield: All right. So the first one. Your house burns down because of an accident. Can you deduct that?

Yochim: I would say no. Insurance is going to pay for that.

Brokamp: I'm going to say, yes.

Southwick: Why are you going to say yes, Robert Brokamp?

Brokamp: Isn't it because of, like a casualty loss or something like that? You can deduct some of those above a certain floor?

Brinsfield: Right. A hundred dollars and 10% of AGI. I think.

Brokamp: Adjusted gross income, that is.

Brinsfield: Yeah. But you have to subtract off what you do get from insurance proceeds. So whatever the excess is -- excess casualty loss can be deducted.

Brokamp: The same with theft and things like that.

Southwick: Oh, really!

Brokamp: Yes, it's true. And according to Kiplinger, some guy had a drug lab in his house. It burned down, but he still was able to claim a $9,000 casualty loss for burning down his house because he was making drugs. The quote from Kiplinger: "Even though he was involved in an illegal activity and acted negligently, the Tax Court allowed him to claim the write-off."

Southwick: Oh, lucky him.

Brinsfield: So for casualty loss, it has to be unexpected and sudden.

So the next question. What if termites eat your house and it collapses? Is that deductible?

Yochim: Well, I'm going to say no, because it wasn't sudden or unexpected.

Brokamp: I'm going to say no.

Brinsfield: That's correct. It's not sudden. It's not unexpected. That's what termites do.

Now, another house-burning story: If you donate your house to the fire department and they burn it down as part of a training exercise, could you take that as a charitable deduction?

Yochim: Wouldn't the donation of the house be the charitable deduction?

Brokamp: You always hear from charities like NPR saying if you don't want your unused boat or car or burning house, phone it in to us.

Brinsfield: They always say that, yes.

Yochim: All right. What's the rule here?

Brinsfield: The rule is that you can deduct the difference between what you received and what you give. So the amount that you give in excess of what you receive. So you're actually receiving a benefit of demolishing services. which usually outweighs the value of what you gave.

So, the answer is no.

Brokamp: I've donated my car twice, in my life, and it's gotten much more difficult to do it. They're much more careful about how you do that, and want more documentation. That's where pictures come in.

Yochim: You should just burn your car.

Brinsfield: Yes. [Laughs]

Yochim: Set it on fire in a parking lot...

Brinsfield: It's not "unexpected" if you do it yourself.

Brokamp: That's true, unless I'm making drugs in the car and then it's fine.

Brinsfield: If you have a meth lab in your trunk.

So how about a swimming pool? Can you think of a situation where you could deduct a swimming pool?

Brokamp: Maybe if my business was swimming pools or something like that?

Yochim: Swimming pools are always a liability in terms of insurance.

Southwick: And they're fun.

Yochim: And they're fun.

Brinsfield: They are so fun.

Brokamp: But there is a reason why it can be deductible, and it is, Megan, because...

Brinsfield: As a medical expense. There have been cases where someone had a disability, and that exercising in water would help with their recovery of that disability, and so a doctor recommended having a swimming pool. That could be a potential deduction -- the cost of installing that.

Brokamp: What about gym membership? Same thing if a doctor says you need it? Can you deduct that?

Brinsfield: You can deduct it -- it's also a flexible spending expense, as well -- if a doctor says that it's necessary as treatment for some sort of condition.

Yochim: [Can someone get a doctor's note for), say hair removal of any sort?

Southwick: [Laughs]

Brinsfield: I don't think so.

Brokamp: Unless it's a business expense. Because of your job...

Southwick: All right, last one. How about Dayana's cello?

Yochim: Yeah! I totally want to deduct that. I'm going to say yes. Yes, yes, yes, yes, yes.

Brinsfield: Depends on how much it was.

Brokamp: Depends if you're making any money from it, right?

Southwick: Dayana, are you making any money off your cello?

Brokamp: Which gets back to talent, really.

Southwick: Oh!

Yochim: Oh!

Brinsfield: Oh!

Southwick: Burn!

Brokamp: Just kidding.

Yochim: It depends on how much it was?

Brinsfield: How much it was, yeah. You might have to capitalize that and depreciate it over time.

Yochim: Really! Interesting. Because they do become, as long as you're not trashing it, more valuable over time. Huh!

Brinsfield: The IRS will probably place a five- or seven-year life on that asset and have you depreciate it over that time.

Yochim: We'll discuss this later.

Southwick: We will discuss this later.

Brinsfield: Taking it offline.

Yochim: Yep.

Southwick: All right. Well, this has been another episode of Motley Fool Answers. If you would like to ask us some questions to get some answers, you can email us at [email protected]. Don't forget to go to iTunes or Stitcher and like us and give us a review. We would really, really appreciate it.

Theme music is composed, and played, and produced, and all-around performed by Dayana Yochim, albeit not on a cello.

Yochim: There is no cello. There are violins. A melodica. Glockenspiel.

Brokamp: There goes your deduction.

Southwick: More deductions there to be had!

The show is edited by Rick Engdahl. For Robert Brokamp, Dayana Yochim, and Megan Brinsfield, thanks for joining us. And for you at home, Fool on!

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