9 Frugal Tax Strategies That Rarely Pay Off
Sometimes, being frugal can save you money. But sometimes, such as in the case of filing taxes, it can actually cost you thousands or tens of thousands of dollars.
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Whether you’re about to file taxes or you’re planning ahead for next year, here are the top frugal tax strategies that rarely — if ever — pay off.
Holding Onto Losing Investments for Tax Write-offs
If you’ve been holding onto those losing investments for the sake of writing them off on your taxes, chances are you’re losing more than you’re gaining.
“While it may seem beneficial to offset gains with losses for tax purposes, evaluating the long-term viability of investments independently of tax considerations is essential,” said Mark Stewart, an in-house certified public accountant for Step By Step Business.
The issue with this seemingly frugal tax strategy is that you’re prioritizing short-term tax benefits over long-term financial gains, according to Stewart.
“Holding onto losing investments solely for tax write-offs may prevent investors from reallocating their funds to more profitable opportunities,” he said.
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Not Using Tax Software
Some people choose to file taxes on their own without using tax software. But even though this could save you a couple hundred dollars upfront, you could miss some significant tax deductions or breaks that could save you much more money.
“It is common for taxpayers who want to avoid paying for tax software fees to truly self prepare — fill in the 1040 PDF and mail to the IRS,” said Eric Bronnenkant, CPA and head of tax at Betterment. “While this strategy may seem like a good way to avoid fees, it will likely result in significant costly errors.”
More often than not, avoiding the tax software fees will end up being more expensive in the long run.
“Filing taxes on your own without professional guidance can lead to overlooked deductions or errors that may cost more in the long run,” Stewart added. “In such cases, investing in expert tax advice or software can often result in higher savings or better financial outcomes compared to attempting to navigate complex tax laws independently.”
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Obsessively Tracking Medical Expenses
If you’ve been tracking your medical expenses throughout the year in hopes of receiving a tax break, you may be wasting your time.
“Medical expenses are deductible as an itemized deduction to the extent that total unreimbursed medical expenses exceed 7.5% of adjusted gross income,” Bronnenkant said. “While it is possible to exceed this threshold, many taxpayers who have virtually no chance of exceeding the 7.5% of AGI spend too much time tracking medical expenses [that] do not provide any tax benefit.”
Claiming Itemized Deductions
Itemized deductions can sometimes reduce your tax burden, but not always.
“Many taxpayers attempt to save money when filing taxes by claiming itemized deductions for expenses such as charitable contributions, property taxes or mortgage interest,” said Christopher Sternau, a founding partner at Evans Sternau CPA LLC. “However, these strategies usually do not provide benefit due to the historically high standard deduction and other limitations.”
“The standard deduction, which is a fixed amount set by the IRS, is currently $27,700 for a married couple filing jointly,” Sternau continued. “The standard deduction usually exceeds the total of the taxpayer’s itemized deductions.”
Essentially, most taxpayers don’t end up benefiting from itemizing these deductions when they file their taxes. A better strategy might be to bunch deductions instead.
“This is when taxpayers strategically accelerate or defer their itemized deductions into specific years to surpass the standard deduction threshold,” said Sternau.
Only Buying Assets for Tax Benefits
If you’re thinking about purchasing assets so you can write them off on your taxes, this strategy might not be as helpful as you think.
“If you need to acquire something, like new computers or a machine, it makes tax sense to buy it before Dec. 31 and get the write-off this year — time value of money,” said Eric Green, a tax attorney and founder of The Tax Rep Network. “But so many accountants advise their business clients to go ‘find write-offs,’ and so they go buy stuff they don’t really need to create a deduction. This is spending $100 to save $30.”
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Exaggerating Your Deductions
Some taxpayers try to claim more deductions, like charitable donations or medical expenses, to reduce what they owe. But this rarely pays off.
“This strategy is fraught with risk, primarily because the IRS has sophisticated mechanisms to flag returns that deviate from statistical norms,” said Kelly Hanley, a senior tax analyst and attorney at The Tax Defenders. “If caught, taxpayers face audits, penalties and interest on unpaid taxes.”
Not Reporting All Income
You might save money by not reporting all of your earned income — like freelance work, dividends or interest payments. Not only is this illegal, but it can also lead IRS audits.
“The IRS has numerous ways to track income, including matching filed returns against information reports from third parties — e.g., forms 1099-K, 1099-NEC, 1099-MISC, etc.,” Hanley said. “Report all sources of income, regardless of whether they were subject to withholding or you received a 1099 form.”
Delaying Income
Hanley also advised against trying to delay your income to avoid taxes. This might lower your current tax liability, but you’ll still have to pay it eventually. It can also lead to mismatching information and a potential IRS audit.
Some taxpayers will also delay income in hopes that it’ll put them into a lower tax bracket the following year. There are no guarantees that this will work, however.
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Claiming Personal Expenses as Business Ones
Some people will write off their personal expenses as business deductions in hopes of lowering their tax burden. But this is risky, according to Hanley.
“If audited, the IRS will require detailed documentation to prove these expenses are directly related to business activities,” she said. “Misclassification can lead to disallowed deductions, penalties and interest.”
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