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Four Ways You’re Unknowingly Cheating on Taxes

Posted By Jim On 06/23/2008 @ 6:54 am In Personal Finance,Retirement | 8 Comments

You might not realize this but last year you probably cheated on your taxes.

Yep, even if you used TurboTax or hired an accountant, you probably cheated on your taxes and you didn’t even know it! We’re not talking about some obscure tax law that no one has ever heard of like a barrel of rum for each ship entering the Port of London [3], these are bona fide legitimate taxes. And you may be evading them.

Now, part of the reason why you may have cheated on your taxes and not known about it is because many of these are not enforced. Many of them are difficult if not impossible to enforce. Use taxes have been on the books for quite some time but I don’t know a single person who has paid a use tax.

So, here are the four ways you’re a tax cheat.

Use Tax

When you ordered that book off Amazon or that new Dell laptop, did you pay use tax on it? Most people don’t and that’s technically illegal. Use tax is a type of tax that is levied on products you purchase outside of the state you’re going to use them in. The tax often matches the sales tax rate of the home state, effectively giving the state the legal right to tax products you buy elsewhere. States aren’t entirely cruel though, many states have a rule that states any sales tax you pay to another state can be used as credit towards the use tax, that way you aren’t hit with a double whammy. How nice of them! (I wonder how many people pay the use tax?)

  • Wikipedia on Use Tax [4]
  • Maryland Comptroller on Use Tax [5] (you can search for “use tax [state]” to find information for your home state)

Sales Tax Evasion

An extension of the use tax example above is one in which you buy something in another state simply because the sales tax is lower there. A lot of people who live on the Maryland-Delaware or Pennsylvania-Delaware border often travel into Delaware to buy things because there is no sales tax there. Technically, that’s tax evasion.

We were tempted to buy all of the alcohol for our wedding in Delaware but scrapped the plan because the two hours drive was barely worth it and because we could return unopened bottles to our local liquor store. (we also would’ve been breaking alcohol transportation laws too)

Barter Income Tax

If you trade your services with someone else on a contract and commercial basis, you have to claim the value of services received on your 1040 Schedule C form. “A barter exchange is any person or organization with members or clients that contract with each other (or with the barter exchange) to jointly trade or barter property or services. The term does not include arrangements that provide solely for the informal exchange of similar services on a noncommercial basis.”

So taking turns mowing lawns with your neighbor without claiming the “barter income” is okay, but trading website design work with a landscaping business requires claiming barter income. If you’re part of a barter exchange or network, it sounds like that’s automatic grounds for claiming it as income. I’m sure this is difficult to enforce but I doubt most people consider barter to be taxable!

Nanny Tax

If you have any household help, be it private landscapers/lawn care or nanny/babysitter, you may have to pay what’s known as a nanny tax. The nanny tax refers to payroll taxes (such as Social Security, Medicare, etc) and you are required to pay them if you pay someone more than $1,600 in a calendar year. Whether you are subject to this tax has been debated for quite some time but the crux of the matter is whether your “nanny” is considered an employee versus an independent contractor. The best advice I have for you is to check out the two links below to get a better handle as to whether you are subject to this tax.

Your babysitter might be an employee… and you might be inadvertently failing to pay your taxes!

(Amazon.com box photo by markuz [9], Nanny picture by teddyb [10])


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URLs in this post:

[1] Tweet: http://twitter.com/share

[2] Email: mailto:?subject=http://www.bargaineering.com/articles/four-ways-youre-unknowingly-cheating-on-taxes.html

[3] barrel of rum for each ship entering the Port of London: http://www.bargaineering.com/articles/50-fun-facts-about-taxes.html

[4] Use Tax: http://en.wikipedia.org/wiki/Use_tax

[5] Use Tax: http://business.marylandtaxes.com/taxinfo/salesanduse/default.asp

[6] Bartering Income: http://www.irs.gov/taxtopics/tc420.html

[7] Grow up and pay the ‘nanny tax’ if you owe it: http://moneycentral.msn.com/content/Taxes/P43440.asp

[8] The Nanny Tax: http://www.smartmoney.com/tax/homefamily/index.cfm?story=nanny

[9] markuz: http://www.flickr.com/photos/markuz/94218829/sizes/s/

[10] teddyb: http://www.flickr.com/photos/teddyb109/2581469474/sizes/o/

Thank you for reading!