Ask Captain Codehead – Real problems. Real solutions.*

by Greg Yoder, CPA

Dear Captain Codehead,

I have an imaginary friend, Horace. He’s always making me buy things because he “forgot his wallet,” and is generally kind of a nuisance, but I can’t seem to get rid of him. If you could find some tax advantages to this situation, that would be a real silver lining.

Two Heads Are Better Than One

Dear THABTO,

You haven’t given me much to work with, and I have to say that it sounds like most of what you buy for Horace would be considered a non-deductible gift. However, since Horace doesn’t appear to have any income of his own, and since he lives inside your, um, abode, I think he could be considered a qualifying relative under IRC §52(d)(2)(H). That means you can take a dependency exemption for him, so Horace can reduce your taxable income by up to $4,050 in 2016.

I should warn you that there are some killjoy CPAs, IRS auditors, etc. who will insist that when the Code says “individual,” it means a living, breathing, flesh-and-blood human being. The appropriate response is to ask these people to show it to you in section 52. If that doesn’t work, just have them talk to Horace.

Also, in a completely unrelated matter, Captain Codehead wants to remind you that psychiatric help is a qualified medical expense. Medical expenses are only deductible to the extent they exceed 10% of your adjusted gross income, but psychiatrists are expensive, and some people need rather a lot of help.

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Dear Captain Codehead,

I’m very worried about the possibility of a complete overhaul of the U.S. income tax system this year. Do you have any insight into what the new legislation might look like?

Concerned

Dear Concerned,

Any competent CPA will tell you that he can’t see the future. Don’t believe them! I’m Captain Codehead: of course I know what the new tax law is going to look like! Naturally, this is one of those situations where after I tell you, I have to kill you, but that resolves both your lack of knowledge AND your sleepless night problem, right?

Ha ha! Captain Codehead will have his little joke and wouldn’t hurt a fly (but maybe sleep with one eye open, just in case). In point of fact, nobody really does know what the new tax law is going to include. I’d say, though, it’s a pretty safe bet that both hair transplants and spray tanning will be deductible under the new regime.

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Dear Captain Codehead,

I always file my taxes early, and I keep meticulous records. I’ve been thinking that it would be fun to go through an IRS audit at least once in my life. I’m certain that the IRS wouldn’t find anything, and then I could tell my friends that I sailed right through it. My only problem is that I can’t figure out a way to increase the odds that I’ll get audited. Can you help?

Confident

Dear Confident,

Actually, I have two pieces of advice for you.

  1. Get a life. And in case that doesn’t sound harsh enough, keep in mind that you’ve just been told to get a life by a tax CPA. At the beginning of April.
  2. You really can’t do anything to change the odds of an audit. Let Captain Codehead explain it to you mathematically. There are two possible outcomes here: either you get audited, or you don’t. That means that there’s exactly a 50% chance of your return getting audited.

It’s amazing how many people don’t understand simple probability.

You know what else is amazing? Despite a 50% chance of audit, none of Captain Codehead’s clients got audited last year! Am I a genius or what?

*Not really.

HAPPY APRIL FOOLS’ DAY!!!!!!