Tax "loopholes" may be good for going viral, but they're rarely good for your tax planning.
When it comes to managing your finances and taxes, you'd be wise to take advice from TikTok with a hefty grain of salt. Certain tax "loopholes" may go viral, but that doesn't mean they're good for your specific tax situation.
The bite-sized video format of TikTok lends itself to oversimplification and embellishment on complex topics like tax planning. Many videos distill nuanced tax strategies down to just a few misleading sentences. Let's take a look at some of the TikTok tax advice that have gained traction, but could potentially lead people astray.
Some videos claim you can form a limited liability company (LLC) to deduct personal expenses like your mortgage, car payments, and even grocery bills as business expenses to reduce your taxes.
While LLCs can provide some tax benefits, simply forming one doesn't magically allow you to write off all your personal costs. There are strict rules about what qualifies as a legitimate business expense. Deducting personal expenses improperly could land you in hot water with the IRS.
Other videos suggest that business owners should hire and pay their children as employees. The claim is that this allows the child to contribute to a Roth IRA using their "earned income."
While it's true that only earned income can be contributed to a Roth IRA, hiring your kids has very specific requirements. The work they do must be legitimate and age-appropriate, and the pay must be reasonable for the job performed. Simply putting your children on payroll as a tax workaround could be considered fraud.
As I explained last week, another viral claim about a legal "tax loophole" advises people to write off the cost of a luxury vehicle like a Range Rover or Mercedes-Benz G-Wagon on their taxes.
The truth is, according to the IRS Section 179 tax code, businesses may be able to write off a G-Wagon if it’s used for business purposes at least half of the time. Section 179 does allow businesses to deduct the full cost of certain assets like vehicles in the year they are placed into service, rather than depreciating the expense over several years. But there are very strict requirements. Additionally, there are limits on the deductible amount for luxury vehicles that exceed $19,800 for cars and $20,500 for trucks and vans in 2023.
When it comes to complex topics like these (and really all things tax-related), don't rely on brief videos from non-professionals. Improper tax strategies could inadvertently cost you much more in penalties, interest, and fees down the road.
Unless a TikTok video is from a credentialed tax expert giving a general overview of tax concepts, take it with a hefty scoop of skepticism. It's best to consult a qualified tax professional who can look at your specific situation and give you legitimate, tailored advice. What makes for a good viral video rarely translates to good tax planning.
