Z Art of Taxes

By Andrew Stern, EA

This book has a modest goal. It is not meant to be the be all end all, all-encompassing tax code review. My intention is to provide super-practical advice to self-employed artists - and anyone else who is self-employed.
It’s about demystifying the process of preparing your taxes, to dial down the intimidation and fear of interacting with the government, about empowering you to make wise tax planning decisions, to let you know what you have to do tomorrow, next week, next month, and next year.
What makes me qualified to write such a book? Thirty plus years in the trenches, knowledge learned on the job, much more so than in school. There is no substitute for experience in this field. What I have to offer is a very good technical skill set of tax code combined with a lot of common sense and logic, years of hands-on tax preparation experience, and a healthy dose of streetwise attitude. Being a musician since age 13 serves me as well because I have experienced the other side, of being self-employed as an artist. As the great Jimi said, “are you experienced?”
I have run my own tax preparation business for 30 plus years. I have prepared tax returns for artists and other self-employed individuals tens of thousands of times. I understand what it means to be self-employed. You are risk takers, free thinkers, seeking alternative ways to live your life (suit and tie optional). You created your own business vision because your passion led you there.
Along with your creative success comes the burden of handling your business, and that means taxes. I have seen clients leave their confidence, their common sense, and their logic at the doorway into the world of taxes. Those traits are replaced with panic, procrastination, sleepless nights – all as a result of feeling that taxes are beyond your control, that you don’t understand them and never will be able to.
Bottom line, taxes cannot be ignored. We all have to prepare and file tax returns and pay taxes every single year. The choice is clear - continue down the path of self-torture, or change your perspective.
So let me welcome you now into the world of calm, cool, and confident! That is how you will feel after you digest the information contained within these pages.
Here are a few reviews ...
• Andrew Stern has made a terrible mistake. The beloved Bay Area tax guru has written a book so clear, well-written, and witty that his clients, even ding-dong finance-phobes like me, can now sit down and do their taxes without him. Please help him. Buy this book. (P.S.: It's deductible!)
-Mary Roach, author (Stiff, Packing for Mars)
• Andrew Stern, aka Ztaxman, has been making brilliant cut-to-the-chase sense out of the fog of nonsense that is the tax code for me and other lucky citizens for decades now. The wonder of his book is that he spares the spin, spares the brag, spares the angst, and simply unlocks and opens the palace of wisdom in as direct a manner as possible. If he were a filmmaker, he'd be Ozu. If he were a songwriter, Willie Nelson.
-Jonathan Lethem, author (The Fortress of Solitude, Chronic City)
• Every year, the dreaded day comes. April 15th! Taxes are due. Panic sets in! Not anymore! After reading "Z Art of Taxes, The Streetwise Guide for the Self-Employed Artist, and Every Other Self-Employed Taxpayer” by Andrew Stern. All my worries are gone. The book explains everything I need to know about keeping track of my expenses. I highly recommend this book to all my friends.
-Dave Shul, guitarist for Spearhead

• Language: English
• Publisher: Andrew Stern, EA
• Release date: Feb 1, 2013
• ISBN: 9780988921108

Book preview

Introduction

This book has a modest goal. It is not meant to be the be all end all, all-encompassing tax code review. My intention is to provide super-practical advice to self-employed artists - and anyone else who is self-employed.

It’s about demystifying the process of preparing your taxes, about removing the scariness of the subject matter, to dial down the intimidation and fear of interacting with the government, about empowering you to make good decisions, about allowing you to take control of your financial life, to let you know what you have to do tomorrow, next week, next month, and next year, to help you through the maze of tax code, to give you a better life, an easier life.

What makes me qualified to write such a book? Thirty-five years in the trenches. Knowledge learned on the job, much more so than in school. Academic study is only the starting point for becoming a good tax practitioner. There is no substitute for experience in this field.

I am not a tax code–loving junkie. I will leave that up to the wonderful people who run the review seminars that travel around the country. What I do have to offer is a very good technical skill set of tax code combined with a lot of common sense and logic, years of hands-on tax preparation experience, and a healthy dose of streetwise attitude.

Being a musician since age 13 serves me as well because I have experienced the other side, of being in business as an artist. Some of my clients wonder how music and tax preparation are related; to them they are worlds apart. But the study of music is rooted in mathematics. If you are a good musician, odds are you are pretty good at math as well. For me personally, that seems to be the case.

I have run my own tax preparation business on the West Coast for 30 plus years. I have never advertised. My business built up completely by referral. I service many different self-employed artists: fine arts painters, sculptors, circus clowns, filmmakers, musicians, writers, web designers, you name it, I probably have worked for someone in that profession. I also work with a fair number of what one would consider to be more traditional clients i.e., attorneys, doctors, therapists, etc., who have a wide range of issues such as real estate, rental properties, portfolios, stock options, etc., pretty much a well-rounded group of clients living in an urban environment.

My first tax gig was at the office of the father of one of my best childhood friends. This dad was one cool cat. A former high school business teacher turned tax practitioner/driftwood sculptor with a big grey Afro. He built the entire tax office out of driftwood. It had a swing in the waiting room. People walking by thought it was a day care center.

After my first 2 years there I prepared about 30 tax returns for my musician friends on the side. I would drive to their houses, briefcase filled with tax forms, carbon paper, pencils, pencil sharpener, and a calculator. I’d sit in their kitchens and prepare the tax returns by hand, in triplicate using carbon paper. One mistake and you’d have to start all over again. This was several years before computers were available to the masses.

The next year, I had 100 clients; the following year, I had 200. Within another two years, I had left the firm and started my own business. Existing clients kept on referring their friends, and pretty soon my client book had expanded way beyond musicians, to include self-employed individuals of all sizes, shapes, and disciplines. As my business grew, so did my reputation for getting self-employed artists and like-minded souls.

Over these thirty plus years I have prepared tax returns for artists and other self-employed individuals tens of thousands of times. I understand what it means to be self-employed. You are risk takers (you started your own business), free thinkers (not working for a boss), seeking alternative ways to live your life (suit and tie optional).

You have been motivated to go down the path of creating your own business vision because your passion led you there, you saw life differently from others, wanted more control and freedom about your choices, wanted to escape the reality of the 9 to 5 work week.

Unfortunately, along with your creative success now comes the burden of handling your business, and that means taxes. Throughout my years as a tax practitioner, I have seen friends and clients leave their confidence, their common sense, and their logic at the doorway into the world of taxes. Those traits are replaced with panic, procrastination, sleepless nights, worrying all the time – all as a result of feeling that taxes are beyond your control, that you don’t understand them and never will be able to.

Bottom line, taxes cannot be ignored. We all have to prepare and file tax returns and pay taxes every single year. The choice is clear - continue down the path of self-torture, or change your perspective.

So let me welcome you now into the world of calm, cool, and confident! That is how you will feel after you digest the information contained within these pages.

Chapter 1

A My Tax Strategy, Plain and Simple

A: My Tax Strategy, Plain and Simple

Here’s one of the most important pieces of advice I have: Think simple. Don’t overcomplicate this subject. It’s not rocket science. It’s just a math puzzle with variables year to year. And the math, for the most part, is straightforward: addition, subtraction, multiplication, division, percentages. Once you master the basic concepts of tax code that affect you, it should become second nature.

Good recordkeeping. Careful analysis. Responsibility. Getting good advice from a professional. These are all you need to accomplish your tax goals.

Business Deductions and How to Think about Them

Anyone who runs a business needs a clear understanding of what constitutes a business deduction. Here’s where the conceptual meets reality, or, in other words, where tax code meets your financial life. Worlds colliding.

In the spirit of simplicity, we can sum up the basic business deduction strategy like this: turn what you already spend money on into deductions. Yes, it is that simple.

Good recordkeeping enables you to perform careful analysis. That’s where you start the process of finding business deductions.

Tax code defines a business deduction as being any expense that is ordinary and necessary for running your business. The IRS doesn’t provide a definitive list of expenses that are deductible, just this definition. It’s up to you to interpret what that means.

As you review your expenditures for the year, keep this conceptual definition in mind: ordinary and necessary.

Now there are always going to be the obvious business deductions: telephone, office supplies, business use of home and car, like so. What you should also be looking for are the indirect, peripheral, and personal expenses that still have a relationship to your business. Consider everything you spend your money on. How can you turn them into a business deduction? Where’s the thread that connects one to the other?

You may notice that you are spending money in areas that are not related to your business. Could they be in the future, if you change your business model? This should also be on your plate as you analyze your financial life. Where are your future opportunities?

Consider where you like to spend money, where you will continue to spend money. These are areas which provide opportunities to manipulate and exploit.

Consider money saved as a potential deduction. Money saved turns into retirement plan funding.

Connect the dots

Tax strategy for the self-employed person mostly consists of modest events. Yes, there are a few grand slams, like home ownership and retirement plan funding. But the rest can be subtle, and not necessarily connected to each other.

Your goal is to connect the dots for all of these different opportunities into one cohesive overall strategy. How do health insurance, medical expenses, quarterly estimates, business deductions, retirement plan funding, and Health Savings Accounts, all fit together into your tax scenario? Your tax issues can be widely diverse, but they are all part of the big picture. It is the aggregate of all your opportunities together that form a working, effective tax strategy, allowing you to exercise control over your tax liability. In baseball terms, it’s as much about the single and the sacrifice fly as it is about the home run.

Should you spend more money on deductions to lower your tax liability?

If you made more money this year than last, should you buy more stuff for your business to get more deductions? Only if you need more stuff for your business! The answer, generally speaking, is no.

Why would you spend a dollar to save 35 cents? Why would you spend money on something you don’t need, just for a deduction? This does not make fiscal sense.

Yes, keeping your tax liability as low as possible is an important part of achieving financial independence. But sometimes you are better off saving instead of spending, even if that means a higher tax liability.

What does financial independence mean? That is a difficult question to answer. It means something different to each of us. To me it means having enough money saved and invested in a diversified way that my family and I are able to live comfortably now and for the rest of our lives. It means being able to control when I work, whom I work for, and what type of work I prefer. A lofty goal for sure.

Having the lowest tax liability is not the end goal. It is just a piece of the puzzle towards creating financial independence, albeit a very