We all know the story of the first Thanksgiving. But what if the Pilgrims had to concern themselves with filing a federal income tax return as we do today? What would they be able to claim as deductible expenses? Let's look at the life changes they went through that year and the effect those changes would have on their tax returns.
- Moving expenses: Many of the Pilgrims were farmers and craftsmen by trade and did the same type of work in the New World as they did in Europe, qualifying them to claim a moving expense deduction. The cost of their transportation on the ship, and the cost to move their household goods to the ship would be deductible. Even if they didn't itemize, they could have likely deducted their moving expenses.
- Job hunting expenses: Many Pilgrims had to provide written documents on their nature and work ethic to be allowed to travel to the New World. The cost of printing their resumes and delivering them to officials while setting up their big move could be deducted when itemizing deductions. Networking and meeting lunches, business gifts, and travel expenses - including carriage or cart mileage - all of the costs related to searching for and securing employment, would be deductible.
- Self-employment income: The Pilgrims were largely self-employed farmers and businessmen. They needed to be sure they kept track of their expenses for tools, seed and supplies for their business. Since most business was done through barter in the early years, they would have needed to track the value of the items they traded and received in trade in order to accurately determine their total income for tax purposes. Under today's tax code, the net profit from their business would have been subject to self-employment taxes and would have to be paid when filing their tax return. It is important to remember the value of their time while farming, building, hunting or gathering was not deductible. Taxes should be paid in quarterly estimates, so each businessman or farmer would have needed to determine their expected annual profit each quarter, along with their self-employment taxes, and send an estimated tax payment to the IRS.
- Charitable contributions and gifts: During the first year of the Plymouth settlement, the Pilgrims received gifts and help from the local tribal charity. If donations were made by the Native Americans to a church or other qualified charity, the goods and property would have qualified as a charitable donation based on the fair market value or basis of the property donated. While gifts received are not included in income, the Native Americans would have had to keep records of the value of the items they donated so they could deduct the charitable contribution as part of their itemized deductions.
- Education expenses: Many of the Pilgrims needed education by the local teachers, the native people, so they could live in the harsh new environment. The value of the items they bartered for, the lessons they learned and any other education related costs could have been claimed as a Lifetime Learning Credit on their tax return.
- Home building materials: As early as our Pilgrims, the purchase of a home was an American dream and included many tax benefits. The total actual expenses for building their home would have provided the basis of the home initially, so when they sold it, they could reduce their potential gain. They may have been eligible to exclude the first250,000 (500,000 if married filing jointly) from income. Other costs as with loan interest to buy or build and property taxes for the property owner would also have been deductible as part of itemizing deductions.
As you can see, the Pilgrims of 1620 certainly had many challenges - a hostile environment, securing food and shelter, uncertain and harsh weather and many other considerations. However, they did not have the challenge of today's federal (and if applicable, state) income tax return. If they had today's tax return and corresponding tax rules, as we hope to show with the above humorous allegory, keeping up with tax deductions, life changes and the tax benefits under today's environment could have certainly led to lower taxes and even a bigger tax refund.
Lucky for the Pilgrims, the tax code was simpler back in 1620 and mainly consisted of coming up with a bushel of wheat to give to the town mayor.