Tax Talk – Page 8 – Wilson Rogers & Company

Upcoming Tax Changes in 2013

Q: I’ve heard that tax year 2013 could be much different than 2012 due to the expiration of the Bush tax cuts. Do you all have any perspective on this?

A: Back in 2001, then President Bush passed what was known as the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), more commonly known as the Bush Tax cuts. For the last few years ever since the cuts were extended through 2012, there has been much consternation as to what is going to happen to tax rates in 2013 when they expire. The question on everyone’s mind is if the expiration of the cuts in 2013 will really be all that painful? Some also wonder if Congress will extend the tax cuts as they did in 2010 when the expiration was originally scheduled to occur. Not knowing the final outcome, it’s important to have a plan in place to prepare for whatever Congress decides.

In addition to the above, the Patient Protection and Affordable Care Act (PPACA), also referred to as Obamacare, will also have provisions that begin in 2013.

If we take a look at the provisions that President Obama has included in his fiscal year 2013 budget, we can get an idea if we need to worry much about what may potentially happen.

EGTRRA

Increase in ordinary tax brackets. The most significant changes from the expiration of the 2001 tax cuts would be the increase of the Ordinary Income Tax Brackets. For most earners, the Income Tax would not increase, but individuals who are in the top two brackets would see changes. For example, if you earn over $390,050 a year, expect an increase of 4.6% in the top most bracket.

Increase in long-term capital gains rates. Ever since 2003 long term capital gains tax for assets held greater than 1 year has been 15% for those in the 15% bracket and higher and 10% for those in the 10% bracket. The change would affect single taxpayers with taxable income below $200,000, head of households below $225,000 and joint couples below $250,000. These individuals long term rate would remain at 15% while filers above these amounts would have a have a 20% rate.

Qualified dividend tax rate. Since 2003 the maximum qualified dividend tax rate has been 15%. President Obama’s budget proposal looks to keep the current dividend rate of 15% for everyone not considered an upper income taxpayer. For these individuals, dividends would be taxed at their ordinary income tax rate of either 36% or 39.6%.

Change in benefit of itemized deductions. Itemized deductions allow one to reduce taxable income be deducting amounts greater than the standard deduction. This includes things such as charitable deductions, mortgage interest, state income taxes, medical expenses, etc. The value of itemized deductions for those upper income taxpayers would be capped at 28%, so someone in the 35% that currently receives $3,500 of benefit for $10,000 of itemized deductions, would only receive $2,800 of tax savings.

PPACA

Change in the health care deduction limit. Through December 31^st 2012 you can deduct health care expenses that exceed 7.5% of your adjusted gross income (AGI). However, beginning January 1^st 2013 that threshold will rise to 10%. For some, that essentially results in a tax increase, since you have to spend more on health care before seeing the deduction. A way to get around this is to use a FSA or HSA so that all of your expenses are basically tax deductible.

Medicare wage surtax. Starting in 2013, if you make more than $200,000 as a single person ($250,000 if married filing jointly) you will pay a 0.9% tax on the income above that level.

Medicare unearned income surtax. Another tax will be applied to Modified AGI (in this case AGI + tax-free income) for those with income levels that are the same as above. There is an additional 3.8% surtax applied to the lesser of your net investment income OR the excess Modified AGI beyond the limits.

Excise tax on medical devices. Medical devices such as prosthetics and wheelchairs will be assessed an excise tax of 2.3%, although items like hearing aids and eyewear that are sold in retail settings won’t be subject to the tax.

While the impact of most of these items won’t be felt until you file your 2013 return in 2014, it’s good to give some thought as to how you will plan out next year in light of what may be on the horizon. But then again, this is an election year so there is always the probability that no increases will happen. Who wants to increases taxes when you’re trying to get elected?

By Administrator|2012-08-21T10:56:50-06:00August 21, 2012|Categories: Tax Talk|Tags: tax changes in 2013, upcoming tax changes|Comments Off

Taxes When You Live In One State & Work In Another

Q: I just took a new job, but heard that it may make my tax situation a little complicated. I live in Illinois but I work full time in Indiana. Is there anything you can tell me about this?

A: Living in one state and working in another can make things complicated from an income tax standpoint. However, there are many mechanisms written into the state tax codes that ensure you don’t pay tax to more than one state on the same income. For example, reciprocal agreements between states exempt some people from filing a return. Thus, if you are a resident of Iowa, Kentucky, Michigan or Wisconsin and only have wage income from Illinois, you are not required to file a return. But what about Indiana?

Indiana and Illinois don’t have a reciprocal agreement, however, they do offer a credit for taxes paid to another state. The steps to filing are as follows:

File Your Federal Return. An individual’s Illinois return begins by using the Adjusted Gross Income (AGI) from their Federal (IRS) return. Thus, once you have your Federal return done you’ll be ready to begin your state returns.

File Your Indiana Return. As your income is earned in Indiana and you more than likely had Indiana Income Taxes withheld from your checks, it’s best to start with this return next. You will file a NONRESIDENT return for Indiana (Form IT-40PNR) and owe Indiana tax on the money you earned in that state. If you have Indiana tax withheld, that will go against your Indiana tax liability and produce a refund or an amount due, depending on how much you had withheld.

File Your Illinois Return. Since you live in Illinois you will file a full-year RESIDENT return and compute tax on your entire income (Form IL-1040). You will then complete the “Credit for Tax Paid to Another State” where you subtract what you paid to Indiana from your tentative Illinois tax liability. In theory, you should wind up not owing Illinois if you paid enough taxes to Indiana.

Now what if you live in Indiana and work in Illinois? You simply reverse the process as Indiana also offers a credit for taxes paid to another state.

By Administrator|2012-08-07T22:04:18-06:00August 7, 2012|Categories: Tax Talk|Tags: taxes when you live and work in different states, taxes when you live in two states|Comments Off

Canceled Debt – Is it Taxable?

Q: My house went into foreclosure a while ago and the bank notified me that the transaction closed. I then received a Form 1099-C, but am not sure what this means. Will I have to pay taxes on the amount that was forgiven?

A: Very good question and the short answer is that it depends. Generally speaking, when a debt that you are liable for is canceled, forgiven, or discharged, you will receive a Form 1099-C (Cancellation of Debt) and must include the canceled amount in gross income. If, however, the creditor is continuing to try to collect the debt, or you meet an exclusion or exception, then you do not have cancellation of debt income.

Cancellation of debt, whether it be partially or totally, that is secured by property may occur because of a foreclosure, a repossession, a voluntary return of the property to the lender, abandonment of the property, or a principal residence loan modification. You must report any taxable amount of a cancelled debt for which you are personally liable, as ordinary income from the cancellation of debt. This is done via your Form 1040 and must be reported whether or not you receive a Form 1099-C. But what about those exclusions and exceptions mentioned above?

Canceled Debt that meets the requirements for any of the following exceptions or exclusions are not considered taxable:

Exceptions

Amounts specifically excluded from income by law such as gifts or bequests
Cancellation of certain qualified student loans
Canceled debt that if paid by a cash basis taxpayer is otherwise deductible
A qualified purchase price reduction given by a seller

Exclusions

Cancellation of qualified principal residence indebtedness
Debt canceled in a Title 11 bankruptcy case
Debt canceled during insolvency
Cancellation of qualified farm indebtedness
Cancellation of qualified real property business indebtedness

The Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. This exclusion for “qualified principal residence indebtedness,” provides canceled debt tax relief for debt forgiven during calendar years 2007 through 2012. It allows taxpayers to exclude up to $2,000,000 ($1,000,000 if married filing separately) of “qualified principal residence indebtedness” which is:

Any mortgage taken out to buy, build or substantially improve your main home
Is secured by your main home
Any debt secured by your main home that you took out to buy, build or substantially improve your main home (but only up to the amount of the old mortgage principal just before refinancing).

Generally, if you exclude canceled debt from income under one of the exclusions listed above, you must also reduce your tax attributes in the asset by the amount excluded. You must file Form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness) to report the exclusion and the corresponding reduction of certain tax attributes.

Point of Caution

If your debt is secured by property AND that property is taken by the lender in full or partial satisfaction of your debt, you will be treated as having sold that property. This may result in a reportable gain or loss. The gain or loss on such a “deemed sale” of your property is a separate issue from whether any canceled debt also associated with that same property is includable in gross income. Make sure to discuss this potential transaction with your tax professional or see IRS Publication 544 (Sales and Other Dispositions of Assets), for detailed information on reporting the gain or loss.

By Administrator|2012-06-28T13:57:47-06:00June 28, 2012|Categories: Tax Talk|Tags: canceled debt, canceled debt income, is canceled debt income taxable|Comments Off

10 Ways To Make Next Tax Season Better

So tax season has come to an end, but the memories of the last minute filers still burn brightly in our dreams. The filers who waited because they KNEW they owed. The taxpayers who had to go on extension because of missing documentation. The people who cried because there was nothing we could do to help their situation. Well, this post is for all of YOU!

Next tax season doesn’t have to be like this year. Nothing pains us more than not being to help someone out of their situation. To that end, here is our list of the top things you should do right now so that next year is less painful and hopefully easier on your pocketbook:

Start a filing system. Ask any attorney what the golden rule is and they will tell you “he who has the most paper wins.” This is the rule that the IRS goes by as well. Most taxpayers pay more in taxes than they should because of inadequate documentation. If you give donations to charity, drive your personal vehicle in connection with work, real estate, a medical condition or charity; it’s important for you to log these items. Unreimbursed business expenses are another area where documenting expenses is crucial. To ensure nothing is missed come next year, start a filing system to keep all of your paperwork. This can be as simple as a drawer where you dump everything until January 2013 or as elaborate as a spreadsheet. The point is make sure you keep all your documentation in one place that is easy for your to find.

If you owed, adjust your withholdings NOW. The amount of the refund you receive or balance due to the government is simple arithmetic. Withhold enough and you’ll get money back; fail to do so and be prepared to write Uncle Sam a check. If you owed last year, talk to the fine folks in your HR or payroll department now and have your withholdings adjusted on your W4. It’s already April, which means you’ve missed out on four months of withholding at the correct rate. The longer you delay, the greater the probability will be that you’ll owe again next year.

If you recently got married, change your withholdings. Newlyweds often forget to adjust their withholdings, but doing so can sometimes be detrimental to your bank account. Married couples sometimes find that their combined income pushes them into a higher income bracket. However, if you fail to make the necessary adjustments, you’ll quickly learn that you didn’t have enough withheld to cover your tax obligation. Follow the steps listed above to avoid this painful lesson.

Manage your pre-tax benefits. The easiest way to pay less in taxes is to reduce your taxable income. The best way to achieve this is to take advantage of all the pre-tax benefits that your company offers. This includes 401(k) contributions AND associated match, utilizing pre-tax transit and parking benefits as well as contributing to a Flexible Savings Account (FSA) or Health Savings Account (HSAs). Money is contributed to these items before your take home pay is calculated. As your pay will be reduced by these items, so will the corresponding amount for which the associated taxes are calculated upon. The result? A reduced tax base and less money paid to Uncle Sam.

Begin contributing to a retirement plan. If you’re not contributing to a 401(k) or other retirement plan, you’re passing up some of the best tax savings available. Contributions to 401(k) plans are not subject to federal or most state income taxes. Your contributions and employer match will grow tax-deferred until you withdraw them during retirement. You could save between 20 and 40% of your contribution in taxes. If you’re already contributing to a 401(k) or other employer-sponsored plan, increasing your contributions early in the year will increase your tax savings and your earnings over time.

Start contributing to an IRA. If your employer doesn’t offer a retirement plan, contributing to an IRA each year can get you some of the same tax savings. For instance, if you make eligible contributions to a qualified IRA, 401(k) and certain other retirement plans, you may be able to take a credit of up to $1,000 or up to $2,000 if filing jointly. The credit is a percentage of the qualifying contribution amount, with the highest rate for taxpayers with the least income. For increased earnings on your IRA, don’t wait until April 15th to open it. The earlier in the year you make your contribution(s), the faster it will grow.

Schedule a midyear evaluation. There is nothing that your tax preparer can do for you regarding your tax liability once December 31^st rolls around. June will be here before you know it which means that half the year will already have passed. Schedule some time with your preparer to discuss your situation and any changes that you think may impact your tax bill next year (e.g. marriage, new child, job change or loss, etc). That way you all can begin to plan accordingly and make the necessary adjustments so that neither of you are get surprised with a big tax bill.

Run a tax projection. Once you’ve had a chance to get your tax situation reviewed, have your tax preparer run a tax projection. Make sure that you incorporate things such as capital gains from stock sales, mutual fund trades, execution of stock options, bond redemptions, unemployment compensation, medical expenses, etc. It’s easy for taxpayers to make a few decisions (such as pulling out money early from a 401(k)) and not realize that there are multiple tax consequences (like the 10% early withdrawal penalty). By having a tax projection run, you can see what those consequences are and prepare for any unintended ramifications.

Shift income if you make over $70K. If you are single and make over $70K, consider shifting your income via some of the following strategies to reduce the amount of taxes you pay:

Rearrange your investments to reduce taxable income. You want investments that generate interest income inside retirement accounts, and investments that generate capital gains and losses outside of retirement accounts.
Realize capital losses to offset capital gains.
Bundle expenses to maximize itemized deductions.
Increase retirement plan contributions as limits rise. Each October the IRS announces the new contribution limits for 401ks, IRAs, and other retirement plans. Check the 2012 contribution limits, and be sure to adjust your payroll contributions to put the maximum amount into your plans.

If nearing retirement, check to see if your retirement income will be taxable. The downfall for most retirees is that they begin to start receiving income from their investment vehicles but aren’t necessarily having taxes withheld (due to how the accounts work). If you are nearing retirement, be aware that the following income is typically taxable:

Withdrawals from Traditional IRAs, 401ks, or other retirement plans. If a plan was funded with pre-tax dollars, whether by you or your employer, it will result in taxable retirement income when withdrawn.
Pension income. Most pensions are a source of taxable retirement income.
Interest income, dividend income and capital gains inside of after-tax accounts. Interest, dividends and capital gains that occur within tax-deferred accounts, such as IRAs, 401k plans or variable annuities, are not taxable in the year they occur. Instead, all gains are deferred and you only pay tax when you take a withdrawal.
Withdrawals from an annuity. When you take withdrawals from a fixed or variable annuity (one that is not owned by an IRA or retirement account) the IRS rules say any gain must be withdrawn first, and this gain is taxed as ordinary income. Once all gain has been withdrawn, you would be withdrawing your basis, or principal. Withdrawals of basis are not counted as taxable retirement income.

By Administrator|2020-09-16T11:16:21-06:00April 30, 2012|Categories: Tax Talk|Tags: how to make tax season better, how to make tax season easier|Comments Off

Tax Preparer Fraud – The Real Deal

When our office gets a “takeover client” there are a series of steps that we perform. In addition to the normal verification of identity, organizer completion and client interview, we also request a copy of the prior year return for review. We do this to obtain a glimpse into the clients history, but we also look to see if potential mistakes were made. Occasionally we find something that should be changed. Hey, tax preparers are human too and sometimes mistakes are made. But then, there are people like these who aren’t making mistakes, but are out to make a quick buck.

So, most people think of tax fraud as fudging the numbers a little. But the reality is it often involves the calculated manipulation of the entire return to generate a false refund. Okay, so what is the benefit to the tax preparer in doing this? The short answer is they get to charge a larger fee for their services and there will be less likelihood of the client balking because of the magnitude of the refund. This is particularly true if the preparer has a banking relationship that allows them to withhold their fees from the refund proceeds. So let’s look at the mechanics of how this works.

Client comes in and wants their return prepared. Let’s say they are also one of those 1) I need my money yesterday and 2) I am looking for a big refund. Okay, fair enough. Now let’s say that the preparer is one of those 1) we can get your money fast and 2) we’ll get you the biggest refund you’ve ever seen. Now this is where the interaction gets a little dangerous. Why? Because the scene is set for the preparer to potentially do things they shouldn’t and the client to turn a blind eye to things that they really should not ignore.

So what does the preparer do? The options are numerous. They could create fictions losses on Schedule C to reduce wage income to acceptable levels to claim the Earned Income Credit (EIC). They could create fictitious income on Schedule C to give a client who doesn’t work income so they can claim the EIC. Wage income could be reduced by bogus stock losses, falsely generated unreimbursed business expenses, nonexistent charitable contributions, etc.

So what is the end result? The client is often presented with a return where they are “guided” to the refund amount. The client is happy with what they are getting right? Typically, thus the reason they are okay with paying a fee that represents 4-10% of the refund. The disheartening aspect of this is that a $450 fee for a person who is getting a $4,500 refund is nowhere near warranted nor realistic. A $450 fee is one that is mostly associated with “complex” returns; meaning those that take a few days to work on and involve a lot of leg work.

So what’s the point of all this? Well, it’s twofold. Firstly, we all need to be aware that there are fraudulent tax preparers out there. Some will perform the above to keep a client while others will do it to get a nice check. If you figure that your average retail tax office does about 400 returns per season, if they are charging $450 for each of them, that makes for a nice $180K season. Secondly, if you encounter one of these preparers, you need to know that the responsibility for your return ultimately lays with you the taxpayer. While the IRS and Department of Justice will typically lock up a fraudulent preparer, they will come to you to get their money back. Furthermore, like we always say, the US Government never loses so it’s best to just do the right thing at the outset.

Until next time.

By Administrator|2012-02-04T23:13:33-06:00February 4, 2012|Categories: Tax Talk|Tags: eic fraud, fraudulently claiming eic, tax preparer fraud, tax return fraud|Comments Off

Is Married Filing Separately (MFS) Right For You?

Q: So I’m married but I’m not sure if I should file my taxes with my spouse. I’ve heard that I can file separately, but is there anything I should consider before doing so?

A: Most married folks just assume they should always file their taxes together. While this is normally the case (we typically advise married individuals to file together), there are some instances when it’s beneficial to file separately. If you are considering going the separate route, just know that it’s not necessarily equal.

Who Qualifies?

The MFS filing status is available only to those who are, well, married. But for those who tied the knot in 2011 (meaning those who were both single and married last year), this can be a little confusing. If you were married at the beginning of last year, you generally retain that tax status for the whole year unless you were divorced or separated under a decree of separate maintenance (same thing as divorced under the tax rules) as of Dec. 31, 2011. If you married during the year and were still hitched on December 31^st, your options are generally limited to filing jointly with your spouse or using the MFS status.

Isn’t Filing Jointly Better?

Assuming you were in fact married at the end of last year, you may think filing jointly for 2011 as opposed to using MFS status is the no-brainer choice. Generally, the biggest reason to file jointly is because it eliminates the need to track and report each spouse’s income and deductions. Additionally, using the MFS status makes filers ineligible for several popular tax breaks that could save them dough if they file jointly (more on this later).

Filing jointly usually does lower the tax bill when one spouse earns a healthy amount of income while the other has little or none. That’s because the joint-filer tax brackets are exactly twice as wide as the MFS brackets. For example, the 28% federal income-tax bracket for joint filers starts at taxable income of $139,351 for 2011. In contrast, the 28% bracket for MFS filers starts at $69,676 of taxable income.

Using an example to illustrate, let’s say that Joseph and Mary earn a combined $100,000. Joseph earns $90,000 at his job and Mary earns $10,000 as she primarily works as a stay at home mother. If Joseph and Mary file together, their combined income puts them in the 25% bracket and their tax bill is $17,250. If they file separately, Joseph gets pushed into the 28% bracket and has to pay $19,235 while Mary is in the 15% bracket and has to pay $1,075. The result is the couple will pay $3,060 more in taxes by filing separately. So when one spouse earns quite a bit and the other not so much, filing jointly will usually cut their tax bill.

When to File Separate Returns

It’s generally advantageous to file separately when 1) both you and your spouse have taxable income, and 2) at least one of you (preferably the person with the lower income) has significant itemized deductions that are limited by adjusted gross income (AGI).

The three most common itemized write-offs that are limited by your AGI level are:

Medical expenses, which you can deduct only to the extent they exceed 7.5% of AGI.
Uninsured personal-casualty losses (like hurricane damage to your home), which you can deduct only to the extent they exceed 10% of AGI.
Miscellaneous itemized expenses (usually nonreimbursed employee business expenses and investment expenses), which you can only deduct to the extent they exceed 2% of AGI.

When you have these types of expenses, filing separately can lead to tax-saving results, because the AGI numbers on your separate returns will be lower. Therefore, deductions that are limited by your AGI may be considerably higher when you file separately.

What You’ll Lose By Filing Separately

If you do decide to file separately, just know that the IRS is going to penalize you. With that said, you can’t claim any of the following if you use MFS:

You can’t claim the child and dependent-care tax credit
You can’t claim the deduction for college tuition and related expenses
You can’t claim the American Opportunity/Hope Scholarship or Lifetime Learning tax credits for higher education expenses
You can’t claim the student loan interest deduction
You can’t deduct more than $1,500 of capital losses against ordinary income (compared to $3,000 if you file jointly)
You can’t make a Roth IRA contribution if your AGI exceeds $10,000 unless the spouses lived apart all year
You can’t convert a traditional IRA into a Roth account (prior to 2011)
You must itemize deductions if your spouse itemizes (you can’t claim the standard deduction)

This list is far from exhaustive, which is why you should always have your tax preparer “run the numbers” to evaluate whether the MFS status might be beneficial.

It’s Never Too Late

If you discover that filing separately would cut your 2011 tax bill, it’s not too late to change your filing status even if you’ve already filed a joint return for 2011. Just file an amended return that substitutes two MFS returns for your original joint return. However, make sure you get the job done before the April 17^th 2012 (due to the DC holiday) filing deadline. The IRS doesn’t allow you to file an amended return switching from joint to MFS status after the due date.

By Administrator|2012-01-22T13:58:12-06:00January 22, 2012|Categories: Tax Talk|Tags: married filing jointly, married filing separately, married filing separately vs jointly, MFS|Comments Off

Is Retail/Professional Tax Preparation Dead?

So a few days ago we came across this year-end tax tips video from the fine folks who make TurboTax. However, what caught our eye occurs around the 2:40 mark. New for 2012, TurboTax will be offering free live tax assistance via Enrolled Agents, Tax Attorneys and CPAs. So what’s so significant about this? Well, before there is any speculation, you have to know the back story.

For many years, if you were preparing your taxes you either paid someone to do it or you would get the forms and do it yourself. Many of you will remember grabbing that pencil/eraser and spending hours filling out forms until you couldn’t stand it anymore. And if you don’t remember that, you sure remember your parents doing it! Well, with the proliferation and acceptance of the PC, the rise of tax preparation software began soon afterward. Now if you wanted to do your taxes on your own, you no longer had to spend countless hours to do so.

Gradually over the past 10 years or so, there has been a steady rise in the number of “digitally prepared” returns. The initial assumption is often that the increase is due to a market shift from retail to online preparation. However, Internal Revenue Service statistics show that the growth in digital preparation, which has overwhelmingly benefitted TurboTax, has largely been at the expense of pen-and-paper preparation. Assisted preparation has remained about 60 percent of the market for the past decade, while do-it-yourself has stayed at roughly 40 percent.

So if the market share has remained unchanged, why does it seem like retail preparers have been struggling? Well the short answer is through the loss of certain complimentary bank products (e.g. the Refund Anticipation Loan or RAL), retail preparers have seen revenues decline. Combine that with the fact that the sluggish economy means stagnant job growth (which translates into stagnant tax return growth) and the result is flat to declining performance at your local tax shop. Thus the performance declines of the Blocks and Jackson Hewitt’s of the world really isn’t a result of customer shifts, but more so poor product performance.

So back to the original question, why is Intuits move to hire tax professionals significant? Well, we believe the answer is twofold. Firstly, if the market has always been heavily skewed to assisted or retail preparation, then those customers have been conditioned. When that customer switches to a digital DIY solution and encounters a problem, what is the result? They’ll either call customer service, the IRS or a friend in search of an answer, and in extreme circumstances they may give up on the product and go back to assisted preparation. Thus, we believe that Intuit is trying to address these facts so that converts to their product have a positive experience and will become repeat customers.

The second part of the answer is a little more speculative so it needs to be taken in that context. Over the years, technology has become more integrated into our lives. With that, the ability for the customer to service themselves from any and everywhere has also increased. This has resulted in the decline of the explicit need/desire of customers to venture to a brick and mortar location. Retail tax preparation has lagged on addressing this and hasn’t been quick to embrace “online” service solutions for delivering their product. With that said we believe Intuit is trying to secure market share in what may be the next emerging tax preparation distribution channel; online assisted preparation.

Will this become the “future” in terms of how individuals have their returns prepared? Who knows, but if history is any indication, the retail channel probably won’t retain its prominence in the years to come. While there will always be a need for certain individuals to visit a physical site (e.g. individuals without access to technology, small businesses, etc.), ultimately you will probably see an increased shift towards some hybrid model. Thus the answer to this posts question, we don’t think retail/professional tax preparation is dead, we just think it’s evolving.

By Administrator|2012-01-06T16:30:01-06:00January 6, 2012|Categories: Tax Talk|Tags: is retail tax preparation business profitable, is tax preparation a good business|Comments Off

I Need A Taxman!

Q: I’ve prepared my return in the past, but my tax situation has been getting more complicated each year. I’m thinking of going to a tax preparer this year, but I’m not sure just how to pick the right person. Any advice?

~ Taxed to The Max

A: A few weeks ago there was an article in the LA Times on this exact topic. We sent it out into the twittersphere but promised to follow up with a blog post a little later. Why the follow up you ask? Well, let’s just say that a little more information is warranted as picking your tax guy/gal could be more involved than you initially think.

When it comes to preparing that ‘ol 1040, you can go a number of routes. You can go the DIY route (which is okay if you have a simple return, have the time to do your taxes and are pretty confident interpreting the IRS code) or you can outsource it. But who you outsource it to could be the difference between a $25 back alley shop and a $3,000 Attorney.

In the article, the following types of preparers were discussed:

Storefront preparers
Financial Planners
Enrolled Agents (EAs)
Attorneys
Accountants/CPAs

We won’t rehash what each has to offer in this post. What we will highlight are the recent changes to the paid preparer environment. When it comes to taxes, it really boils down to one thing, paying what you owe. Pay too much (by not claiming all of your entitled deductions, exemptions, etc.) and you just gave the US Government free money. Don’t pay the right amount (unintentionally or deliberately) and they will come and check you into your very own private suite; equipped with locking bars and a jump suit.

Unfortunately, accurately paying what you “owe” requires you to have a degree in astrophysics, psychology, classical literature and differential equations. And that is just to figure out what page of the Code the rules are on for your situation! But in all seriousness, figuring out what applies to your situation can be complicated stuff at times. Well, too often people were not getting it right, including your friendly paid preparer. So what recently happened is the IRS began regulating preparers by instituting some changes for anyone who prepares a return for money. These changes included:

Registration and obtaining a Preparer Tax Identification Number (PTIN)
Testing
Certification
Continuing education

What the above essentially did was ensure that those who prepare returns have a basic understanding of the rules, what documentation/proof should be obtained and just what is not allowed. For example, if you have a dog and pay for veterinary (medical) care, can you deduct the expenses when you claim them as a dependent? The answer is of course no (you can’t claim your pet as a dependent), but stuff like that use to happen back in the day before the IRS started requiring that all dependents have a SSN. Thus, the regulation requirements help ensure that if you are using someone to make certain you pay what you owe, that they know just what they are doing.

So, if you decide it’s time to begin employing the services of a professional, make sure that you do a little tire kicking before you just hand over your financial life to someone. At a minimum here are some questions you should ask every preparer when you first meet:

How long have you been preparing returns?

You want someone who has been in the business for a while and knows that they are doing. While there isn’t necessarily coloration between years in the business and competency, the longer the person has been doing it, the more likely it is that they know the fundamentals of accurate return preparation.

What is your experience with my return?

Using a preparer who hasn’t dealt with your situation could be a recipe for disaster. Tax preparation is just like riding a bike, the more you do it the better you become. Seek a preparer who has experience with your situation and your wallet will thank you.

How do you keep abreast of tax law changes?

Tax laws change faster than the weather in Chicago. What applied five years ago (heck even last year) may be totally null and void this year. If your preparer doesn’t keep up with the changes then you are running the risk of things being reported incorrectly to the IRS. Want to know what happens when you report wrong? Neither do we!

What stance do you take when preparing returns?

Some preparers are aggressive while others are conservative. It’s best you know their approach BEFORE they do your return. The responsibility for an accurately prepared return actually resides with the taxpayer, not the preparer. If something is wrong, the IRS will contact you first. Thus, make sure you know if your preparer is the type to push the envelope when flying in the gray area or if they tend to play it safe. Nothing is worse than paying for your return and then finding out a year later that the IRS doesn’t agree with the stance that was taken and they want their money back (penalties and interest tacked on of course).

What is your audit rate and can you represent me if I get audited?

The IRS audits a subset of returns every year. If you prepare returns long enough, some of your clients will eventually get selected. In general, a preparer’s audit rate should be low. However, if it is abnormally high, it may be a signal that they aren’t preparing returns correctly or they are being overly aggressive (or even fraudulent). Most preparers can’t practice before the IRS (only EAs, Attorneys and CPAs can) so its good to know if your preparer can just in case you do get selected for an audit. If they can’t, that just means that you’ll be the one who will have to present and defend your position to the IRS.

How is the price of my return determined?

Some preparers charge by the hour, some by the number of forms you file and others just charge a flat fee. Ensure that you know their billing method up front to avoid any surprises at the end. For example, if you walk into one office with a cereal box of receipts it could cost you nothing, whereas at another office it could be $500 of time spent sorting and classifying the expenses.

The above questions are only a smattering of things that come to mind when selecting a preparer. In the next few weeks we’ll try to post some more topics and insights under the “tax talk” category to help you get prepared for the upcoming season. Until then, stay warm and start getting those documents pulled together!

By Administrator|2011-12-06T21:29:26-06:00December 6, 2011|Categories: Tax Talk|Tags: what to look for in a tax accountant, what to look for in a tax preparer|Comments Off

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