Monday, February 2, 2015

Money matters - The only things certain are death and taxes - By Christopher Wallace


According to the National Taxpayer Advocate there have been almost 5,000 changes to the tax code in the last 11 years. How many of them really apply to you? As a tax preparer for almost 20 years I can tell you…not many! Change is inevitable in all things. I think these changes are more of a scare tactic than anything. Either way you better understand what applies to you so you are not getting letters from the IRS that seem impossible to respond to. Here is my take on the changes and what to do to insure you do not miss any.

Capital Gains/ Retirement Plan Distributions: Other than taxable rates there have not been many changes here. The challenge is that the IRS now matches forms with what is reported. Even though there may not be any tax due, you still have to report the distributions. If you do not the IRS assumes your basis is 0 and will tax you on the full amount.

Health Savings/Reimbursement Accounts: These continue to change with each tax year. Normally you contribute through work and receive a form at the end of year for any distributions. Many taxpayers fail to report this on their taxes. If you miss this the IRS will add it to your income and assess additional taxes. Make sure you file the required report.

Health Insurance Deductions: This does not apply to the individual that works for a company and reports the payments on their W2. If you are self-employed be really careful how you report this deduction. It could potentially be reported in three different places across your return. More importantly if you run a business and have employees there are now credits available to you.

Dependent Care Credit: There are two ways to go with this: You can receive a credit for expenses paid during the year or have a deductible account through work. For most clients I advise the latter. Again you have to make sure it is reported correctly. If you do not file the correct form including the deductions at work you will get an IRS notice.

Education Credit: By far the most complex credit. Up to $5,000 in the first two years of undergraduate college. There are many complications to this credit. You need a 1098T to support this deduction. Tons of fraud on the filer’s part have made this the most audited deduction in the past five years. Other education credits are available after the first two years. You just want to make sure you keep your 1098Ts because the IRS is going to ask for them.

Child Tax Credit: $1,000 for each child who is still under 16 on December 31st of the filing year. It is a credit toward your income tax due. If your income is low enough it may also be refundable.

Earned Income Credit: Preparers are now required to verify that your child actually qualifies as your child. If you can bring school records, health insurance information or day care receipts this makes things much easier. As a preparer we face fines if we can verify you qualify for this credit and take it. This is one of the few credits that is refundable depending upon your income.

Home Office Deduction: Ten years ago the IRS changed the rules around this. If you do not have a separate space in your house and use it regularly and exclusively to see clients you are out of luck. The only exception to this is running a daycare. In 2013 the IRS came out with a “Standard Deduction” for the Home Office Deductio, which is $1,500 if you meet certain conditions and it is not something the IRS can audit for. This is applicable whether you take this deduction on a 2106 or schedule C.

Affordable Care Act: Penalties for failure to have health insurance start this year. They are so minimal the average citizen will not face them. You can get an exception for the penalty as well. I cannot see anyone paying a fine this year. I would not be concerned about this. In most cases your employer will provide you with what you need. If you are self-employed make sure your health insurance provider gets you that information. Penalties start to ramp up in 2015. Make sure you are keeping documentation around your coverage.

On top of these we have the foreign tax credit, residential energy credit and first time homebuyers credit repayment. These are so far and few between that I will not go into them here. But realize your tax professional has the answers to any questions you might have.

These are the major changes I have seen over the past 15 plus years that apply to the typical tax client. Tax filing is one of the few areas where I believe more is better. I would rather file a return and report information anytime they receive an IRS notice.

When I first started preparing taxes I thought it was absurd to pay someone to do something I could do myself. I now think just the opposite. You are going to pay $50 to $100 for a decent piece of software to help you. You will spend at least two to three hours actually preparing your return. How many additional hours are you going to spend collecting information and worrying after that?

Tax preparation fees usually start at $150 and go up from there. If you are thinking of using a professional make sure they are registered with the IRS, file electronically and have completed continuing education for the year. What is your time worth? Wouldn’t you want a professional to navigate this craziness for you? What are you going to do when the IRS comes calling on you?









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