Answering a question
Tax season officially ends today when the clock runs out on the one-day extension granted by the federal government after the IRS computer systems crashed on April 17, 2018. I chose not to work today weeks ago and my ER visit last night merely cemented my intention. That being said, I will admit to having gone in this morning before the office opened in order to clear two "rejects" where the e-filing of returns I did for clients were not accepted by the IRS. In both cases, the issue was a mismatch between the name on the return, the Social Security number and how those items are recorded in the Social Security Administration database. Happily, both rejects were easily resolved.
A couple of weeks ago, a client I was helping mentioned that their friends had asked them why they come to me, when they could just use TurboTax or another of the numerous online tax products. Their answer was an expression of their confidence in my work. But I wanted to share a couple of anecdotes about things a highly trained tax-professional can do that an online or CD-ROM tax solution cannot do.
* * *
This client's issue was that when they applied for their 2017 healthcare coverage through California's exchange, Covered California, they underestimated their income for the year. As a result, they had a balance owing on their federal tax return of over $900. It could have been worse without the limits on advance premium tax credit repayment that are contained in this chart.
This particular client is single, but the hack I'm about to describe works for anyone. On their Form 8962, the form on which the advance payment of the subsidy is reconciled with their actual income is a measure of where the taxpayer (family) falls on the Income as percentage of poverty line. This client's result was 302%.
So I suggested that the client contribute $500 to a traditional IRA. That lowered their income from 302% of the poverty line to only 299%. As a result, their required repayment was reduced from $1,250 to $750. Their balance owing to the IRS dropped from over $900 to just over $200. So by contributing part of what they would have paid to the IRS toward their retirement savings, they are paying less in taxes.
An online or CD-ROM tax solution cannot come up with that kind of solution because it isn't programmed to look for things like that.
* * *
The next client has been using TurboTax for years, and it cost them a large amount of money as a result. This is because there are two ways to calculate the deduction for having an office in your home.
The simplified method is the easier method of the two. You take a deduction of $5 per square foot for an office of up to 300 square feet. The maximum deduction under this "safe harbor" is $1,500.
The other method is the actual expense method. You take the square footage of the office and the total square footage of the home and create a ratio. A home of 800 square feet with a 100 square foot office results in a ratio of 12.5%. Then you total the rent, utilities and other expenses that apply to the entire home, multiply it by that ratio and then add any expenses that are directly deductible because they are specific to the office. Paint the whole home and 12.5% of the expense is deductible. Paint just the office and the entire expense of painting is deductible.
In this case, I calculated what the actual expense method deduction would have been for the years 2014 and 2015 and it was over $11,000 for each year. That means that this taxpayer paid a lot more in tax in each of those two years than they would have if they'd gone to a professional. How much more?
The income tax rate was 25% federal and 6% for CA. 31% of $11,000 is $3,410 in income tax savings. Then there's the savings of self employment tax, which adds $1,554 to the extra tax this person paid. That's roughly an extra $5,000 in income tax paid per year over 2 years because they went with an online/CD-ROM solution.
The worst part of this is that when Congress implemented this simplified method, it was done in such a way that once you elect either method, you cannot go back and change your election. So I couldn't amend this client's returns to recover the lost $10,000 in taxes they didn't really owe.
* * *
Fortunately, the final anecdote has a happier ending. In this case the client decided to move out of their home at the beginning of 2016 and rent it out. They did their taxes on TurboTax.
Now I don't know if during the preparation of that return, the application asked the client about the purchase price of the home and so on, but the one deduction that was missed was depreciation. Depreciation is the recovery of the cost of business property over its "useful life" as defined by the Internal Revenue Code. The code defines the useful life of residential rental property as a period of 27.5 years.
The "basis" of this home was roughly $600,000 which means that the missed depreciation deduction was over $21,800. Now in this case, by amending the return and claiming the missed depreciation, the previously reported and taxed profit of roughly $7,000 became a loss of over $14,000.
The loss isn't deductible this year because the client's income is above a certain level, but the loss is carried forward into future years until it can be used. Meanwhile, they got a refund of 36% of $7,000 or $2,520.
* * *
I'm not saying TurboTax sucks. Nor am I saying that about any other online solution, although having tested most of them, I will say that my personal opinion is that the H&R Block online solution is better than the rest. Not because I'm an employee. Because of two reasons. One is that in my opinion, it is more intuitive in probing for things other applications miss. The other is that the user can quickly and easily opt, for a reasonable fee, to have a trained tax professional review and verify their return is accurate.
A couple of weeks ago, a client I was helping mentioned that their friends had asked them why they come to me, when they could just use TurboTax or another of the numerous online tax products. Their answer was an expression of their confidence in my work. But I wanted to share a couple of anecdotes about things a highly trained tax-professional can do that an online or CD-ROM tax solution cannot do.
* * *
This client's issue was that when they applied for their 2017 healthcare coverage through California's exchange, Covered California, they underestimated their income for the year. As a result, they had a balance owing on their federal tax return of over $900. It could have been worse without the limits on advance premium tax credit repayment that are contained in this chart.
So I suggested that the client contribute $500 to a traditional IRA. That lowered their income from 302% of the poverty line to only 299%. As a result, their required repayment was reduced from $1,250 to $750. Their balance owing to the IRS dropped from over $900 to just over $200. So by contributing part of what they would have paid to the IRS toward their retirement savings, they are paying less in taxes.
An online or CD-ROM tax solution cannot come up with that kind of solution because it isn't programmed to look for things like that.
* * *
The next client has been using TurboTax for years, and it cost them a large amount of money as a result. This is because there are two ways to calculate the deduction for having an office in your home.
The simplified method is the easier method of the two. You take a deduction of $5 per square foot for an office of up to 300 square feet. The maximum deduction under this "safe harbor" is $1,500.
The other method is the actual expense method. You take the square footage of the office and the total square footage of the home and create a ratio. A home of 800 square feet with a 100 square foot office results in a ratio of 12.5%. Then you total the rent, utilities and other expenses that apply to the entire home, multiply it by that ratio and then add any expenses that are directly deductible because they are specific to the office. Paint the whole home and 12.5% of the expense is deductible. Paint just the office and the entire expense of painting is deductible.
In this case, I calculated what the actual expense method deduction would have been for the years 2014 and 2015 and it was over $11,000 for each year. That means that this taxpayer paid a lot more in tax in each of those two years than they would have if they'd gone to a professional. How much more?
The income tax rate was 25% federal and 6% for CA. 31% of $11,000 is $3,410 in income tax savings. Then there's the savings of self employment tax, which adds $1,554 to the extra tax this person paid. That's roughly an extra $5,000 in income tax paid per year over 2 years because they went with an online/CD-ROM solution.
The worst part of this is that when Congress implemented this simplified method, it was done in such a way that once you elect either method, you cannot go back and change your election. So I couldn't amend this client's returns to recover the lost $10,000 in taxes they didn't really owe.
* * *
Fortunately, the final anecdote has a happier ending. In this case the client decided to move out of their home at the beginning of 2016 and rent it out. They did their taxes on TurboTax.
Now I don't know if during the preparation of that return, the application asked the client about the purchase price of the home and so on, but the one deduction that was missed was depreciation. Depreciation is the recovery of the cost of business property over its "useful life" as defined by the Internal Revenue Code. The code defines the useful life of residential rental property as a period of 27.5 years.
The "basis" of this home was roughly $600,000 which means that the missed depreciation deduction was over $21,800. Now in this case, by amending the return and claiming the missed depreciation, the previously reported and taxed profit of roughly $7,000 became a loss of over $14,000.
The loss isn't deductible this year because the client's income is above a certain level, but the loss is carried forward into future years until it can be used. Meanwhile, they got a refund of 36% of $7,000 or $2,520.
* * *
I'm not saying TurboTax sucks. Nor am I saying that about any other online solution, although having tested most of them, I will say that my personal opinion is that the H&R Block online solution is better than the rest. Not because I'm an employee. Because of two reasons. One is that in my opinion, it is more intuitive in probing for things other applications miss. The other is that the user can quickly and easily opt, for a reasonable fee, to have a trained tax professional review and verify their return is accurate.
posted by me at 4:29 PM
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