What are some of the big changes in the tax law this year that people should be looking out for?
The biggest problem that we have this year is the check — the anticipatory refund — that everybody got. Most people are putting the wrong number on the form. If they received the check, they’re not entitled to anything additional and they’re putting the check down and taking it as a credit. It’s the biggest error that the IRS is seeing this year. It’s driving them nuts.
How are people supposed to be dealing with that tax rebate? Are they reporting it as income?
No, they’re reporting it as a credit on the backside of the 1040. Which means that they are trying to get an additional refund of $600.
The way it worked was, you got $300 to $600 depending upon what your income was in the prior year and your filing status. If you got the money already then you’re not entitled to anything additional.
What we’re finding is, if they gave you a check then your refund is actually being reduced by that amount.
So that money wasn’t really a windfall then, it was only an advance on this year’s taxes.
Yes, in a sense. I think some people are doing a little bit better with it because there is a new 10 percent bracket. But if you got the money it’s possible you might have to pay it back, it’s possible your refund might be reduced from what it would have been had they not sent you the check and you might even have to pay more because of it. Another consequence of it that we won’t see this year but we may in the future is that the alternative minimum tax is going to rear its head.
How does that tax work exactly?
Basically, what it is is you don’t get any deductions in eight major areas. It was meant as a tax on the rich who were getting away with not paying any tax at all. What it’s ended up to be is a tax on the middle class and even some of the poor who have tremendous tax benefits. They end up paying this flat tax instead of paying the regular graduated tax.
What you do is you compute both taxes — you must do this with pretty much everybody because you can’t tell just by eyeballing it. If the alternative minimum tax is higher than the regular tax, there’s a line and a form that adds the excess that you would have paid to your graduated tax.
How did that change this year?
This year they increased the exemption amount for the alternative minimum tax. But in future years, starting about 2004, the number of people subject to alternative minimum tax is going to skyrocket. Thirty-five million Americans are predicted to be paying it in 2010.
Is there any way around that?
No, it’s the law. I think that’s one of the biggest misconceptions in the tax system. There aren’t a lot of ways around the taxes. There might be deductions, there might be this, and there might be that, but ever since 1986 it’s pretty darn difficult to get around a lot of things.
Are there any ways to save; are there any things that people commonly overlook?
One thing that’s overlooked quite often is charitable deductions. If you have a lot of junk sitting around your house that you don’t know what to do with, you can gives this stuff to various charities like Goodwill. You can actually deduct a generous amount of that but you have to know how to do it. And the IRS, if you don’t know how to do it, will only allow you like $50 a bag.
There are at least one or two companies out there that sell this book. One that I know is a CPA firm that audits these businesses like Goodwill and determines what they sell the products for, which determines what the fair market value is and, in turn, determines what you can deduct for it. If it’s under $5,000 worth of products that you’re giving, you don’t have to get an appraisal.
Keep the list of the items for each one of your gifts, the name and address of the person you gave it to and hopefully a receipt. A lot of people when they do it that way, rather than just getting $250 to $500, they’ll get $1,000 to $1,500 worth of deductions. In a 28 percent bracket, $1,000 is $280. That’s not a bad thing.
The IRS recently announced that it is going to step up its auditing. Is that something that should strike fear into taxpayers?
I’ve never really been terribly afraid of an IRS audit. I think the issue is that people need to realize their responsibilities and fulfill them. We recently had someone that was being audited that came to us, and the hardest thing to get across to them was the burden-of-proof thing.
People say, I have to prove that I owe them money and that’s not it. You have to prove that you don’t owe them money. That’s not that tough if you’re schooled in how to do it. You just need to keep your receipts and organize them. And you need to organize them at the time that you do your tax return and put them away somewhere that you can find them. It’s something your accountant can’t do for you; it’s something you have to do for yourself.
As long as you understand evidence, you’ve done your homework before you’ve done your tax return and you store all these documents in a place that you can get to easily, it’s really not something to scare you.
The other thing is IRS audits were down to a fraction of one percent. They hope to increase that to about three percent. Now, I’m not encouraging people to do this. It’s really not a good idea to play Russian roulette. But the odds of you being audited are still pretty darn slim. Ninety-seven percent of people are going to be fine.
How busy do you get this time of year?
You get pretty busy. You don’t sleep a lot. You don’t see your family a lot.
Do you get people coming in and begging for help on April 14th?
All the time.
Is it too late at that point?
Sometimes it is, but sometimes it isn’t. Often what happens when you sit down with a tax professional is that that person is going to be looking for things that you haven’t thought of. If they are giving you ideas for the future, they’re doing their job. Taxes are very complicated, so as they look at your whole financial picture it will spark ideas that may help you in the future.
It’s kind of like a post-mortem. When you come in to do your taxes, it’s like an undertaker looking at a dead body. You can make them look good, but there’s not a lot you can do about it. If you’ve got somebody that’s alive, in other words, the year is still going on and the tax return is somewhere in the future, there’s a lot we can do. Looking forward is much better than looking backward.
Do you have any final words of advice for taxpayers? I guess the sooner they get cracking on this, the better.
Yeah, it’s almost too late now. A lot of accountants I know say by March 15 that they can’t guarantee that they’re going to get it in for you. Try to get on top of your records in January so that you can surprise them and come in in early February. Don’t procrastinate, don’t make excuses. You only have a certain amount of time and when that time expires, you’re just out of luck.
