Taxes and TV Yelling

I have a personal vendetta against tax preparation companies like H&R Block/Jackson Hewitt/Liberty Tax. While I am sure there are some excellent employees, I find their business premise and advertising to be misleading – the vast majority of their employees are NOT CPAs. 

If you listen closely to their ads, they call themselves “Tax Professionals.” What does that mean? Absolutely nothing in terms of professional accreditation. H&R Block’s website specifies that their “Tax Professionals” have had 84 hours of training. The requirements to become a CPA in New York? 150 credit hours of classes (33 class credits in accounting alone, plus 36 in general business - meaning you need a masters degree in accounting), plus a four-part exam, plus 1-2 years of work experience, plus 40 hours annually of continuing education. “Tax Professionals” are essentially workers given two weeks of basic training to punch your information into Turbo Tax.

And their guarantee that “calculations” are 100% correct? This is NOT a guarantee that they have maximized your deduction or even correctly done your taxes – it only means that given what they inputted, the tax software did the math correctly. Huh.

This was actually a tangential soap box since I always get annoyed this time of year at the many ads offering to prepare your taxes for you (my husband can attest that I regularly yell at the television when these ads come on – earning eye rolling from him). Of course, even if you do contract with an actual CPA, you are still responsible for everything on your return – your signature puts you on the line for liability, not your CPA.

Still not sure who to have prepare your taxes (assuming you are like 95% of Americans and would rather pull out your own fingernails than wade through IRS forms)? Check out the IRS' 10 Tips to Help You Choose a Preparer.

With that in mind, and because the unusual political environment has made tax uncertainty even greater than usual, I am devoting this post to tax tips on commonly misunderstood topics. Keep in mind though that tax laws are constantly changing (thank you, politicians and the IRS) and can get complicated quickly, so don't think you can quote my blog as support if the IRS comes after you :o).

1.       Assess Your Withholding Rates

If you under-withhold your taxes (meaning you owe money at the end of the year), you can get socked with fees by the IRS. This always seemed a bit unfair to me, since the government doesn’t pay us taxpayers interest when we withhold too much, but sadly the IRS doesn’t care what I think. Generally you are excluded from the under-withholding penalty if:

      

       + You owe less than $1,000 in tax after subtracting withholdings/credits OR

  

      + You paid at least 90% of tax due in current year or 100% of tax due in prior year,    whichever is smaller

2.       Tips and Other Cash Items  

Yes, cash tips are taxable even though they are not on a W9 or other income report (and yes, I also know this is a bummer). Technically all cash income is taxable… lottery winnings, babysitting earnings, etc. Even gifts are taxed – though you can give up to $13,000 per person in cash gifts before it becomes taxable (and after $13k, it’s the giver who pays tax, not the recipient).

3.       Tuition Deductions: Rather complex, but worth a read to make sure you are not leaving money on the table.

a.       American Opportunity Credit (replaces Hope Credit for years 2009-2012): While the Hope Credit allowed for two years of post-secondary education deduction, AOC expands this to four years, and raises income limits on who can deduct. Annual limit: $2,500 per student – and you can include required course materials where fees are paid to the school (but not items like textbooks where you pay a bookstore).

b.      Lifetime Learning Credit: A $2,000 per year credit for post-secondary tuition. There is no limit to the number of years you can take the credit, but you can’t do both LLC and AOC, so use up AOC first, then go to LLC.

c.       Unreimbursed Business Expense: There is no maximum tuition that can be deducted, but this is a very tricky one to qualify for, because the training must relate to your current job, cannot be part of the minimum requirements for your profession (so if you were an part-time masters of accounting student, classes wouldn’t count because you need the masters to get a CPA), and cannot qualify you for a future different position. Basically the only one I have heard work here is a part-time MBA where you are still working full time and where you are not looking to use the degree to change fields. Part-time law school basically never counts because it is by definition preparing you for a new trade.

d.       Other: Also remember to deduct student loan interest (if you itemize), and help defray costs by participating in a Coverdell education savings account (ESA) or Qualified Tuition Program which feature tax-free earnings. Keep in mind also that some scholarships are actually taxable income! Check out the IRS Education site info for more details.

4.       Capital Gains 

     When you sell investments, you are taxed on the “capital gains” – i.e. the price difference between where you bought vs. sold the investment. If you held the investment less than a year, you pay short-term cap gains tax at your full tax rate. If you held the investment more than a year, you get a special lower rate. It is typically 15% for 2011 and 2012, but the rate could easily go up significantly in 2013, depending on who wins the 2012 elections. (So if you have uber gains on investments not yet sold, you might want to consider selling before 2013).

5.       Investment Property

If you own a second home that you rent out (meaning you don’t live there), you have an investment property. The good news is, you can now deduct expenses related to the property such as condo fees, insurance, management fees, repairs and supplies, and your travel expenses to check on the property.  The bad news is you have to keep records of all expenses, fill out a Schedule E tax form, and go through the slight hassle of depreciating the building, which lowers your taxes now but causes you to have potentially larger taxable gains when you eventually sell the property.