Q&A: Tax expert explains what's new this year
Q The economic crisis appears to be hitting everyone in one way or another. How is it showing up among your clients this tax season? Are they asking different questions than usual? Or opting not to come see you at all, to save money?
A We're seeing a real slow start to filing season. The delay in distribution of 1099 forms from the stock brokerages (Congress gave them until Feb. 15 this year) is a significant factor, but I think people are depressed. If they are expecting refunds, they hear California won't be sending it to them anytime soon. If they took gains early in the 2008 year and didn't balance them out with losses at year-end when things crashed, they are finding themselves set to pay taxes on the gains and not being able to write off losses.
I also think some people are opting to self-prepare (their taxes) this year. That may be shortsighted — tax laws change all the time! I've always said that our clients need us in good times, but they need us even more in bad. When every dollar counts, you don't want to take a chance that you're not getting the benefits of any tax breaks you may not know about.
Q Don't the software programs that many people use "know" about all the possible tax breaks?
A One of the problems with commercial software use is that most people don't use it the way it is intended. They take shortcuts and simply enter their information as quickly as they can. They miss the most important part of preparation, the interview. The best consumer software has lots of Q&A's built into it and far more information embedded than the average person would ever need, but the average person doesn't take the time to look. What your tax professional should be doing is conducting a thorough interview with you to give advice and make sure all bases are being covered.
Q What's an example of a problem like that that you've seen recently?
A A good example is AMT (Alternative Minimum Tax) credits from the dot-com bust. Any remaining credits from those years were released by the big bailout bill in October. Income restrictions were lifted, and taxpayers will receive 50 percent of the amount remaining from 2007 on their 2008 return, and the other 50 percent on their 2009 return (see story on Page 5E for more on this topic). I've had several calls from people who did their own returns on commercial software and never tracked the credits correctly. We've handled several "reconstruction" projects to be sure the people can get what they're entitled to on the 2008 return. That can be very big money for people who were impacted by those awful incentive stock options and AMT problems years ago.
Q You mentioned to me that you think taxpayers are feeling a bit apathetic about dealing with their taxes so far this year. What do you mean by that?
A The exuberance around the change of political administration and the opportunity for major tax policy changes that typically come with such a change has been short-lived. Part of the problem is the justifiable fear of increasing tax rates in a recession. And an unexpected and unfortunate public airing of our political leaders' tax deficiencies at the same time we are entering the time of year where the IRS is expecting average citizens to honestly comply with the law and pay their taxes, I think, is creating apathy toward the tax system.
Q What issues are standing out for taxpayers this season because of the economic downturn?
A Many of my clients had just used up the capital losses from 2000 and 2001 when the big (stock market) drop hit at year end. The difference this time is they are eight years older and will find staying in the work force longer an even greater challenge. Most of them really are looking at needing to work longer than they had previously planned. I'm seeing a bit more fear about how long it will take to see significant recovery in their personal and retirement portfolios this time around.
Q What are a few key issues taxpayers should note this year?
A Property taxes can be added to the standard deduction, for those who do not itemize. This applies to a lot of seniors. There were no home energy credits in 2008, but look for them in 2009, as well as newly increased ones for solar energy on the federal return. And for stocks in your portfolio that became worthless at year end, be sure there was no value remaining at year end before you take the loss.
Q What's the most unusual deduction a client has ever tried to claim on his/her taxes?
A A Realtor successfully deducted the cost of a pool table, because buying and installing it in the house was necessary to her ability to close the sale. And a commercial pilot deducted education expenses that were more than 50 percent of his current-year income. He could not renew his license without passing a test, and he kept failing the test. So training on a jet-simulator was essential to renewing his license, and it was expensive.
Position: Owner and principal of TaxMam and TMI Tax Services Group; Enrolled Agent; editor in chief of the "Journal of Tax Practice & Procedure" published by CCH, a tax and business law information company.
Previous jobs: Hill has been a tax preparer since 1974, but before that she worked briefly as a systems analyst at United Technologies.
Hometown: Phoenix, Ore.
Education: B.A., California State University-Fullerton; MBA, San Jose State University