Who Should Prepare Your Taxes? Part Two

In part two of this blog  we will talk just a little about  tax preparers other than CPA’s, Attorney’s, and EA’s.  We will also discuss some recommendations and conclusions about who you should use for your income tax preparation and how you should decide on them.

The last choice I feel are the chain tax preparation companies.  The tax preparers working for this firms are often less highly trained.  They usually work only a portion of the year  and have a lower experience level.  That said, I know some individuals working for chains (usually in specialty offices) who are superb tax preparers.  Once again, it can be too difficult to identify who those individuals are and they are few and far between.  The chains are also usually slightly more costly to go to as they have generally higher overhead than other preparers due to the large corporate structure.  The GOA did a study a few years ago where they found that the chains made errors in 100% of the returns they tested them on.  That does not sound like a great selling point to me.  While these “test” returns are often complicated and a majority of tax preparers make errors on them, the chains made errors on 100% and made some grievous errors in judgment preparing those returns such as 100% of them did not refer to the previous year tax return.  I just do not know how you can feel good about that.

Other tax return preparers often do not have nearly as much experience or education as CPA’s,  EA’s, or attorneys.  They also are not required to have as significant an amount of continuing education each year.

So my advice is usually to avoid those tax return preparers  who do not have the professional designations referred to above.  On the other hand I do know some tax preparers who do not have those designations who are excellent preparers and are committed maintaining their education and do good work.  They are just rarities and are very hard to find.

I strongly recommend CPA’s (since I am one) and EA’s.  These individuals have made a strong commitment to be a professional.  They are usually available year round to assist you in tax and other financial matters.  You should talk to either one ahead of time to assure that they have appropriate experience dealing with tax returns and business situations like yours.

Unless you have a legal problem, I rarely refer to attorney’s for standard tax preparation due to the high cost.  But attorney’s can be a requirement for certain serious problems.

How to find a tax preparer creates some more challenges.  While I recommend that you ask some trusted friends for referrals, I do not recommend that you ask your friends or barbers or hairdressers for tax advice.   I would more likely recommend you ask for referrals from your banker, insurance agent, or lawyer.  A CPA will often also refer you to a very qualified preparer if they are not the right individual to prepare your return.  You can also check with professional organizations such as the Colorado Society of CPA’s who maintains a referral page on their website.   Then interview the possible preparer asking questions about what kind of continuing education they obtain and how much experience they have with issues like yours.

You should further ask questions to determine how interested your preparer is in your success and your future.  Income tax preparation should lead to tax and financial planning for you.  Make sure your preparer is someone you can work with in various aspects of your financial life.

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Who Should Prepare Your Taxes? Part One

I try not to post blogs this long, but consider this an important issue with a lot of information you should pay attention to.  I am going to try splitting it into two parts.  This first part will cover CPA’s, CPA/Attorneys and EA’s as potential tax preparers.  The second part will discuss other options and conclusions.

I am often asked if there are advantages to using a CPA to prepare individual income taxes rather than some other tax return preparer.  The answer as with nearly all tax related questions is “it depends”.

CPA’s often have some distinct advantages over other preparers as they have a very broad knowledge of business activities.  The must pass a very extensive multi day examination  which covers broad areas of accounting theory, business law, auditing, and taxes.  They must have a specific amount of experience and maintain continuing education training every year to hold themselves out as a CPA.  Many CPA’s have a well rounded capability to assist you with financial and retirement planning in addition to your income taxes.  On the other hand, many CPA’s specialize in areas other than tax.  They must also obtain their continuing education in a wide range of subject matter.  Because my practice is fairly broadly based involving income taxes and business issues, I obtain nearly triple the required continuing education each year.  When choosing one as a tax preparer, be sure their area of practice includes significant experience preparing taxes and that they get substantial continuing education which is income tax specific.   Since I am a CPA, I certainly recommend them, but we will go through some of the advantages and disadvantages of other options below.

CPA/Attorneys are even more highly educated, many of them specifically in tax related issues.  They also often command higher fees.  In some situations there are attorneys who are not CPA’s who also specialize in taxes.  But in general an attorney’s level of expertise is quite different than that of a CPA or EA (mentioned below).  If you have a serious tax or criminal tax problem, you may consider a CPA/Attorney who has experience dealing in similar situations.  While some attorneys operate good tax practices, I would not normally go to an attorney for regular tax preparation.  A CPA/Attorney can sometimes be a good choice for estate planning needs because of their understanding of income taxes and other potential business issues.

Enrolled Agents (EA’s) also must pass an examination.  It is income tax specific.  Many enrolled agents are highly experienced in the income tax field.  While some also have a good bit of accounting and bookkeeping expertise and experience, they may not have as much as a CPA.  Some of the best tax preparers I know are EA’s.  I would consider many of them to be great choices as tax preparers.  Better than some CPA’s I know.  If you have reasonably standard income tax returns, I would not hesitate to use an EA.  If you have other business related needs or financial and estate planning needs, you should check the capabilities of the preparer carefully regardless of which credential they put after their name.  While I know many EA’s who have excellent capabilities in these areas, I would probably look more closely at CPA’s if I have those needs.


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Filing allowed for Depreciation and Education Credit Forms

The Internal Revenue Service has announced that it will begin processing returns with depreciation forms (form 4562) on February 10, 2013.  They also announced that those returns claiming  education credits will begin to be processed on February 14.

These two issues affected by far the largest majority of the returns which could not be filed on January 30, the delayed start of this years’ filing season.   Most of the remaining returns which cannot yet be filed relate to lesser used business credits and some energy credits.  The production deduction and passive activity losses are also delayed which are the most common remaining items affecting several of my clients.   It is still possible you could be affected, but much less likely now.  The IRS is estimating that filing for these still delayed returns will be available by the first week of March.

The depreciation form was released significantly earlier than the original projection, so maybe they are making progress at the IRS and some of those other forms will also be released earlier than March.  We will have to wait and see.

In fact, even though the IRS will accept these returns now, your software provider may not be able to electronically file them for another day or so.  I know my software does not release the depreciation form until 10AM today, February 11.

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Should We Build A Death Star?

This issue is not heavily tax related, but is interesting nonetheless.  It is also interesting to note that the White House has increased the number of signatures required to respond to a petition to 100,000 from 25,000 since this petition was responded to.

There was recently a petition placed on the white house petition board requesting that the government secure funding and begin building a death star.   The petition has received at least 34,000 signatures.  The president generally responds to any petition which receives more than 25,000 signatures.   It has been rejected by the President who had the chief of the Science and Space Branch at the White House Office of Management and Budget, Paul Shawcross, respond to the petition.

Mr. Shawcross pointed out that a group of Lehigh University students determined the estimated cost at $850,000,000,000,000,000.  That is $850 Quadrillion.  And that is only for the necessary steel.  It does not count construction or transportation costs.  This is about 13,000 times the gross domestic product of the world.    The white house has for once said that we are trying to reduce the deficit, so did not think it appropriate to undertake this additional debt.

Some of the comments of Mr. Shawcross were fun to read.  They included:

“This is not the petition response you’re looking for”.

“The Obama Administration does not support blowing up planets”.

“Why would we spend countless taxpayer dollars on a death star with a fundamental flaw that can be exploited by a one-man starship”?

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How Many Wealthy People Are There?

With the recent battles over tax laws we have heard a lot about the wealth and that their percentage of the tax burden should increase.  I have found a little bit of information at the Tax Foundation which gives some interesting estimates of how many wealthy people are in each state.  We have heard attempts to define the wealthy as those who earn over $250,000 per year and the recently enacted legislation tries to define them as those who earn over $400,000 or $450,000.  The Tax Foundation has used a number of $500,000.    Using that number we find that roughly one half of one percent of American taxpayers earn more than $500,000 per year.  The average of the various states is .493%.  Since the IRS has also broken down the numbers using the $500,000 number, that is a convenient number to use.

In Colorado, we are in about the middle with .57% of taxpayers earning more the $500,000.  The “wealthiest” state is Connecticut at 1.34%, followed by New Jersey at .98%, New York at .95% and Massachusetts at .94%.  California is number 5 at .72%.. No other states exceeded .67%.  The least wealthy states were West Virginia at .25%, Mississippi at .26% and New Mexico at .28%.  There were eight states bunched closely together between .32 and .35%.

So, if .5% of us taxpayers are wealthy and we know there are approximataely 138 million tax return filers (ony about half of those pay income tax) in the US, then there must be about 690,000 wealthy taxpayers who earn more than $500,000 per year.

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What Is 5 S?

The five S’s are five techniques used in efficient business processes.  They were developed by the Japanese and are signified by five Japanese words which happen to start with S.  Those Japanese words all happen to translate (or transliterate) into English words which start with S (one is a slight stretch).  Companies which use the 5 S systems are in general significantly more productive and profitable than other companies.   I have seen dramatic improvements in my clients who have implemented these types of systems, even when they only begin to implement them.  The 5 S system is the basis for what has become known as “Lean” manufacturing.  This is a bit of a misnomer, but is in common usage.  It is really a system of continuously improving the way things are done.  The 5 S systems can also be used in our personal lives to help keep ourselves more efficient and productive.  The five S’s in the appropriate order are:

  • Sort.  Sort out what is needed and what is not needed.  When in doubt , throw it out.  If you have not used something in the past day, it probably should not be kept within your reach.  If you have not used it in the past week , it probably does not need to be in the same room.  If you have not used it in the last year, you probably do not need it.  The Japanese word is Seiri.
  • Straighten.  Sometimes called Setting in order.  Keep everything that is needed in an orderly fashion so that things can be accessed easily.  The Japanese word is Seiton.
  • Sweep.  Sometimes called Shine.  Better translation is clean, but that does not start with S.  Clean the machines, floors and walls.  The Japanese word is Seiso.
  • Standardize.  Make standards so that any abnormality becomes obvious.  This assures that work is always accomplished with consistent quality and timeliness.  It also makes it easy to improve the standards and implement ways to do things better.  The Japanese word is Seiketsu.
  • Sustain.  Sustain the improvements.  Continuously review the way things are done to make sure you have not let bad habits creep in. The Japanese word is Shitsuke.

The 5S system was originally developed by Hiroyuki Hirano, as a part of the broader production system known to the Japanese as Kaizen.  Kaizen translates as continuous improvement even though we Americans tend to refer to it as “Lean” manufacturing.  The entire system of continuous improvement actually grew out of the systems the American military set up and assisted the Japanese in implementing to rebuild their country after World War II.



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Is Social Security Income Taxable?

Those individuals who receive social security income may find that income is partially taxable when the file their income tax returns.

  • If you are single and your total “combined” income (an IRS term for adjusted gross income from your tax return plus nontaxable interest income plus one half of your social security income) for the year is between $25,000 and $34,000, then up to 50% of your social security benefits can be taxable.
  • If you are single and your total combined income for the year is greater than $34,000, then up to 85% of your social security income may be taxable
  • If you are married filing jointly and your total combined income for the year is between $32,000 and $44,000, then up to 50% of the social security income may be taxable.
  • If you are married filing jointly and your total combined income for the year is above $44,000, then up to 85% of your social security income can be taxable.


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Where Is My Refund?

With tax season “postponed” by 8 days by the IRS this year, some early filing taxpayers may be concerned about how long it will take to receive their refunds.    The IRS will not begin processing tax returns this year until January 30.  This is eight days later than originally planned.  They have said that refunds will not be delayed and will take about the same amount of time from the time the IRS processes the return for the refund to arrive.  They say you should receive refunds  in less than 21 calendar days after they receive your return.

The IRS has a “Where’s My Refund” page where taxpayers can check the status of their refund.  It is available at www.irs.gov but will not be available until January 30.   If you check your refund on this page, you will need your social security number, filing status , and the amount of the refund.  It would probably be a good idea to have a copy of your return available as you check the information.  The information will not be available until approximately 24 hours after the IRS receives your efiled return or 4 weeks after you mail a paper return.

If you have your refund deposited, the direct deposit will take place about 2 days quicker than the IRS will mail a paper refund check.

This year a large number of returns will continue to be delayed beyond January 30 due to the IRS needing more time to update their computers for changes in tax laws.  Most of these returns will be those which include depreciation forms, so it will effect most taxpayers with businesses or rental property.

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Exchange Students

In our family we have hosted exchange students a number of times in the past.  I strongly recommend doing so to anyone who has an interest.  It can be a great experience for the entire family.  It can also be very challenging and frustrating.  So look into it very carefully before proceeding.  I have become aware of a number of clients who have recently begun hosting exchange students as well as other people who have expressed an interest.  We will not go into detail about the whole process here, just talk about a few of the tax related questions which come up and you should be aware of before you get started.

  • There is a possible charitable contribution tax deduction.  To qualify the student must be part of a program which is non-profit and you must have a written agreement with the organization.  This is usually the case, but there are some for profit organizations arranging exchange programs which would not qualify you for the deduction.  The student must be enrolled full time in high school.  College students or trade school students do not qualify.  If somehow the student qualifies as your dependent, you do not qualify for the deduction.
  • The amount of the deduction is a maximum of $50 per month that the student lives with you.  You must have expenses which exceed the $50 per month which would include food, clothing, transportation or other expenses for the well being of the student.  The student must reside in your house at least 15 days of the month for the month to count.
  • If you are reimbursed in any way for any expenses, then you may not count the amount reimbursed.  In general reimbursements are not considered taxable income to you.  I have never seen a situation where someone was reimbursed more that the costs to host a student, but if that occurred, there is a possibility there could be taxable income.
  • If you are hosting a student and your own child has gone abroad as a part of the same organization you may not take the charitable contribution deduction.  If your child goes abroad with a different organization or independently, there is no restriction on your ability to take the charitable contribution deduction.
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Office In Home Simplification

The IRS recently issued Revenue Procedure 2013-13.  This new procedure for computing the office in home deduction (OIH) is intended to simplify the process.  In some instances it does.  For most people it will probably create a smaller office in home deduction than the regular way of computing it but does offer some advantages.

The new way of computing the deduction is simply to take the square footage of the office and multiplying by $5.  The maximum deduction possible under this procedure is $1,500 or 300 square feet.   This procedure does relieve the taxpayer of a portion of the burden relating to putting together the information necessary to compute the deduction.  It also allows that the deduction for home mortgage interest and property taxes can be taken in full in addition to the OIH deduction.  Under the regular method these amounts must be reduced by the amount included in the OIH deduction.

Another potential advantage to the new method is that it does not require you to take a depreciation deduction and risk the need to recapture that depreciation as income on the sale of the house.

Before using the new method, you should have your tax professional look very carefully at your particular situation and explain the advantages and disadvantages of both methods.

This new method does not take effect until January 1, 2013, so you cannot use it for the income tax returns we are getting ready to prepare for 2012, but you and your tax advisor can discuss the potential effect your your situation when you discuss your current year situation.

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