The Average DIY Taxpayer Lost b/w $347-$841

Fellow tax professional Dave Ramsey recently preformed a survey of 2000 taxpayers; about half of who prepared their own returns, and the other half who had them prepared professionally. This is what he found:

When you use software to file your income taxes, there’s a moment, an instant just before the point of no return, when you silently wonder—what if?

What if I didn’t enter the numbers correctly?
What if I miscalculated?
What if I missed a deduction or credit?
What if I claimed a deduction or credit I’m not eligible for?

All that uncertainty is one of the downsides of self-filing. Other disadvantages can hit you where it hurts most—your wallet.

Reduced Refund

Since most folks aren’t tax experts, it’s easy for them to miss deductions or credits when they self-file. They are also more likely to take the standard deduction instead of itemizing their expenses. Either of these mistakes could lower their refund.

Take a look at these numbers from our recent survey of 2,000 of Dave’s Facebook fans.

• Self-filers got an average refund of just less than $1,500.
• But folks who had their returns professionally prepared had an average refund of nearly $1,800!
• Procrastinating self-filers, those who filed their returns during April, got an average refund of more than $1,800, while those who used a pro got an average $2,600 refund!

Those folks potentially lost hundreds of dollars by trying to save a buck and doing their taxes themselves. It doesn’t seem like such a smart choice now, does it?

Magnified Mistakes

The cost of DIY tax prep isn’t limited to the size of your refund. Your mistakes can also cost you in the form of penalties and interest.

The IRS checks every return for a signature (manual or electronic) and math errors and cross-checks all sources of income that are reported via W2s, 1099s, etc. So if you fail to report any income or enter the wrong number in the wrong column, the IRS will call you on it.

And if it turns out you owe taxes, by the time the IRS notifies you, penalties and interest will have already inflated that amount. You’ll be charged a penalty for paying late and you’ll be charged interest from the date the tax was due until the date of payment, and it compounds daily.

By working with a tax professional, you’ll not only have confidence that your taxes will be done right the first time, you’ll also have peace of mind that your tax professional will be there to help you if the IRS has questions about your return. File with [consumer] tax software, and you’re on your own if the IRS comes knocking…

The evidence is clear; trying to save pennies with DIY tax software can cost you thousands of dollars in unclaimed refunds, penalties and/or interest.  And one of the most important losses is your time.  Remember, even if you are using a “free” DIY tax service, you still have to take the time to for research, record keeping, learning the program and double checking all the figures.   It obvious that receiving a larger well deserved refund is more valuable than smaller refund.   However, the old adage that “time is more valuable than money” couldn’t be more true especially when the IRS reports that it can cost a taxpayer up to 32 hours simply to prepare an annual tax return!

So, save yourself time, money & the stress of preparing your income tax return yourself and contact an R&G Brenner tax professional today.  We offer a free consultation for your current year tax returns as well as your 3 previous years returns.  Plus, you can qualify for many promotions that can save you money & even make you money.

Source: daveramsey.com

Citibank's Clients

Citibank recently sent out 1099 forms to thousands of it’s clients indicating that their redeemed airline miles are taxable to the tune of 2.5 cents per mile and listed as miscellaneous income.  This of course caused an immediate uproar not only because Airline miles could cost additional money in taxes, but also because if they’re not reported on your income tax return, the chances that the taxpayer will get hit by an Audit increases (not to mention additional penalties and interest).

Confused taxpayers and tax experts alike began flooding the IRS with calls asking for a ruling on whether miles can be considered taxable. The IRS addressed the issue, however, it appears their ruling only added another dimension of confusion to the issue:

“When frequent-flier miles are provided as a premium for opening a financial account, it can be a taxable situation subject to reporting under current law,” said Michelle Eldridge, an IRS spokeswoman.

OK, so Citi apparently has that part right. But what about miles received for using a credit card or handed out by an airline just for taking a trip?

Eldridge said that in those cases, miles wouldn’t be taxable because they’re more like a rebate.

“A common analogy,” she said, “is buying a $500 television at a retail store and receiving a $50 manufacturer’s rebate. It’s not income, just a deemed reduction of the cost of the television.”

What about valuing the miles? In Citi’s case, the bank is declaring that miles received by customers are worth about 2.5 cents apiece. But tax pros say Citi almost certainly acquired them for less, probably closer to 1 cent each.

“Under the income tax law,” Eldridge replied, “the amount of income to the taxpayer is the value of the property received, not the cost that the business paid to acquire the property.”

Therefore, it doesn’t matter how much the miles were worth to Citi when the bank deducted them as a business expense. The value that must be reported by taxpayers is whatever Citi says it is.

So if Citi is correct about miles being a prize or award for tax purposes, doesn’t that mean virtually all goodies handed out by companies are similarly taxable?

“Whether or not any incentive provided by a business must be reported to the recipient of a Form 1099 depends on the nature, value and other facts and circumstances surrounding the particular incentive,” Eldridge answered.

That’s a fancy way of saying the IRS doesn’t know.

Tom Griffith, a USC law professor who specializes in taxes, said that if frequent-flier miles can be considered income as a prize or award, “in theory, any benefit you get could be taxable.”

But he said the IRS would probably shy away from such thinking because of the administrative headache that would ensue if the agency had to make a call on every single little incentive given out by companies.

“As a practical matter,” Griffith said, “you can see why the IRS wouldn’t want to go there.”

This much is clear: Whomever thought of this over at Citi is probably going to get a huge bonus as Citibank stands to offset millions of dollars in expenses and place them squarely on the shoulders of their clients.  This is not exactly a great way to solidify customer relations and I can see this costing Citi some business.  However, the bigger question is how long will it take other banks to follow suit?  The deadline to issue W2s & 1099s is today–January 31st–so it appears that other banks will have to wait until next year.  Or, will there be such an outcry like there was late last year when Bank Of America tried to impose a $5 surcharge for debit card purchases?  Time will tell, but this doesn’t feel right…but when was the last time a bank too-big-to-fail-bank has done anything for the benefit of their customers?

Source: LA Times

“Issuing tax refunds as debit cards provides a security and convenience not available with paper checks,” DRS Commissioner Kevin B. Sullivan said in a release. “Couple that with the elimination of check cashing fees and the refund debit cards are a benefit for taxpayers and the state.”

The plastic cards will come in the mail and people will have to contact Chase to activate them. They can be used to access the money at ATMs or at retailers that accept them.

While Sullivan emphasized convenience, the DRS move follows a similar one made by the state Labor Department which began issuing unemployment insurance benefits on debit cards in 2011 and also allowed for direct deposit of benefits. The Labor Department, which also selected Chase for its program, said the move was expected to save about $200,000 a month in printing and postage costs…Like its Labor Department deal, Chase has agreed to limit fees and people can avoid being charged if they use a Chase or People’s United Bank ATM. However, fees can be charged if other ATMs are used, or if users leave money on the card for more than one year.

Source: CTPost.com

The Wall Street Journal printed an interesting piece which offers a “rare glimpse into how the ultra-wealthy can use the tax code to their benefit and [other] important lessons…” While the average taxpayer may not benefit from these tax positions, it is nonetheless interesting and important to be aware of.  The following list is what the experts have discovered from combing through Romney’s return:

A. Avoid salary, wages and tips to the extent possible. The Romneys reported no such compensation, which is taxable at rates up to 35%. In addition, these types of pay are subject to payroll taxes: a 6.2% Social Security tax (lowered to 4.2% in 2011) and 1.45% in Medicare tax, both of which the employer matches. While the Social Security tax is capped each year at a certain income level ($110,100 for 2012), the Medicare tax isn’t.

Some experts believe “carried interest,” or profits such as those from investments that Mr. Romney received as a partner at Bain Capital, should be taxed as compensation at rates up to 35%. Currently, those profits usually count as capital gains and are taxed at a top rate of 15%.

B. Muni-bond interest isn’t the be-all and end-all. Many wealthy people turn to municipal bonds for tax-free income, but the Romneys reported only $557 of tax-free interest in 2010—and $3.3 million of taxable interest.

Kenneth Brier, an attorney at Brier & Geurden in Needham, Mass., notes that Massachusetts has a flat tax of 5.3%, making munis less attractive there than in high-tax states with graduated rates such as New York or California. And because the Romneys’ overall tax rate is so low, the after-tax difference between munis and taxable bonds might not be large enough to justify investing in munis, Mr. Ochsenschlager says.

Some of the taxable interest on the Romney’s 2010 return came from U.S. Treasurys; such interest isn’t subject to state taxes.

C. Strive for “qualified” dividends. The Romneys’ 2010 return reports $3.3 million of qualified dividends, which are taxed at a top rate of 15%. (There is another $1.6 million of nonqualified dividends, taxed like interest income.)

What makes a dividend “qualified”? In general, the dividend must be from a stock held at least two months and paid by any domestic corporation or most foreign corporations. The dividend can’t come from a stock that a brokerage firm has lent as part of a short sale, says Robert Willens, an independent tax expert in New York.

D. If you have a “Schedule C” business, think twice before claiming a home-office deduction. The Romneys didn’t take one on either of two Schedule C forms, which are for business results reported on personal returns. The Romneys used their Schedule C forms for director’s fees and speaking fees.

Not only do home-office deductions raise red flags at the IRS, but they can come back to haunt taxpayers when the home is sold: Part of the gain on the home’s sale may not be eligible for the $250,000 or $500,000 tax exclusion because taxpayers who took depreciation deductions in prior years have to reduce the exclusion by that amount.

In addition to raising taxes in many cases, this poses a record-keeping problem, Mr. Ochsenschlager says.

E. Generate income from long-term capital gains. The biggest factor in the Romneys’ super-low tax rate is their outsize income from capital gains: $12.6 million in 2010. Most of that consisted of long-term gains, which, like qualified dividends, are taxed at a top rate of 15%.

The benefits don’t end there. While the tax code gives wage earners almost no flexibility as to timing, the capital-gains rules offer unparalleled flexibility. Investors can often time when they take a gain or loss, and losses may be used to offset gains so that no tax is due. There are few restrictions: For example, a loss on land held as an investment can offset the gain from a stock.

Net capital losses can shelter up to $3,000 a year of ordinary income from tax, and losses can be carried forward indefinitely to shelter future gains. Canny investors or their advisers often “harvest” losses during market downturns, reacquire the investment after 30 days and use those losses to offset future gains, Mr. Willens says.

On Schedule D of their 2010 return, the Romneys’ original long-term capital gain of $16.8 million was reduced by $4.8 million of carried-over long-term capital losses.

F. Know the score on itemized deductions. One way the Romneys resemble many other taxpayers is that they didn’t get a medical-expenses deduction. Only expenses above 7.5% of adjusted gross income are deductible; for the Romneys, that hurdle amounted to $1.6 million, while they reported medical expenses of just $14,176.

The Romneys did make tax-wise charitable contributions. They gave away nearly $3 million, almost 14% of their adjusted gross income, about half in cash and half in other forms.

All of their contributions were fully deductible, whereas the biggest givers are subject to limits. Billionaire Warren Buffett, for example, gives away such vast sums each year that much of it can’t be deducted from his income tax (though the gifts will be out of his estate).

Making noncash gifts—such as appreciated stock or other assets—often is a smart move for people like the Romneys because they can skip paying capital-gains tax on any appreciation, while getting a full deduction.

For example, say a higher-bracket taxpayer has 100 shares of stock bought years ago for $30 a share that is worth $80 when he donates it. If he sold the stock, paid tax and gave the remaining cash to charity, it would receive $7,250 and he would have a deduction of the same amount. If he gives the stock directly to the charity, it would receive $8,000, and he could deduct the full $8,000. (Some restrictions apply.)

G. Capital gains and dividends can help trigger the AMT. Long-term capital gains and qualified dividends are taxed at 15% and aren’t subject to the alternative minimum tax.

The AMT takes away the value of deductions, such as the one for state taxes, when taxpayers are deemed to have too many write-offs. But a large percentage of capital gains and dividends in a taxpayer’s overall income mix can cause a taxpayer to owe AMT.

The reason: With capital gains and dividends off limits, deductions loom large relative to other income, and that triggers AMT. The Romneys paid $232,989 in AMT in 2010 and lost the value of their state tax and other deductions, according to Jay Starkman, a CPA in Atlanta. “Without that, their tax rate would have been even lower,” he says.

H. Beware of small benefits requiring large tax-prep efforts. The oddest line on the Romneys’ 2010 return is a tax credit for $1 of “General Business Credit.” Don Williamson of American University’s Kogod Tax Center says the credit could be for hiring a disadvantaged youth or qualified veteran and it flowed through from an investment partnership.

But likely it cost far more than $1 just to fill out the three-page Form 8300 for the return. Mr. Williamson says he sees this problem all the time. Often tax-prep fees are disproportionate to an investment’s tax benefit or the income it produces, he says—especially with larger investment partnerships.

One other lesson: For the wealthy, offshore investments can save onshore taxes. Robert Gordon, head of Twenty-First Securities in New York, a firm specializing in tax strategies, points out that the Romneys’ 2010 return has 17 different filings of IRS Form 8621. Each indicates an investment, perhaps a hedge or private-equity fund, held in an offshore corporation.

These are legal arrangements, Mr. Gordon stresses. They can have significant tax advantages for the wealthy who live in high-tax states—especially Massachusetts, because its flat tax allows no deductions.

Investments held offshore in what is known as a “blocker corporation” can allow U.S. taxpayers to pay less tax than if the same investment were made through an onshore entity, Mr. Gordon says.

He offers an example. Say a partnership based in the U.S. invests $100, $80 of which is borrowed. It earns $5 of profits and has $4 in interest expense, for $1 of net pretax profit. In Massachusetts there isn’t an interest deduction, so the entire $5 would be taxable.

If the investment were held in a fund based in the Cayman Islands, however, only $1 would be taxable in Massachusetts. Federal deductions subject to limits would also be preserved, Mr. Gordon says.

Source: The Wall Street Journal

IRS Delaying Refunds for Early Filers

If you are one of the millions of taxpayers who filed early this year, the IRS has emailed tax professionals that they  may be delaying the release of refunds by about a week (or even more). 

“The [IRS] says some refunds will take longer to arrive because its ‘fine-tuning’ some of its systems.  The email says the agency is also conducting additional screening for fraud this year, which could also play a role in the delay”

Taxpayers didn’t expect these delays and are upset. Many intentionally file early in the season because they need that tax refund to pay bills. Families could experience more hardship than others even with only an extra few days of delay, he said. 

Though IRS officials would not say it directly, the crackdown delaying some refunds could involve a case from Detroit, where a suspected criminal ring was disrupted by federal officials.

Federal officials say that a group of metro Detroit tax preparers submitted at least 352 fake tax returns using names and Social Security numbers of the dead in an attempt to obtain more than $800,000 in refunds, according to court documents.

Two area tax preparers were arrested Friday for conspiracy to defraud the government by filing false tax returns and obtaining refunds, using the names and information of recently deceased individuals, according to U.S. Attorney Barbara L. McQuade.

Based on communication we have received, the IRS is expecting normal processing to resume for tax returns filed on or after January 26th.  To check the status of your federal refund, click “Where My Refund”.  For all other States, CLICK HERE.

Source: ABC News & Detroit Free Press

The Tax Foundation’s “State Business Tax Climate Index” compares the 50 states in five areas of taxation that impact business: corporate taxes; individual income taxes; sales taxes; unemployment insurance taxes; and taxes on property, including residential and commercial property.

New Jersey took the last place among 50 states in terms of business friendliness. New Jersey scored at the bottom by having the third-worst individual income tax, the fifth-worst sales tax, the 13th-worst corporate tax, and the second-worst property tax. The report said New Jersey’s and local tax burden percentage has consistently ranked among the nation’s highest, currently estimated at 12.2 percent of income (first nationally), above the current national average of 9.8 percent.

The report also said New Jersey taxpayers receive less federal funding per dollar of federal taxes paid than any other state, making the Garden State the nation’s biggest “donor state.” Per dollar of federal tax paid in 2005, New Jersey citizens received $0.61 in the way of federal spending.

New York was ranked at No. 49, beating only New Jersey. New York had the second-worst individual income tax, fifth-worst unemployment insurance tax and sixth-worst property tax.

During the past three decades, New York’s state and local tax burden percentage has ranked among the nation’s highest, currently estimated at 12.1 percent of income (second nationally), above the current national average of 9.8 percent.

The 10 lowest ranked, or worst, states in the 2012 Index are Iowa (No. 41), Maryland (No. 42), Wisconsin (No. 43), North Carolina (No. 44), Minnesota (No. 45), Rhode Island (No. 46), Vermont (No. 47), California (No. 48), New York (No. 49), and New Jersey (No. 50).

On the other hand, the 10 best states are Wyoming (No. 1), South Dakota (No. 2), Nevada (No. 3), Alaska (No. 4), Florida (No. 5), New Hampshire (No. 6), Washington (No. 7), Montana (No. 8), Texas (No. 9), and Utah (No. 10).

 Source: Insurance Journal

The name “Watson”–the IBM supercomputer that beat human Jeopardy champions handily–has become a fixture in today’s lexicon.  So much so that the New York State Department of Taxation has partnered with IBM and is using the same technology developed for Watson to review tax returns.  Thomas H. Mattox, the tax commissioner explained that their new systems incorporates the use of “business analytics” to determine the merit of tax returns.  In other words, Watson is helping NY to catch cheaters.

It is not surprising that the IRS & States are employing this type of technology given that most tax returns are required to be filed electronically.  These returns can be analyzed in seconds–what would normally take humans days.  Furthermore, EVERY return can now be analyzed instead of randomly selecting returns for audit.  Over the last couple of years, NY taxpayers started receiving “pre-refund” letters as soon as 7-10 days after tax returns were filed. It’s hard to see how these letters–which requested additional documentation before a return would be processed–could be sent out so fast without the help of computers.

So, it is quite evident that NY State has gotten their act together and entered the 21st century.  Unfortunately, many NY taxpayer’s refunds are being delayed even though they have legitimate deductions and credits.  Our advice is to make sure NY taxpayers keep all of their documentation organized and on hand in the event NY sends a letter requesting more documentation.  The worst thing one can do is to not reply to these letters even if their proposed adjustment is marginal.  Not only will you get less of a refund you deserve, but your next year’s tax return is almost guaranteed to be flagged for a “pre-refund” letter again.

Contact R&G Brenner for more information on this subject and to speak with a tax professional today.

Source: The Street

With recent tax law changes and the extension of the payroll tax holiday, taxpayers may wonder how these things affect their 2011 tax returns…

“Marriage, divorce, having a child, even going back to college — these life changes can bring about tax savings,” said Kathy Pickering, executive director of The Tax Institute at H&R Block. “Every year, taxpayers are leaving money on the table by not claiming all of the credits and deductions to which they are entitled.”

Some of those changes taxpayers should take into account impact workers, homeowners, college students and many others.  The following tips can help you–the taxpayer–navigate these changes:

1. Payroll tax holiday has been extended for two months – While it doesn’t impact the tax return, it certainly impacts everyday financial decisions. The 2-percent payroll tax holiday, which amounts to a temporary pay raise for many workers, was extended for two months through Feb. 29. Unless Congress extends this tax cut through the rest of 2012, the employees’ portion of Social Security contributions will return to the 2010 amount of 6.2 percent of wages for 160 million workers. This would mean almost a $1,000 decrease in take-home pay for someone earning $50,000 over the full year.

2. Millions may be eligible to claim casualty losses – There were many natural disasters in 2011, including Hurricane Irene, tornadoes in the Midwest and Texas wildfires, resulting in a record-breaking number of federal disaster areas. Claiming a casualty loss as an itemized tax deduction could mean significant tax savings for millions of taxpayers in a federal disaster area. Losses in a federally declared disaster area in 2011 can be claimed on either an amended 2010 return or a 2011 return.

3. Education credit extended – One of the most overlooked credits is the American Opportunity Credit, which was extended through 2012. This credit allows eligible taxpayers to claim up to $2,500 for each of the first four years of college for each student. Through 2012, the Tuition and Fees Deduction provides a reduction in taxable income of up to $4,000, and the Lifetime Learning Creditis worth up to $2,000 per return for post-secondary degree programs. These education benefits cannot be combined for the same student, so taxpayers should choose the one that is most beneficial. Also, with today’s average college graduate having more than $25,000 in student loan debt, they should remember to deduct student loan interest.

4. Energy credits have been reduced – Taxpayers may claim energy-efficiency tax credits for up to 10 percent of the cost of eligible home improvements, but the maximum lifetime credit is now $500 instead of $1,500. If taxpayers already claimed credits equal to or greater than $500 in previous years, then they cannot claim the credit on a 2011 return.

5. Credit for hybrid vehicles has expired – Though the tax credit for hybrid vehicles expired, taxpayers may claim a credit for 2011 for neighborhood vehicles, conversion kits and plug-in electric drive vehicles, such as the Chevy Volt and Nissan Leaf.

6. New cost basis reporting requirements in effect – Beginning this year, the IRS now requires brokers to report the cost basis, as well as the sale of stocks and securities. Use the cost basis reported by the broker to help calculate the amount of capital gains taxes owed on a 2011 return.

7. Adoption credit is fully refundable – The Adoption Credit can be claimed for qualified expenses up to $13,360 for 2011. The IRS will refund any amount of the credit that exceeds the adoptive parents’ tax liability.

8. Tax deadline is April 17 – Because April 15 is a Sunday and Washington, D.C., will observe Emancipation Day on April 16, the deadline to file federal tax returns is April 17. Most deadlines for filing state returns are also April 17; however some states may differ…

Contact R&G Brenner to help you navigate this extraordinarily difficult tax year or call us toll free at (888) APRIL-15.  We also offer live video conferencing via Skype from the comfort of your home or office.

Source: Yahoo Finance

New penalties apply for failure to e-file. If a preparer doesn’t e-file a required return, the Tax Department may impose a penalty on the preparer and the taxpayer.

Client penalties	Amount
Failure to e-file	$25 penalty per tax document for individual taxpayers $50 penalty per tax document for all other taxpayers
Failure to e-pay	$25 penalty per payment for individual taxpayers $50 penalty per payment for all other taxpayers

In addition:

• A paper document is subject to the penalty imposed for that tax type for failure to file a return or report. (This doesn’t apply to income tax returns.)
• Any overpayment claimed on a paper tax document that was required to be electronically filed will not be eligible to receive interest until the document is filed electronically

Please contact an R&G Brenner representative if you are accustomed to filing your tax returns without electronic filing.  We offer free electronic filing and many other money saving promotions.

Source: NY State Department of Taxation

Republic was originally sued by the FDIC for $2 Million for RAL program violations , and then Republic counter-sued to protest those violations.  All suits will be dropped as part of the terms of the settlement.

Republic Bank is the only bank continuing to offer the RALs after the IRS refused to provided a debt indicator to third parties.  This has caused internal and external regulations of the RAL to increase, and the approval rate for RALs to decrease dramatically. This coupled with extra Bank Fees and Transmitter surcharges makes the RAL very unattractive to providers and consumers.

So is this the death of the RAL?  It would certainly appear so.  The Refund Anticipation Check (RAC) is safer and only takes a few more days to process.  All any tax preparation firm really wants is a level playing field.  The FDIC could have saved a lot of time and money by simply ruling RALs illegal, as opposed to slowly choking the life out of the product for the last few years.  The bottom line is that R&G Brenner–and all tax firms–no longer has to offer this inferior product to remain competitive.  Ding Dong, the RAL is dead…until another bank devises a way to skirt around the rules.

Source: Business First