• Unlicensed tax professionals who have PTINs (more than 375,000)—These people are permitted to prepare your tax return and to file your tax return electronically. Period. Some are highly experienced and do get a great deal of education and training throughout the year. Many are not, so beware. To determine if the unlicensed tax professional of your choice is reliable, here are some steps to take:◦ Check that IRS PTIN database I mentioned previously. If it shows that their PTIN is in good standing, that’s good news.◦ Ask if they are a member of any professional tax organizations. Some reputable organizations include the National Association of Enrolled Agents (NAEA), National Association of Tax Professionals (NATP), National Society of Accountants (NSA), National Association of Tax Consultants (NATC), and American Society of Tax Problem Solvers (ASTPS), among others: https://www.taxsites.com/associations.html. All these organizations require their members to maintain high standards of continuing education.
Tip #31:
Avoid tax preparation outfits within certain retail establishments. Services offered at car lots, stereo stores, and other high-ticket stores where they provide free or low-cost tax preparation services are often really designed to help you get a refund to use toward a store purchase. The preparers may be unlicensed, untrained, and only know how to generate high refunds in ways that may not be legal.
Tip #32:
Avoid tax offices that push refund anticipation loans (RAL)—especially if they tell you that you must get one. With current IRS efiling protocols, you will probably get your refund deposited directly to your bank account within about ten business days or less. So there is absolutely no need to pay someone a high fee to get your own money. The IRS frowns on this practice and has posted alerts to the public about what to watch out when being offered RALs: http://www.irs.gov/uac/Tax-Refund-Related-Products.
Tip #33:
Read your tax return before you sign it. By law, all tax preparers must give you a copy of your tax return before you sign the Form 8879 or Form 8453 to file electronically. It doesn’t have to be on paper; an electronic copy is OK. But do take the time to read and review it before you sign the electronic filing forms or before mailing in your paper tax return. If the preparer made an error, it’s your problem and your responsibility. So read the whole return and ask questions if you don’t understand something.
Tip #34:
Amazing and magical refunds are too good to be true. Some unscrupulous preparers attract clients by promising huge refunds. They make up numbers on Schedule A, Itemized Deductions—like mortgage interest (even when you don’t own a home), tax credits like the American Opportunity Credit for education costs, or other credits that don’t apply to you. If your refund is strangely high, ask them how it got that way. Do not file a fraudulent tax return. If you do, the IRS will catch you. You will face all the original taxes, plus high penalties and interest on the taxes and penalties. The preparer? He or she will be long gone and impossible to find.
Tip #35:
Find a tax pro with whom you can establish a long-term relationship. Get to know this person and return to that firm year after year. In fact, since it’s difficult to do tax planning during the tax preparation appointment, schedule a planning appointment for May or June so you can discuss your financial goals, planned large purchases, or expenses (home, dental work, college, retirement, etc.).
Tip #36:
Always call your tax pro for a consultation before you take any large step financially. It breaks our hearts when you call after you have already done something. We can help guide you before the fact and often help you find a tax-free way to use your retirement funds or make investments or get credits. Once you’ve already taken the step, fixing it may be impossible—or time-consuming and expensive. Believe me, that one-hour consultation in advance may save you thousands of dollars later.
Deductions around the House
THE AMERICAN DREAM—OWN YOUR own home, a car or two, a big screen television, and several mobile communications devices. It’s true, not everyone ends up buying a home, but those who do are entitled to a whole raft of itemized deductions and, perhaps, even tax credits. First, let’s take them in the order they appear on Schedule A. Then we’ll explore the potential credits and how to snag them.
Tip #37:
Real property taxes. Deduct the real estate taxes you pay on all your properties, unless some of those taxes are deducted elsewhere. This split deduction might happen if you use a home partially for business (Form 8829) or rent out a room or half a duplex (Schedule E). Read your property tax bill carefully because not all the charges are deductible as property taxes. For instance, your bill might include special assessments for bonds, or might include sewer fees or payments for city or county improvements. While you pay for those things along with your property taxes, they are technically not deductions. (Shhh . . . I have never seen the IRS adjust for this on audit.) Some states might have special charges that look like nondeductible assessments or fees but are deductible. For instance, California has something called Mello-Roos fees. In February 2012, the IRS ruled that these are deductible as property taxes. Note: If you pay your taxes to your lender as part of your monthly payment, they will give you a year-end statement showing the taxes, property insurance, and PMI (mortgage insurance) paid on your behalf during the year.
Tip #38:
In order to deduct the property taxes, you must own the property and you must be the person making the payments. Gosh, that seems obvious, doesn’t it? Why bring it up? Because sometimes people don’t have enough of their own credit to buy their homes. Someone else needs to get the loan for them (like a parent, relative, or an amazingly good friend). So their name isn’t on title—or on the loan. Uh oh. That means the person on title doesn’t get the property tax deduction because they weren’t the ones paying the property tax. And you don’t get the deduction because you’re not on title. Is there a solution to this dilemma? Yes there is. Stay tuned to Tip #50, when we talk about mortgages.
Tip #39:
What are the most overlooked, but deductible, property taxes? Property taxes assessed as part of your time-share fees and as part of your community’s common area fees. Some sets of fees are pretty low. In other areas, common area fees are quite high, and you can pick up several hundred dollars (or thousands) by getting the reports from your management companies.
Tip #40:
Escrow is another source of real estate taxes paid. When buying or selling real estate, read the HUD-1 summary (or escrow closing statement). You may find that you have paid taxes through the escrow by repaying the sellers for taxes they paid for part of the year. On the other hand, you might learn that they are paying you in advance for their share of the taxes due later in year. For example, many states collect taxes around April and December. The April payment covers the period from January through June. The December payment covers taxes due from July through December. So if the sale takes place in September, the buyer ends up paying the June–September property taxes as part of the December bill. In escrow, the seller makes up for that by paying the buyer for those June–September property taxes. That means the buyer reduces his or her property tax expense at the end of the year. The opposite happens if the property is sold in the first half of the year. The buyer reimburses the seller for the taxes he or she paid in the beginning of the year and gets an extra property tax deduction as a result. Here’s where you find this information on the HUD 1 statement: http://portal.hud.gov/hudportal/documents/huddoc?id=1.pdf