Posted on by Jan Roberg

Tax Preparer Fraud—How to Avoid Being Taken

Tax Day

Photo by chuck holton at Flickr.com

 

I’ve seen a lot of stories in the news lately about tax preparer fraud.  The IRS is catching these folks and they’re going to jail.  That’s a good thing in my opinion.  Those of us with licenses and who play by the rules really hate the crooks; they’re bad for business.

 

The IRS tried to regulate preparers by setting up the Registered Tax Return Preparer (RTRP) designation.  I made all my employees take (and pass) the test as a condition of employment, but the RTRP requirement was thrown out in court so anybody can hang up a shingle saying they’re a professional tax preparer and they don’t need to do didly squat to prove they’re competent.

 

So how do you tell if the person you’re hiring to do your taxes is legit or not?  I was recently asked that question at a panel discussion about Enrolled Agents on the web the other day.  The feedback I was getting from the non-tax preparers is that they don’t know what questions to ask, or what to look for when hiring a preparer.

 

Enrolled Agents are licensed by the Department of the Treasury to represent taxpayers before the IRS.  That means we are hired by and work for citizens to help them with their IRS issues.  We do not work for the IRS.  CPAs and attorneys are also allowed to represent citizens before the IRS; they are licensed by their respective states.  EAs are federally licensed. 

 

So, being an EA, I’m going to recommend you hire an EA.  My buddy the CPA will say to hire a CPA.  And I’ve got a couple of tax preparer friends who don’t have any initials after their names that, to be perfectly honest, are really good tax preparers.  But the biggest issue I think a regular person has to be aware of is—how do you know the person you hired isn’t a fraud?

 

Face it, I can tell you I’m an EA until I’m blue in the face, but how do you know?  Ask to see my license!  Oh sure, I’ve got a nice little document hanging on my wall.  I got that back when I first became an EA.  But EAs need to renew their licenses every three years.  You want to take a look at the license I keep in my wallet.  (I’m not going to post it online to prevent some fraud monster from copying it.)

 

Another way to check out a preparer is to go online and look them up.  You can check on an EA by going to the National Association of Enrolled Agents website:  https://portal.naeacentral.org/webportal/buyersguide/professionalsearch.aspx

 

If you want to check out a CPA, you can find out their status at CPA verify:  http://www.cpaverify.org/

 

One thing that everyone who prepares returns professionally must have is a PTIN number, that’s a Preparer’s Tax Identification Number.  Anyone who gets paid to prepare tax returns must use one of these numbers when preparing your return.  You can check on a PTIN number by checking out this directory:  http://www.ptindirectory.com/ the big problem with that directory is that if the preparer hasn’t enrolled in it, she won’t be listed.  Now, the IRS is supposed to have their own directory, but they charge you $35 and they send you a CD, so that’s really not a user-friendly option.

 

It’s important to know that non-paid preparers, like the volunteers at VITA or AARP, do not have to use a PTIN on your tax return.  So if you’re using one of those services and there’s no PTIN number on your tax return, that’s okay.  VITA does have a pretty decent training program for its volunteers.

 

This is important:  If you pay someone money to prepare your taxes and there’s no PTIN number for the preparer down by the signature line—Walk away and do not pay for the return.  That’s the number one sign of tax fraud.  The PTIN is the IRS’s way of keeping track of tax preparers.  Anyone not using a PTIN is hiding something.

 

Here’s another thing to watch out for:  If your preparer promises you a big refund before she even sees your paperwork.  How can they know how much you’ll get back if they haven’t even looked?  That’s another deadly warning.

 

Another big fraud scam is when they say they can get you money for something you haven’t done:  for example—college tax credits.  That’s the most recent scam that tax preparers went to jail for in my city.

 

What’s scary is, I think I spoke to one of their clients on the phone last year.  I received a call from a fellow asking me what I’d charge to do a tax return with a college tax credit.  I asked the man a few questions about his return and I realized that he didn’t qualify for a college tax credit—and I told him so.  He didn’t seem to care he just wanted me to prepare the return, claiming the illegal credit, and charge less than the other guy who told him about the scheme.  I told him I wouldn’t do that return for him.  I’m not sure who he had gone to, but at least one group of preparers is now going to jail for illegally preparing returns claiming credits.  http://www.stltoday.com/news/local/crime-and-courts/owner-of-st-louis-mo-money-tax-prep-franchise-pleads/article_804ad59d-d455-5865-a2f8-28b15a49d6fd.html

 

So, here’s my best piece of advice:  if a tax preparer tells you that you can get money back for something you know isn’t true, DON’T DO IT!  You could wind up in big trouble, and your preparer could wind up in jail.

Posted on by Jan Roberg

What Can an Enrolled Agent Do for Me that I Can’t Do Myself?

Horse

Photo by T M Tonmoy Islam @Flickr.com

 

The other day at a networking meeting I was asked the question, “What Can an Enrolled Agent Do for Me?”  I really had to think about that.  You see, I had two different answers:  The first one was, “nothing” and the second one was, “everything.”   Both answers are right.  Let me explain.

 

An Enrolled Agent is someone who is licensed by the Department of the Treasury to represent taxpayers like yourself in front of the IRS.  Let’s say you are getting audited, you can hire an Enrolled Agent to help you through it.  If you have an Enrolled Agent, you don’t have to talk to the IRS at all; the EA can do all the talking for you.   That’s probably one of the biggest advantages.

 

You can represent yourself, but most taxpayers really should not try to represent themselves during an IRS audit.  You’ve probably heard the saying, “The defendant who tries to represent himself in court has a fool for an attorney.”  It’s pretty much the same in an audit.  Honest, intelligent people can get themselves tripped up by the IRS.

 

For example:  one taxpayer was trying to represent herself when the IRS denied her refund claim on an amended return.  She had made numerous phone calls and written letters to the IRS explaining her claim, but was getting nowhere.  When she called me in, I discovered that she had been responding to what she “thought” was the problem, not what the IRS was asking for.  It’s actually a fairly common mistake—talking to the IRS can be confusing.

 

Another issue is debt resolution.  You might have seen those tacky TV commercials where the little old lady says, “I settled my taxes for pennies on the dollar.”  That’s known as an Offer in Compromise (OIC).  And while that company is out of business now (they used some questionable practices) an Offer in Compromise is something that an Enrolled Agent can do for you.  But there’s a really important thing about preparing an Offer In Compromise in the first place:  it’s knowing if you really need one in the first place.  For example:  I once received a call from a woman who wanted me to prepare an OIC for her because the IRS said she owed them $15,000.  Well, I could have just done the OIC paperwork, but I reviewed her tax returns first and found that the IRS actually owed her $8,000 instead.  An $8,000 refund is a whole lot better than paying anything to the IRS isn‘t it?

 

Enrolled Agents are required to prove their competence in all areas of taxation, representation and ethics before they can practice before the IRS by passing a three-part federal exam.  All enrolled agents specialize in taxation.  This is very different from attorneys or CPAs who are licensed by their respective states and may not specialize in taxation at all.

 

An Enrolled Agent can prepare a tax return, represent you in an audit, and help you settle your IRS debt.  Some Enrolled Agents can even represent you in Tax Court, but only those EAs that have passed a special Tax Court exam can do that.

 

The Enrolled Agent designation was created back in 1884 when Congress passed the Horse Act.  At the time there were lots of dubious claims for Civil War reparations—there were more claims for horses then there were horses lost in the Civil War.   Most of the dubious claims were from agents representing the people with claims as most of the agents were scam artists and con men.  Congress decided that the agents needed to be regulated.  They created a standard which required suitability checks, criminal record checks, moral character, and testing.  When the income tax was passed in 1913, the role of Enrolled Agent was expanded to include claims for relief of citizens whose taxes had become inequitable.  As tax regulations became more cumbersome and complex, the role for EAs kept expanding.

 

As an Enrolled Agent, I can do a lot to help you with your taxes; but, I’m no longer able to get Congress to give you a horse.

 

For more EA information you can check out the McTax Hangout video:  https://plus.google.com/u/0/106432421922678528479/posts/iKYcxFGzZjn?cfem=1

 

Posted on by Michael Siebert

Qualified Plug-in Electric and Electric Vehicle Credit

Chevy Volt

Photo by John Biehler at Flickr.com

 

Thinking about purchasing an Electric Vehicle (EV) or a Plug-In Hybrid Electric Vehicle (PHEV)?  The Federal government and many states offer incentives to people who do.  Currently, the Chevrolet Volt is the highest selling Plug-In Hybrid vehicle in the United States followed by the plug in Toyota Prius and the Nissan Leaf.  Many taxpayers are making the switch to reduce what is commonly referred to as their “carbon footprint.”  Plus, these cars do actually look like normal cars and are less toxic to the environment.  They do not need oil changes—they don’t even have an engine!

 

www.pluginamerica.org, whose mission is to “accelerate the shift to plug-in vehicles powered by clean, affordable, domestic electricity to reduce our nation’s dependence on petroleum and improve the global environment” is a 501(c)(3) public charity dedicated to this purpose.  Visit their website at www.pluginamerica.org for more information and help.

 

The tax credit for purchasing a plug-in hybrid or electric car is $2,500 to $7,500.  The amount depends on the size of the battery.  The credit was created in the American Recovery and Reinvestment Act—aka the stimulus package. There is a phase out after an automaker sells 200,000 vehicles that are eligible for the credit.  If you are curious about the quarterly sales, the IRS has posted that information for some automakers: http://www.irs.gov/Businesses/IRC-30D-%E2%80%93-Plug-In-Electric-Drive-Motor-Vehicle-Credit-Quarterly-Sales.

 

There are state incentives as well.  For example, In Arizona, there are reduced license fees and tax credits for installing EV charging stations.  To check your state incentives, visit http://www.pluginamerica.org/incentives

 

Also, taxpayers often get insurance discounts for purchasing an electric car.  Check with your insurance provider to see if you qualify for any breaks.

 

Where is the credit reported?  Use Form 8936

 

Form 8936—Qualified Plug-in Electric Drive Motor Vehicle Credit (http://www.irs.gov/pub/irs-pdf/f8936.pdf)
Use this form for all electric vehicle types purchased in 2012 or later.    For example, if you purchase a Chevy Volt it would go on the 8936.
Also, new qualified two or three wheeled plug in electric vehicles would go on the 8936.  However, if it was acquired before 2012, report it on Form 8834.

 

How does the Government know you’re making a legitimate claim?  The forms ask for the Vehicle Identification Number or (VIN) which has all of the information they need to prove your claim.

 

Not sure if your vehicle qualifies or how much of a credit you should get?  Check out http://www.irs.gov/Businesses/Qualified-Vehicles-Acquired-after-12-31-2009.  Take the Chevrolet Volt for example.  Click on General Motors and you can see the 2011, 2012, 2013, and 2014 Volts all have a credit amount of $7,500.  Most of the vehicles do in fact have a credit amount of $7,500.

 

There is no phase out of the credit based on your income.

 

Imagine a highway of all electric cars.  What would it sound like?

Posted on by Jan Roberg

What Every Divorced Woman Needs to Know About Retirement: Social Security

Ex-spouses may claim Social Security based upon their exes' earnings.

If you’re divorced, but were married for more than 10 years to your ex-spouse, you may be able to claim Social Security benefits based upon his income.

 

This may come as a surprise to you, but your ex-husband could turn out to be good for something after all. If you were married for at least 10 years, you may be entitled to Social Security benefits based upon your ex’s income—that is, if he’s entitled to Social Security benefits.

 

Here’s how it works: let’s say you’re thinking about retiring. You go to the Social Security website and find out what your benefits would be if you retire at 62, if you retire at your full benefit age, and if you retire at age 70. Then you call Social Security to find out what your benefits would be if you used your ex’s Social Security benefits. The number is (800) 772-1213. If you retire at 62, you can get 35% of his benefit; at full retirement age, you can get 50% of his benefit.

 

Let me show you with an example: Jane is 60 years old and she’s contemplating what she wants to do about retiring, whether to start taking benefits at 62 or hold out until later. She runs the numbers on the Social Security website ( www.ssa.gov )  and gets the following information:

 

  • Retire at 62, monthly benefit: $ 585
  • Retire at 66, monthly benefit: $ 820
  • Retire at 70, monthly benefit: $1,040

 

Those aren’t great numbers. Jane didn’t always work because she was raising a family, and when she did work, well, she didn’t make all that much money. But Jane’s ex-husband, Tom, made plenty of money. Using the Quick Retirement Calculator at ssa.gov: http://www.socialsecurity.gov/OACT/quickcalc/index.html.

 

Jane estimates Tom’s Social Security earnings will be $2,586 per month at retirement. Now she’s going to want to actually talk to the Social Security folks to get the real numbers, but the calculator will give her a rough idea.

 

So, if Jane retires at 62, she can qualify for 35% of Tom’s money which would be $905 per month. If she waits until her full retirement age, she can qualify for 50% of Tom’s money which would be $1,293. For Jane, she can make more money retiring using Tom’s benefits than she can make on her own.

 

This is really important to know:

  • Your ex-husband will not lose his Social Security benefits if you use them
  • You cannot be currently remarried and qualify for your ex’s benefits
  • If you have had more than one marriage that lasted for over 10 years; you may use the spouse that gives you the greater benefit

 

If you claim Social Security based upon your ex-husband’s benefits before you reach full retirement age you will not be able to switch back to your full benefit at age 70. You really want to think long and hard about those numbers before you retire early.

 

What you’re eligible to receive from Social Security is very personal. It’s all based upon your individual contributions, you can’t make any assumptions based upon what your friends or neighbors get. You can learn what you’re eligible for by creating your own account at the Social Security website. It only takes about 10 minutes. Finding out about benefits from an ex-spouse will take a bit longer because it involves a phone call and the hold times can be pretty long. Isn’t it worth finding out?

Posted on by Michael Siebert

Schedule R – What is the Schedule R Anyway?

Photo by Jen Ren at Flickr.com

Schedule R is Credit For the Elderly or the Disabled.  It’s purpose is to provide a measure of financial relief for low-income senior citizens and taxpayers who are unable to engage in any kind of gainful employment as a result of their disability.

 

You may be able to take the credit if you are 65 or older.  If you are under age 65, you must be permanently and totally disabled, receive taxable disability income for 2012, and on the first day of the tax year you did not reach mandatory retirement age.

 

As with all tax credits, there is a set of income limitations that may or may not qualify you for the credit.  It is posted below:

Then you generally cannot take the credit if:

If you are…

Then amount on Form 1040A, line 22, or Form 1040, Line 38, is… (AGI)

Or you received
Single, head of household, or qualifying widower $17,500 or more $5,000 or more of nontaxable social security or other nontaxable pensions, annuities, or disability income
Married filing jointly and only one spouse is eligible for the credit $20,000 or more $5,000 or more of nontaxable social security of other nontaxable pensions, annuities, or disability income
Married filing jointly and both spouses are eligible for the credit $25,000 or more $7,500 or more of nontaxable social security or other nontaxable pensions, annuities, or disability income
Married filing separately and you lived apart from your spouse for all of 2012 $12,500 or more $3,750 or more of nontaxable social security or other nontaxable pensions, annuities, or disability income

 

Figuring the credit is a little tricky but the IRS can figure the credit for you if you are doing everything by hand.  If you are filing Form 1040, check box c on line 53, and enter “CFE” on the line next to the box.  Attach Schedule R to your return.

 

How does the IRS determine what is permanent and total disability?

  1. You cannot engage in any substantial gainful activity because of a physical or mental condition
  2. A qualified physician determines that the condition has lasted or can be expected to last continuously for at least a year or can lead to death.

 

Taxable Disability Income is the total amount you were paid under your employer’s accident and health plan or pension plan that is included in your income as wages instead of wages for the time you were absent from work because of permanent and total disability.  This is different from Social Security Disability which is never taxable.

 

After you have reached mandatory retirement age, disability income does not include any money received from your employer’s pension plan.

 

Also, you may need a physician statement located in the Schedule R instructions.  This to certify you were permanently and totally disabled on the date you retired.  This is not filed with the tax return but is to be kept with your records.  You don’t need a physician’s statement if you filed one for 1983 or an earlier year, or you filed for tax years after 1983 and the physician signed on line B of the physician statement.  Line B reads “There is no reasonable probability that the disabled condition will ever improve…..”

 

The Department of Veterans Affairs can certify that people are permanently and totally disabled.  If this be the case, you can use VA Form 21-0172 instead of a physician’s statement.  The form must be signed by a VA authorized person.  Visit your local VA regional office for the form or to ask questions.

 

Remember, the IRS can figure the credit for you, or your software can.  If you are inclined to do it by hand, just make sure to read every line carefully and include all of the amounts in question.  It is one of the more complicated credits to compute.  The amount of credit can be reduced if you received certain types of nontaxable pensions, annuities, or disability income.

 

The amount of credit you can claim is generally limited to the amount of your tax. Use the Credit Limit Worksheet in the Instructions for Schedule R to determine if your credit is limited.

 

So how does a taxpayer end up in the situation to be able to claim a Schedule R credit?  It’s very rare, but if you have taxable disability income, be sure to check in case you do qualify.

 

 

___________________________________________________________________________________________
Below are some links that may help:

http://www.irs.gov/pub/irs-pdf/f1040sr.pdf
http://www.irs.gov/pub/irs-pdf/i1040sr.pdf
http://www.irs.gov/publications/p524/index.html
http://www.irs.gov/pub/irs-pdf/p554.pdf

Posted on by Jan Roberg

Where’s My Amended Return?

Day 222 (Or is this Day 1 now?) - Oops!

Photo by Kate Sumbler on Flickr.com

What do you do when you file an amended tax return but you haven’t heard back from the IRS? Well now you have access to an online tracking tool to let you know what’s happening. It’s called “Where’s My Amended Return?” Okay, so the IRS isn’t so great at catchy names, but that’s probably what you’d type into Google if you were researching it right?

And the best part is, it’s not that difficult to use. Here’s a link to get you there: http://www.irs.gov/Filing/Individuals/Amended-Returns-(Form-1040-X)/Wheres-My-Amended-Return-1

If you don’t want to do this on the internet, you can always call them. The number to follow up on an amended return is: 866-464-2050. That is a toll-free number, I recommend not calling when you can click the link and get the information much faster. Save calling the IRS for those times when you absolutely need to.

In order to access the amended return information (whether you call or use the internet) you’re going to need to provide the following information: social security number (if you’re married filing jointly you’ll need the social of the primary taxpayer–the primary is the person whose name is on the top, not necessarily the one who makes the most money. You’ll also need your of birth (or the primary’s) and your zip code.

The “Where’s My Amended Return?” website will only access information on 1040Xs for the current three eligible years. If you amended old tax returns or you have Net Operating Loss Carry-backs–this website won’t have any information for you, you’ll have to call the IRS directly for that information.

While this new web tool is good for most returns, there are a few other things you won’t be able to get information on: injured spouse claims, returns with foreign addresses, and business returns are not available here. Also, if your amended return was re-routed because of some special circumstance; such as you amended your return because of a CP2000 notice (that’s one of those IRS nasty little ‘whoopsie we think you made a mistake’ letters.)

Even though there are many types of returns that aren’t listed in the “Where’s My Amended Return” website, it’s the best place to start. Any time you can get an answer from the IRS without having to actually call and wait on hold it’s a good thing.

Generally, you’ll have to wait at least three weeks before you can access information from the “Where’s My Amended Return?” website. Most amended returns take 12 weeks to process and some can take even longer. If you’re looking for a refund, think in terms of waiting at least three months before you’ll see the money.

Of course, if you owe, you should pay right away, because the debt will back date to the date the original return was due and the IRS will start charging you penalties and interest from that point in time. For what it’s worth, they do pay you interest if you have a refund coming.

Amended returns are not the fastest thing happening at the IRS, but at least now you have a tool for tracking them.

Posted on by Michael Siebert

Some Hidden Truths About the Standard Mileage Rate

Lego 4996 with Yellow Car

Photo by Yul B Karel at Flickr.com

Hello again.  Mike here.  Today I am going to discuss some issues regarding automobiles.  Don’t worry—I won’t get too crazy with the details as one could write an entire novel on this subject.  It will be rather minor things that can have a big impact on your tax return.  Also keep in mind that this is geared towards self employed taxpayers who use their auto for business and report income and expenses on Schedule C and not necessarily employees who use their vehicle for business and report it on a Form 2106.

 

Let’s get started with some numbers.  The 2012 Standard mileage rate is 55.5 cents per mile.  It is expected to be 56.5 cents per mile in 2013.    A taxpayer can either deduct actual costs incurred by the taxpayer’s automobile, or use the standard mileage rate method to calculate the amount deductible by business use.

 

Most people use the standard mileage rate for whatever reason – it produces more of a tax benefit or he or she has not been keeping track of actual expenses.  What makes up this seemingly arbitrary 55.5 cents(2012) or 56.5 cents (2013) per mile anyway?  The IRS says that depreciation, lease payments, maintenance and repairs, gasoline, oil, insurance, and vehicle registration fees all make up this cents per mile figure.

 

Where most people jump off the diving board too early is figuring the costs NOT included in the standard mileage rate.  These are costs IN ADDITION to deducting the standard mileage rate and it is applied using the business percentage of the vehicle.  Parking fees and tolls are applied 100%.

 

These costs include:

Interest Expense
Personal Property Taxes
Parking Fees
Parking Tolls

 

Let’s do a quick example to demonstrate your tax savings.   A single, self employed individual (we’ll call her Mary) makes $50,000 doing a catering business.  Her cost of goods sold is $25,000 making gross income $25,000.  She records 20,000 business miles out of 25,000 miles for the year.  The overall balance due for this taxpayer is $2,061.  Keep it simple here; don’t worry about dependents, adjustments to income, credits, etc.

 

She just records her mileage and nothing else because that is what she has been doing for years.
However, after talking to her astute accountant, she later points out that she paid $100 parking fees, a few tolls at $50, $300 in interest on the car, and paid considerate personal property taxes of $308.

 

The parking fees and tolls get added dollar for dollar to the standard mileage rate calculation.  The interest and the personal property taxes are added by the business percentage or 80% (20,000 business miles/25,000 total miles).  This “extra” $636 ($100 parking fees + $50 tolls + (80% * $300 interest) + (80% * 308 personal property tax)) is added IN ADDITION to the business mileage calculation.
After adding to additional information to the automobile, her balance due becomes $1,922.

 

Her tax savings are $139 ($2,061 – $1,922).

 

Happy Savings!

 

-Michael

 

P.S. Attached is a 2012 auto expense worksheet that will help you organize your automobile expenses and help you decide whether to do the standard mileage rate or actual expenses method.
2012 Auto Expense Worksheet

Posted on by Jan Roberg

DOMA Overturned—Now What Do I Do?

Gay Pride Flag

Photo by Kellie Parker at Flickr.com

 

Wednesday, June 26, 2013 the United States Supreme Court overturned the Defense of Marriage Act (DOMA).  Effective immediately,  married gay  couples will  be able to file their federal income tax returns using the married filing jointly tax status.  What does this mean for you?

 

The first thing to look at is:  Does it make sense to amend my back tax returns?  You’ll want to review your old returns as far back as 2010 to see if the married filing joint tax status would give you any tax benefit.  If so, you will need to amend those tax returns.

 

For tax years prior to 2010, you would have had to file a protective claim to file jointly, see:  http://robergtaxsolutions.com/2012/06/doma-unconstitutional-protecting-your-tax-rights/ Without a protective claim, you cannot file an amended return for years prior to 2010.

 

On your amended return (form 1040X) you will check the box that says Married Filing Jointly in the section that says “Amended return filing status.”  In the explanation box in Part III you will write:

 

pursuant to US v Windsor, this return is being amended to claim Married Filing Jointly tax status.

 

US v Windsor is the court case that the Supreme Court heard when they ruled that DOMA was unconstitutional.

 

You’ll complete the rest of the amended return just as you would any other 1040X form.

 

You are not required to amend your back tax returns if it does not help you.  Because those returns were filed using the law that was in place at the time, you are under no obligation to change your return if it would require you to pay more taxes.

 

Looking ahead:  now that federal law recognizes gay marriage, you may need to do some tax planning given your new status.  For many couples, the married filing jointly status is not beneficial.  I recommend sitting down with a professional and doing some planning, just that same as any other newly married couple would.  Remember, now that the federal government recognizes gay marriage, you are required to claim that you are married on your federal tax return.  You will either need to claim the Married Filing Jointly or Married Filing Separately tax status when you file your 2013 federal tax return.

 

Issues that have yet to be resolved: We know that if you are married in a state that recognizes gay marriage, you may file a federal joint income tax return.  What we don’t know yet is what happens to a couple that is legally married in a gay marriage state but moves to a state that doesn’t recognize gay marriage.  (For example:  a couple gets married in Illinois then moves to Missouri.)   I suspect we’ll see some court cases over that in the future.   I’ll post updates as I learn more.

 

If you’d like to read the court case, here’s a link:  http://www.supremecourt.gov/opinions/12pdf/12-307_g2bh.pdf

Posted on by Jan Roberg

Can I Deduct My Closing Costs On My Tax Return?

Rome House

Photo by @Doug88888 at Flickr.com

 

Now that the housing market is starting to buck up again, I’m getting that question more and more.  I figured it was time to spell it out in a blog post.

 

In general, the big tax deductions that go with home ownership are going to be your mortgage interest expense and your real estate taxes.  Now, if you’re a first time homebuyer and you buy your home late in the year, you might not have paid enough interest or taxes to exceed your standard deduction for the first year.  Don’t worry, you’ll see the benefits of home ownership on your taxes the next year.

 

When you’re looking at your closing costs, those figures are going to be on your HUD settlement statement.  Here’s a link to a blank one so that you can see what that paperwork looks like: http://www.hud.gov/offices/adm/hudclips/forms/files/1.pdf

 

Here’s the deductibility status of closing costs:

 

Real estate taxes: Deductible beginning on the date of sale (lines 106 and 107.)

 

Assessments: Condo fees and Homeowner’s association fees: Not Deductible.

 

Commission: Increases the basis (so when you sell the home, your profit is reduced.) This probably doesn’t affect most people, but it’s still good to know. Increasing the basis comes in handy for when you’re claiming a home office, converting a property to a rental, or if you sell it for more than homeowner‘s gain exclusion.  Currently you can sell your home for a $250,000 ($500,000 if married filing jointly) profit and pay no capital gain on it.  Bottom line, you can’t deduct the commission you pay to your realtor, but you do want to know that number because it can come in handy later.

 

Loan origination fee, loan discount (points):  Deductible (including the amount paid by the seller—if any.)

 

Items payable in connection with loan: appraisal fee, credit report, inspections, etc.: Not Deductible.

 

Interest: Deductible beginning on the date of sale—but that’s usually included on the Form 1098 that you get from your bank so you usually don’t have to take it off of the settlement statement.

 

Items required by lender to be paid in advance like mortgage insurance premium, hazard insurance, flood insurance: Not Deductible.

 

Reserves deposited with the lender such as hazard insurance, real estate taxes etc: Not Deductible.   These are the items on lines 1002 – 1004.  These real estate taxes are your escrow and not an actual tax paid, that’s why it isn’t deductible.  Later, when the real estate tax is actually paid, then it will become deductible.  This is probably the most confusing one on the list.  Although you’re paying a real estate tax—the real estate tax isn’t actually getting paid—it’s just going into escrow.  The tax usually gets paid once or twice a year.  When the bank sends the money to the taxing agency—that’s when it’s considered to be paid.  So, taxes with a line number in the hundreds—you deduct, taxes with a line number in the thousands, you don’t deduct.

 

Items payable in connection with title charges (Settlement or closing fee, abstract or title search, title examination, notary fees, attorney’s fees, etc): Increase Basis but Not Deductible.

 

Government recording and transfer charges, recording fees, tax stamps: Increase Basis


Additional settlement charges (survey, pest and other inspections): Increase basis but not deductible.

 

The bottom line is you might not receive any benefit from your closing costs on your tax return.  (Remember, your itemized deductions need to be more than your standard deduction for itemizing to be worth your while.)  But, if you do get to itemize, you need to know what to look for.  There’s no sense in wasting a deduction that you’re entitled to if it’s going to help.

Posted on by Michael Siebert

A Great Time in Chicago! – The 2013 Midwest in Motion Seminar

Photo by Michael R. Siebert

Hello everyone.  Mike here.  On the way up from the elevator to our office, I overheard two young ladies conversing about their trip to Atlanta over the weekend.  Later on in the day, a CPA on our floor told us about his upcoming vacation to the Philippines—certainly a fun time to be desired.  Near the end of the day, Jan told me she was going to Florida on a business trip with her husband.  At this point, I’m thinking in my head “Oh come on!  Everyone is leaving Missouri except me!”

 

Fortunately in the mail we received an invitation to the 2013 Midwest In Motion Education and Networking For Tax Professionals hosted in Chicago and sponsored by the Illinois and Indiana Societies of Enrolled Agents.  In need of a small vacation, and especially in need of a grasp on the Patient Protection and Affordable Care Act, I went up to Chicago for the two day symposium (Ok you got me, I also needed continuing education credits).

 

Upon my arrival, I was the only RTRP (Registered Tax Return Preparer) in the room full of Enrolled Agents; I felt like a fish out of water at this point.  But as I settled in and conversation naturally bloomed, I could not have felt more comfortable.  Everyone was extremely nice and friendly and I felt like I belonged in the tax industry.

 

The two speakers, James R. Hasselback, PhD, and Robert E. McKenzie, JD, EA, were great and very articulate.  They discussed such topics as the healthcare act, cancellation of debt, bankruptcy, audit reconsideration, and Schedule C hotspots.  It’s hard to stay attentive at an all day seminar and they made it easy.

 

But the real fun was after the seminar.  Karen Miller of Eberhart Accounting Services, P.C. located in Bolingbrook Illinois was kind enough to show me around Chicago.  We took a walk along Lake Michigan and snapped a few pictures.  What a beautiful city.

 

Furthermore, we went to the Navy Pier and rode the big Ferris Wheel.  This was certainly a “Kodak Moment” as the dusking sun created some nice illuminations off the city skyline.

 

For someone who doesn’t get out as much as I should (because I’m too busy reading tax law I guess), a change in scenery was definitely in order to expand my horizons.  I am very young to be in this industry—as I write this I am 24 years of age—and I plan to get my Enrolled Agent license by the end of December 2013.  This event sparked this notion and I am truly grateful to have been a part of it.

 

Thank you again to the Illinois and Indiana Societies of Enrolled Agents and a very special thanks to Karen Miller of Eberhart Accounting Services, P.C.  I would also like to thank Ana G., Bill B., and Jeff S. and the speakers, James Hasselback and Robert McKenzie.