|
I am keeping a running list of situations that justify
seeing your CPA before tax time. A meeting with a CPA could have
prevented these problems. This list will get longer with time!
I would be glad to discuss issues that might have tax
consequences. Programs like TurboTax can do 90% of all tax returns.
I don't want to do your tax return, if you are happy with using TurboTax.
I have no problem with meeting with you merely for a consultation.
What Happened: Dick and Jane are going through a
"friendly" divorce. They want to keep legal and professional fees to a
minimum. (I don't have a problem with that, in itself.) Dick withdrew 1/2 of
his pension plan to pay Jane. At tax time, Dick will pay tax and
penalties on the pension funds that were paid to Jane.
What Should Have Happened: If Dick would have
discussed the situation with a CPA, the CPA would have shown Dick a way to
tax-free give Jane 1/2 of his pension. The meeting with the CPA would
have cost a tiny fraction of what Dick ended up paying in tax and penalties.
What Happened: Matt, who is in his 20s, pulled
$10,000 out of his 401(k) plan as part of a down payment for his first
house. On April 15th he had to pay a $1,000 penalty for taking the
money out of his 401(k) plan too early.
What Should Have Happened: If Matt would have
discussed the situation with a CPA, the CPA would have told Matt to first
rollover the $10,000 from his 401(k) plan to a traditional IRA. Matt
would then pull $10,000 out of the IRA for the down payment. Result:
No $1,000 penalty.
What Happened: Mom is on her death bed. She
makes a gift of her home to her son. Mom dies the day after gifting
the house. Mom originally paid $150,000 for the house. When she
dies, the house was worth $200,000. Right after Mom dies Son sells the
house for $200,000. Son has to pay tax on $50,000 ($200,000 -
$150,000). When the Son received the gift of the house, the cost basis
to him is the same as the cost basis to his Mom, $150,000.
What Should Have Happened: Mom should have
indicated in her will that Son inherits the house. If the Son inherits
the house, his cost basis is the value at the date of death, $200,000, not
his Mom's basis of $150,000. If Son inherits the house, the gain is
zero, not $50,000.
What Happened: Bill and Sally make over $150,000.
Through good financial decisions they were able to pay off their mortgage.
Since they no longer have enough deductions to itemize, they purchased a
rental property to lower their taxes. They were planning on the rental
deductions to make up for the lost mortgage interest deduction. At tax
time, they learned that they cannot take any rental deductions because of
"passive loss" rules.
What Should Have Happened: Bill and Sally should
have known about the "passive loss" rules before purchasing the rental.
If they counted on rental deductions to pay for the rental property, they
should have never purchased that property.
What Happened: Ben moved, but kept his previous
house. He planned to rent it out. He made significant repairs
BEFORE the old house became a rental property. Ben was not able to deduct
the repairs.
What Should Have Happened: Ben should have been
told what steps he needed to do to hold the property out as a rental, BEFORE
starting the repairs. It is important to document how and when the
property was held out for rental.
What Happened: Matt got layed off, and decided
into research a new business. Matt spent over $4,000 on a feasibility
study, and decided not to start the business. Feasibility studies when
you don't start a business are NEVER deductible.
What Should Have Happened: Matt should have been
warned that feasibility studies are not deductible if a business is not
started. There are things that Matt could have done to make a
feasibility study deductible. An hour or less with a CPA could have
taken care of that.
What Happened: George picked up a consulting job
over the summer. It brought in over $20,000. Now George owes
both income tax and self employment tax. There could be penalties
involved.
What Should Have Happened: George should have met
with a CPA to plan payments to cover the income and self employment tax.
George could have been told what he could deduct to reduce the income and
self employment tax. It would also be helpful to put away with each
payment he received a percent for taxes. That way, April 15 will not
cause a financial shock.
What Happened: Chuck needs more money to live on.
He took a $100,000 distribution from his IRA to cover additional
expenses for this year and a few more years. Since Chuck is not 59½,
he was hit with a $10,000 early distribution penalty.
What Should Have Happened: Chuck should have had a
CPA set him up to make "substantially equal distributions" over 5 years or
more. That would have eliminated the penalty.
These are just some examples of what can happen, if a
person does not consult a skilled tax professional before an important
transaction happens.
If you have questions about this, do not hesitate to contact us
at 720-493-4804.
Circular 230 Notice:
The information contained here are simplifications of complex subjects.
We recommend that you talk to a CPA about this issue.
To ensure compliance with requirements imposed by the IRS, we inform you that
(i) any tax advice contained in this communication (including any attachments)
was not intended or written to be used, and cannot be used, for the purpose of
avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing
or recommending to another party any transaction or matter addressed herein. |