I have the best clients. They're honest, hard-working Americans who faithfully file their taxes every year. I've weeded out the list over the years for the rare clients that asked me to compromise my ethical responsibilities as an Enrolled Agent. But by and large my client base is made up of people that sometimes feel more like family than customers.
Even in the off-season it's not uncommon in a day to reply to 20 or more client e-mails and voice-mails with creative ways they've come up with to slice their tax bill. Being your tax pro often mimics my job as a parent...the most common response to a question is "no".
Here are some of the most common "no" responses I have to give:
Q1. My child is 20 and dropped out of college. He lived with me all year, made only about $5,000 and stayed on my health insurance. I fed him, gave him money for clothes, didn't ask for room and board and even paid his car insurance. I figure I spent well over $10,000 this year. Can I claim him as a dependent?
A. NO. Unless your child is a full-time student, once they turn 19 and have gross income of more than the federal personal exemption amount ($3,800 for 2012), they can no longer be claimed on your tax return UNLESS they are permanently and totally disabled.
Q2. My child is 30 and decided to return to school full-time. She earned $10,000 from a part-time job, but I paid $20,000 for tuition plus books and a laptop she needed. She lived with me all year and did not pay room or board. Can I claim an education credit for what I spent?
A. NO. In order to claim an education credit the tuition paid must be yours, your spouse's (if filing a joint tax return) or your dependent's. You can claim a dependency exemption for your child until age 23 if they are a full-time student regardless of the student's income (provided the student did not provide more than half of their own support). However, since your child's income is more than $3,800, you cannot claim her as a dependent and therefore cannot claim an education credit based on her tuition that you paid.
Q3. My son is 17 and is working part-time during the school year and full-time during 8 weeks over the summer. He's a student so he doesn't need to pay taxes, right?
A. NO. If you are claiming your child as a dependent they can earn only a certain amount before federal taxes kick in. For 2012 they are allowed the standard deduction of $5,950. I have seen many times that an ambitious teenager can pass that amount in one year and therefore end up with a federal tax liability. A child who earns $10,000 and is claimed on their parent's return will pay $405 in income tax. If the child claimed exempt on their W-4 for the entire year, they would owe that to the IRS the following year. This is not the way I like to introduce teenagers to our US tax system.
Q4. I just got married. Human Resources sent me a new W-4 to fill out. Should I check "Married"?
A. NO. Assuming your spouse is also working, you need to discuss this with your tax professional or continue as "Single" for the remainder of the year. Note that unless you take the time to fully complete the "Two Earners/Multiple Jobs" worksheet on the back of the W-4, you could find yourself under withheld when you have your return prepared. Remember, unless you complete the worksheet, "Married" tricks the payroll company's computer into thinking that you are the only one working. If you file a joint return, your incomes and deductions get combined. I have too many sad stories of newlyweds whose first interaction with the IRS as a married couple is to go on an installment plan because they screwed up their W-4 form.
Q5. I don't have a house so there is no way I can itemize my deductions.
A. NO. Everyone's facts and circumstances differ. I loathe hearing from new clients that their prior tax "pro" told them that. Yes, most people start itemizing because they own a home due to the high mortgage interest and real estate tax deductions. However, I have many renters that legitimately itemize their deductions. Some clients have very high employee business expenses (I have several ironworkers that pay well over $4,000/yr in union dues). Some are very generous to charity. Some are earning $80K or more and have high state income tax payments. Others have very high unreimbursed medical expenses.
It's really easy to get lazy in the business and just look at the forms the client gives you, transcribe some numbers into the computer and produce a return. That's not a tax professional...that's a typist. A good tax pro will ask you many questions to see if there is anything going on in your financial life that may legally lower your tax bill. That comes from experience and a deep-rooted desire to ensure every client pays the lowest tax they are required to pay under the Internal Revenue Code.
Q6. My mom is 90. So she doesn't need to file, right?
A. NO. Whether or not to file depends on your gross income. There is no age cut-off (despite rumors to the contrary). For a single person 65 or older, a return is not required if their income (excluding Social Security) is less than $11,200. For a married couple who are both 65 or older, the income limit is $21,800 for 2012. Note that even if their income is below these amounts, their tax forms (particularly Form 1099-R and 1099-SSA) should be checked for federal tax withheld. If taxes were withheld they can file simply to get this refunded to them even if they are not legally required to file a tax return.
Q7. I used to work 5 miles from my home. My employer moved the office and now my commute is 50 miles each way. I can deduct mileage for my longer commute, right?
A. NO. Commuting is considered a personal expense regardless of the distance. As an employee you are allowed to deduct unreimbursed use of your automobile for business purposes other than commuting. So if you go to work and then need to meet various clients throughout the day you are allowed to deduct mileage for leaving your office and going to visit your clients and returning back to the office. But your 100 mile daily commute is not deductible. Note that an exception does exist for mileage traveled between two jobs worked in the same day.
Q8. I need to wear a suit and tie to work. If I don't I'll be fired. Can I deduct the cost of buying business clothes and having them dry cleaned?
A. NO. Clothing is a personal and therefore non-deductible expense. The are generally 2 exceptions. If the clothing is not suitable for outside wear, it can be deductible. This would include things like nursing scrubs, police uniform or an article of clothing with a company logo on it (think of the old Century 21 jackets the real estate agents used to wear). The other exception is protective clothing such as steel-toed boots, work gloves or a hardhat. I often have men and women in skilled trades (construction, painting, plumbing) noting that they go through scores of jeans for work because they get ripped, stained, etc. Jeans are suitable for outside wear and are therefore non-deductible.
Q9. I'm often paid in cash. My coworker said I only need to declare what was paid to my by check. Is he right?
A. Hell No. All income from employment is taxable. This includes payments by cash, check, credit card and even bartering one thing for another. Believe me, the IRS knows certain trades are cash-intensive. These trades are more likely to be audited and their cash transactions scrutinized.
Q10. I know I will owe. There is NO WAY I can pay the IRS what I owe them, but I should be able to pay them in full in a year. My best bet is to just file next year when I have the money.
A. NO! NO! NO! I can't stress enough the importance of filing a return on time. Even if you owe thousands of dollars. The penalty for not paying the tax by the due date is 1/2% per month (0.50%). The penalty for not filing the return is 5% per month. The cost of not filing the return is literally 10 times higher than the cost of not paying the tax. So get the return filed by April 15th (or October 15th if you are "on extension") and work (or have me work) with the IRS to setup a payment plan.