As we approach Tax Season, I wonder how many people
understand the potentially vast differences in the quality
of tax return preparation? Are tax returns really the
commodity that they seem to be? Is a tax return prepared by
the tax service in the mall of the same quality as that
prepared by a major CPA firm? What does it mean to have a
"quality" tax return? In fact, can a tax return be prepared
in such a way as to reduce income taxes?
As someone who has been involved in the tax return
preparation process for almost 30 years, let me share some
thoughts on this subject.
Accuracy in a tax return simply means that the information
provided by the client was reflected on the tax return. It
does not mean that the tax return was prepared in the BEST
way it could have been prepared. In fact, I RARELY see a
tax return from a new client that was prepared the way I
would prepare it.
Let me give you some examples. Suppose you have some
expenses that could either qualify as investment expenses
or business expenses. Either classification would be
"deductible" on the tax return. BUT, a business expense is
MORE DEDUCTIBLE than an investment expense. How is that
possible? An investment expense is deducted on Schedule A
and is classified as a "Miscellaneous Itemized Deduction."
There are several limitations on a miscellaneous itemized
deduction. First, you only get to deduct these type of
expenses to the extent they exceed 2% of your income. So,
if you have $300,000 of income and $7,000 of investment
expenses, you only get to deduct $1,000. What's worse is
that if you are in the Alternative Minimum Tax like
millions of taxpayers, you don't get any benefit for your
investment expenses.
On the other hand, if you were able to deduct these same
expense on your Schedule C or your Schedule E, you would be
able to deduct 100% of the expenses. In addition, the
expenses would reduce your self-employment income from your
business. That's another 15.3% tax benefit on top of the
income tax benefit.
Another example of less than stellar tax return preparation
relates to depreciation. Depreciation is the government's
gift back to investors, especially real estate investors,
for investing in long-term assets such as equipment and
buildings. What most tax preparers don't understand is the
idea of a cost segregation or chattel appraisal. The whole
goal with depreciation is to get more of it sooner. This
provides the investor with a terrific tax benefit in the
early years of property ownership. And under the important
wealth creation principles of leverage and velocity, the
sooner we have cash, the sooner we can invest it and obtain
major returns from our investment. The problem appears to
be a lack of knowledge from many tax preparers and CPAs
about the rules surrounding cost segregation.
The one area where I do see mistakes relates to those
taxpayers who file returns in multiple states. This is a
specialty area of mine, which I teach at Arizona State
University. Even in the major firms, there is a lack of
understanding by the Federal tax departments of the many
opportunities for tax savings when preparing multistate tax
returns.
What it comes down to is whether your tax preparer/CPA has
the knowledge and creativity necessary to prepare the BEST
return possible. And is it worth it to you to pay a little
more to get the better result? Are you focused on the
amount you pay your advisors or are you focused on the
return they provide you on your investment? Let me give you
an example.
Suppose you have a choice of paying $750 for your tax
return to a small CPA firm or $2,000 to an innovative,
knowledgeable firm. All things being equal, anyone would
choose to pay the lesser amount. But what if all things are
not equal? What if the $750 gets you an adequate, accurate
return but the $2,000 would get you a return where you pay
$5,000 less in tax? Which is the better deal? In one, you
are out $750 with no return on your investment. In the
other, you are net ahead $3,000. Clearly, the $2,000 fee
returns a greater value.
This tax season, review your own tax situation and the
advice you are receiving from your tax preparer/CPA. Are
you getting the return on investment you want? Are you
getting the planning ideas you need? Are your taxes going
down or do they continue to increase? Taxes are such a
major part of your wealth creation that you cannot afford
to ignore one of the most important part of the tax
planning process - tax return preparation.
Warmest regards,
Tom
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http://www.tomwheelwright.com
