Elmer's tax thread

Couple of turbotax stories. The rule for us live "experts" was to help the customer with what he or she called about. Not to "prospect" by poking around.

But I could not do that. Since we "experts" could see their entire return via the miracle of cyberspace, I had to look around and see what looked funny. And a lot of stuff on a lot of returns looked funny and a lot of it was not the reason for the inquiry.

Example 1 - a lady with over a million dollars in income (no joke) from all kinds of ventures (rentals, partnerships, S corporations, dividends, interest, capital gains, you name it, she had at least a little of it) who did her own return using turbo tax to save money on a tax prep fee. She did not like the user question and answer format for turbotax, which is the best and most accurate way for a person to use turbotax because "it takes too long." She just entered numbers on forms, which one can do, but if one is not pretty well versed in tax law one will screw up, especially one with as much going on as she had. I don't remember what she called about, but it wasn't "foreign tax credit."

I noticed she had a LOT of foreign dividend income. I think I actually asked her if she did because she had so much dividend income, tens of thousands, I knew she would have some foreign tax withholdings. So she looked at her broker statements and found over $4,000 in foreign tax withholdings. That resulted in reducing her tax bite by that much, and that wasn't even what she called about.

Example 2 - a lady with $12,000 net rental income called, but not about that. Something else. We took care of that and I mentioned "that's a lot of net rental income. Must be a lot of property."

"No," she said. "Just one house."

"Must be nice one."

"No," she said. "Three bedrooms, one and half baths. Our former house we kept as a rental"

"Lets take a look," I said. Went to the Schedule E.

To make a long story short, I walked her through all the possible deductions associated with rental houses and at the end, that $12,000 profit had turned into a loss of a few thousand. Her tax bite went WAY down and if I had been single and she had been single, I think she would have asked me to marry her.  (The lady in example one wanted to know how she could make sure she got me next tax season.  I said you can't.  It's luck of the draw.  I didn't tell her I was not going to do this again even at gun point.)

There were many more like that. I handled I think 200 cases that year, and had at least two returns from every state that levies an income tax. I think there are 46 in all. I thought I wasn't going to get any from Hawaii until the last day when I got TWO from Hawaii. One of which was a Section 1031 exchange which I might write on in the future.

the do it yourself programs, and there are many besides turbotax, are good programs. But if a person has much complexity to his or her return, it's almost always better to use a competent professional.

Turbotax has excellent user questions. If a user goes through the program and answers the questions, the user is going to get a pretty accurate tax return. the problem is the user must understand the question. and some of them are a bit obtuse, even when worded as simply as possible, to someone who is not very famililar with tax law and regulations. I would say anybody who has a Schedule C (self employed) Schedule F (farm) or Schedule E (rentals and pass through entities) probably ought to use a competent professional.

I have never done business with one of the "walk in with stuff walk out with a return" tax preparers, but I think H&R Block is one of those. They'll do a complicated return, but the problem is that a person with a complicated return often does not know what to bring with him. But I am not sneezing on H&R Block. They also have a very good user driven on line do it yourself tax program that is probably as good as Turbotax, and I imagine some of other DIY programs are good. I doubt any are better than Turbotax, but they may be a little less expensive. For a complicated return they can't be too much less expensive, though, because I think you can buy a Turbotax program that will do everything possible for about a hundred bucks, and if you purchase it the right way you can do an unlimited number of returns on it, though you can only e-file 5. And you can't be a paid preparer. You just can do your own and any freebies you feel like doing, e-filing up to 5 and paper filing the rest. and interface with every state that has an income tax return, extra charge for more than one state.

I do know this: every time the Congress "simplifies" the tax code, paid tax preparers pick up new customers. There's a lot of necessary tax info other than wages and taxes withheld on W-2 forms these days, too, and even supposedly simple returns can get a little complicated from that.

that reminded me of a category of client we used to call "sack farmers." this was before the career from which I retired, when I worked at a couple of relatively small CPA firms.

Sack farmers are farmers who keep their records in greasy paper grocery bags. This was before plastic. Some of them would separate sales into a small bag, but most just put everything in one bag. When they couldn't get any more in there, they got another bag.

Had this one guy, really nice, sofstpoken guy, who was a classic, textbook sack farmer. His preferred storage medium, as I recall, was a bag from Piggly Wiggly.

He came in one year, chatted with the boss, who then passed the sack to me. I emptied it and carefully unfolded everything and tried to classify it - seed, repairs, fuel, etc. There were some wheat and corn sales in there, and a few cattle sales. I unfolded those and classified them, too. Got everything fairly organized and started running adding machine tapes on each pile. Stapled the tapes to the pile and wrote on the tape what it was.

Summarized all that crap and it showed a cash loss, before depreciation (which he had more than a little of) of $40,000 odd dollars. I thought wow, that's a cash loss for sure. Thought I better check on it. Called the boss, he said "Just call him and ask about it."

I did and told the nice gentleman what sales were by category, expenses were by category, all from his sophisticated accounting system, and said "it's showing you paid out about $40,000 more than you took in."

He was silent for about 45 seconds and in his very soft, calm voice, finally said "Well, I knew it wasn't a very good year."

I asked "Are you sure all the sales were in the sack?" He said "pretty sure, but I'll dig around."

I could only imagine what he was digging around in. In about two hours he called back "I found two wheat sales that run to $52,000 for both."

Also had a rock and roll band. Paid pros, but we're not talking big money. There were four of them in the band. They split the proceeds four ways and each paid their own expenses. Technically probably should have been filed as a partnership, but rules are made to be ignored. Two of them were brothers.

Each member kept his records in a 2 pound size metal coffee can. Crammed the receipts in as tightly as they could. Nobody ever had more than one can. The guy doing the return told them one year "You know, you guys probably need to upgrade your accounting system." The band leader, with a completely straight face, said "We've been thinking about going to a 3 pound can."

One year, still doing 2 pound cans, the brothers only had one can. The guy doing the return asked "Where's your can?" That brother said "I got tired of fooling with it and just did whatever he did (pointing to brother)." If he ate a hotdog, I ate a hotdog. We shared hotel rooms 50/50. Every expense he had, I had in exactly the same amount." Sure made that return a little bit easier, but I don't think upper management discounted the fee any.

well, I am definitely not an investment professional. There is farmland around here for sale as well, and it has never occurred to me to invest in it. While reasonably comfortable, I do not have what I consider to be any money to speculate with. Farmland probably will not go down in value, but whether it performs better than the stock market over a long term is unknowable. Everybody I know that has made lots of money on farmland, and I do know a few, made the big money when urban areas encroached on it and it became commercial property. Probably varies greatly by area. Around here, I think farmland values have pretty much kept pace with inflation at best for several years. And my guess is that under relatively normal circumstances, that's about all farmland is going to do over the long haul. I think the same about gold and silver. There might be short term profits now and then if one strikes while the iron is hot, but over the long term, I think about all they do is keep pace with inflation. A store of value rather than a consistently performing investment.

Off question a little, but occasionally people ask me if I think they should stock up on gold and silver either as an investment or for "hard times." I tell them I think they should do what they think is best, but I am not going to do it because (1) I don't believe either is a good long term investment and (2) one is unlikely to be able to stock up on enough of it to be much help during "hard times" unless the hard times are relatively short in duration, and hard times where gold and silver help are not, historically, short term in duration and (3) the people urging you to convert your worthless paper currency into gold and silver in TV ads are exchanging their gold and silver for your worthless paper currency and (4) Warren Buffett doesn't do it. I don't think he invests in farmland, either. But he may. Warren and I are not close friends.

It's ALWAYS the best way to go.  Aesop even knew that.  Certain or uncertain times.

I've been reading up on Roth 401k's recently. The contribution limits are about three times that of a normal 401k or IRA. Too bad they didn't exist when I was making that phat cash. Oh well.