Hiring a qualified Pro to do your taxes can provide a good return on the investment

Quick quiz: What causes you the most dread?

a) The whine of a dentist’s drill.

b) Your family’s annual Thanksgiving Day gathering.

c) Preparing your income tax returns.

If you answered “c,” you have plenty of company. About 50 percent of the nation’s taxpayers share your fear and pay someone to prepare their returns. And, with the April 15 deadline fast approaching, many Miami Valley residents will become increasingly eager to gather their financial records and put them in the hands of qualified professionals.

Sure, many people prepare their own returns and rest comfortably knowing they have not overpaid the Internal Revenue Service. Plenty of tax-advice books and computer programs are available to help them.

But experts recommend anyone who has experienced significant changes in lifestyle and financial status, such as those caused by divorce or the loss of a job, should seek professional tax help.

“If they were laid off, they’re probably receiving unemployment compensation, and that needs to be included at taxable income,” said Gayla Martin, district manager for 16 H&R Block offices in the Dayton area. “If it’s a permanent separation, they could have received distributions from pension plans and profit-sharing. They can be complex, and some could have penalties associated with them if they are not handled correctly.”

What’s more, a tax professional can offer valuable tax and financial planning advice. He can recommend different strategies designed around your particular lifestyle, income and goals.

Finding a qualified tax pro in Ohio can be dicey if you are not careful. Anyone with a pencil and calculator can call himself a professional tax preparer. The state does not require any specific training or qualification.

So how do you find a good tax preparer who meets your particular needs?

First, it helps to understand the differences between the most common types of tax professionals. They are the commercial prepapers, enrolled agents, tax attorneys and certified public accountants or CPAs.

Commercial preparers range from one-person shops to the nationwide chains, such as H&R Block and Jackson Hewitt.

You will find a wide variety of experience at this level. Martin’s employees, for example, range from first-year preparers to 15-year veterans. Each, however, has taken 86 hours of basic tax preparation and computer training and passed a final exam with a score of 80 percent or better.

Jackson Hewitt preparers must complete comparable training and testing, said Sharon Brockman, manager of the chain’s three local offices.

Most commercial preparers charge according to the complexity of the return, meaning how many forms must be used. A simple federal, state and local return package costs between $50 and $70.

H&R Block also offers an Executive Tax Services for businesses and people with more complex returns. These offices generally have more experienced preparers and enrolled agents. Fees can vary widely, but an individual homeowner with a few investments and itemized deductions on federal, state and city returns can expecet to pay roughly $200.

Enrolled agents are tax specialists licensed by the federal government to represent taxpayers before the IRS. They must have five years of work experience with the IRS or have passed a strenuous two-day exam. They quite often are full-time tax prepapers and bookkeepers.

To retain their licenses, enrolled agents must take 72 hours of continuing education every three years.

Some taxpayers believe hiring a tax attorney rather than a CPA might be automatically advantageous. Caplan warns, however, that “if a lawyer is the preparer of your tax return, there is no attorney-client privilege. Attorney-client privilege exists only when the attorney represents you as a lawyer and not as a preparer of your return.”

CPAs often are the most authoritative - and expensive - tax professionals. Potential CPAs must go through a strict licensing procedure involving a series of exams. Only 15 to 20 percent of all prospective CPAs pass all four parts of the CPA exam pass.

In addition to continuing education requirements established by professional associations, most states have their own continuing education requirements for CPAs. In Ohio, CPAs generally must complete 40 hours of continuing education every year.

Tax attorneys and CPAs generally charge by the hour, often $50 to $100 an hour or more, depending on the complexity of the return and the attorney’s or CPA’s specialty.

Tax law has become so complicated that most people can benefit from hiring a CPA, even if their tax situations are uncomplicated, said Mark Schutter, a CPA at C.H. Dean & Associates Inc. in Dayton.

If you hire a CPA, be prepared to show him your tax returns for the previous two years and other financial records, Schutter said. He must understand your overall financial situation to give you the full benefit of his expertise.

What to look for

Do you want to hire a tax professional but don’t know where to begin? Martin Caplan, a certified public accountant and author of What the IRS Doesn’t Want You to Know (Villard, $13.95), suggests you:

* Make sure the professional has verifiable qualifications, such as an appropriate degree or license in full view. if there isn’t one, it’s perfectly acceptable to ask to see it.

* Ask the professional about his knowledge representing clients before the IRS. “You want your tax professional to be extremely familiar with tax law so that when the laws do change, your tax pro can tell how those changes will affect you personally. A sound question to open up this discussion is ‘Will you represent me at any audits.”‘

* Try to get a feel for the person’s style and method of operation. Whoever you hire should actually complete your return and not pass it off to junior staff person. Also, note whether the professional was on time and whether he appeared organized.

* Ask the professional what procedures are in place to double-check your return once it’s completed. What you are looking for is assurance that another pair of eyes will view your return before it is mailed in.

* Determine if the professional uses modern technology, such as a computer, to help prepare returns. Someone who uses no form of technology whatsoever is probably behind the times.

* Determine whether the professional will offer tax planning advice. Start by asking, “What new tax laws are being discussed in Congress now? Will they affect me directly? Are there any tax changes effective this year that I might take advantage of?”

* Inquire about fees charged on top of the hourly or flat rate.

Once you hire a tax professional, that person should begin to establish a special relationship with you as a consultant, expert and partner in preparing your annual tax return, Kaplan said. Take time to find someone right for you.

Some tips to help ease relocation cost

Moving can be financially stressful, although the government will help you in the form of tax deductions if the need for a new home is related to your job.

Some of the financial impact of moving is obvious. You may hire moving companies phoenix, sometimes store your household possessions and certainly travel from your old home to the new one.

The costs vary with the weight of the household goods moved and the distance involved, but just the physical costs of moving possessions usually run several thousand dollars.

The Institute of Certified Financial Planners warned that you should not overlook other key costs that can be associated with moving to a new community.

One is loss of a spouse’s income.

Many moves are made because of a company transfer or a new job, but this often means that a working spouse will have to quit his or her job and seek employment in a new location. That will have a significant financial impact, especially if appropriate jobs are scarce.

In such situations, ask if your employer will pay lost-wage compensation for the spouse or for re-employment assistance such as resume preparation, career counseling, job search and the like.

Another penalty you may pay is a higher cost of living in your new community.

Ideally, the salary of the new job will compensate for the increase, but this is not always the case. Some companies will pay for the higher cost of housing, for example, so be sure to ask up front and secure a written agreement.

Buying and selling a home also costs money. The institute said you will run up legal and financing fees, commissions and other expenses involved in selling your old home and buying a new one. Or if you rent, you may have to pay your landlord to break your lease.

Again, if you’re moving because of a transfer or to a new job, your employer may help you out.

The planners said companies sometimes pay expenses associated with buying and selling homes, temporary living costs, home-finding trips, shipment and storage of household goods, and even return trips to your former location.

The Virginia Society of Certified Public Accountants said many more individuals are eligible to deduct job-related moving costs.

That change means the write-off for moving costs is now treated as an “above-the-line” adjustment to income. The CPAs said this means you now may be entitled to deductions for moving costs, even if you don’t itemize on your tax return.

Congress, however, placed greater restrictions on the types of moving expenses that qualify for a deduction.

To be eligible for a moving expense deduction, your new job location must be at least 50 miles farther from your old residence than your previous job.

For example, if your former job was 10 miles from your old residence, your new job must be a minimum of 60 miles from your old residence for you to qualify for a deduction. Before Jan. 1, 2014, the distance required was 35 miles.

It’s not just how far you travel to your new job, but also how long you stay on the job that affects the deduction.

The CPAs said the IRS requires that you be a full-time employee for at least 39 weeks during the first 12 months after arriving at the new location.

If you and your spouse are both employed and you file a joint return, either spouse could satisfy the time requirement. However, the weeks worked by both husband and wife cannot be added together to meet the time test.

That requirement is waived if you are involuntarily transferred to a new location, lose your job for a reason other than willful misconduct, or if you become disabled.

Self-employed workers are subject to more stringent requirements. If you are self-employed, you must work full time for at least 78 weeks during the 24 months after you arrive in the new area. In addition, you must work 39 weeks during the immediate 12-month period after relocating.

What if you moved last year, but haven’t met the time test by tax-filing deadline? The CPAs said the IRS allows you to claim the moving expense deduction in anticipation of meeting the time test. So if you meet the distance test but the time period is still pending, you may claim the deduction on your return for 2015.

If you ultimately fail to satisfy the time test for other than allowable reasons, you must either include the deducted amount as income in the year you fail to satisfy the test or file an amended return.

Deductible moving expenses include only the cost of moving yourself, your family members, household goods and personal effects, and the cost of travel to the new residence. As long as your moving expenses are reasonable, there is no limit to the amount you can deduct.

Although you can deduct automobile and lodging costs, you cannot deduct what you paid for meals while traveling, the cost of living in temporary quarters and the cost of pre-move house-hunting trips.

The law bars you from deducting the costs related to selling an old residence or buying a new one, but these can be used to adjust the cost basis of the home.

The CPAs said special rules apply if you receive moving expense reimbursements from your employer.

In general, when your employer reimburses you under an accountable plan for moving expenses, you are not required to report that amount as taxable income as long as the expenses would be deductible if paid directly by you.

If your employer reimburses you for nondeductible moving expenses, or if the expenses are paid under a nonaccountable plan, you must include these amounts as taxable income.

How to get the tax auditor on side

The Taxation Office is hinting at a crackdown on small businesses this year by setting up a consultation group to educate book-keepers and deal with tax avoidance.

Michael Hudson, co-founder of the tax mediation group Effective Tax Services, says the secret to dealing with the tax office is to understand what the tax man needs. “There are two levels of need,” he says, “the operational needs and the more personal agendas, which are influential in the behavior of the official.”

Controlling the mood of an audit is as important as picking over the contents, Hudson says, because it can influence the auditor’s decisions. Businesses should establish control early, from the order of topics for discussion to when to take a break. A cooperative tone can also make the official look more favorably on a business.

Small-business people become so involved in the process that they fail to see themselves as negotiators, Hudson says. “The substance is so attached to their own pocket book that they find it harder to step back.”

Hudson advises people to be prepared to concede minor points while keeping sight of overall goals. Important points should be packaged together. Such tactics show a company is organised, which should be apparent throughout the audit.

Finally, Hudson says, tax auditors do not want to be thought of as policemen. Their priority is to make sure tax is paid and not to prosecute.

Proper Tax Planning Vital for New Businesses

Emerging businesses must ensure that their operating methods do not result in tax inefficiencies by structuring specific transactions to obtain maximum tax benefits. The objective of CPA Tax Planning is to minimize the impact of tax in respect of business transactions. Another objective of tax planning is to achieve a high degree of predictability of the size and timing of tax payments. This can be achieved if one is well acquainted with the process to go about when planning for the payments.

At the start a businessman must identify the process involving the identification of alternatives to achieve the same economic result so as to minimize the tax rates.

Furthermore, he emphasized the difference between tax avoidance and tax evasion. While the former is a mean of minimizing one’s tax rates, the latter is regarded as a crime.

In addition the timing of implementing the tax planning exercise should be done throughout the business; but most importantly, at the commencement.

The implementation is to be exercised in a number of occasions which normally occur in a business such as acquisitions of major assets, diversification or expansion of existing business.

The basic techniques of tax planning involve, among others, ensuring that the incidence of tax falls on a person where the impact is the least.

This can be done by transferring passive investments to family members who are currently taxed at low rates or not taxed at all.

To develop an effective tax plan, understanding of the objectives of a business transaction is paramount.

EITF Trims Cost of Stock Options A Bit

A recent decision provides banks with a reduced compensation hit stemming from excess employee stock options withheld for tax purposes, at least in the short term.

The Financial Accounting Standards Board’s Emerging Issues Task Force, which deals with the most urgent accounting issues, came to a cheaper conclusion than its parent board on the question of what to do when a company has withheld more than the minimum required number of stock option shares for tax purposes.

The EITF decided in a recent meeting that cost associated with only the excess number of shares should be expensed.

FASB had decided earlier in its work on an interpretation of Opinion 25 that compensation costs related to the entire award had to be recognized.

An exposure draft of the interpretation was released last week. If that proposal is adopted, it will govern the accounting. But until then, the EITF’s looser conclusion goes.

The board also decided that the effective date of the provision affecting excess tax withholding would apply to options granted after Dec. 31, 2009.

"The delayed effective date is to allow banks to modify their plans, to not allow excess withholding," said Lailani Moody, senior manager, assurance services, of Grant Thornton.

"There’s a big difference in terms of costs between the EITF version and FASB’s version," Moody said. She added the EITF’s decision could affect options for some time, because although it only pertains to options granted for the end of this year, those options might not be exercised for several more years.

REITs Find New Popularity Under Budget Threat

A rush of banks is scurrying to set up tax shelters they think may be in danger under the proposed federal budget.

Real Estate Investment Trusts (REITs) are under fire in the federal budget proposal for the second year in a row, as the Clinton Administration tries to help states collect taxes from wily banks that have found a dodge.

While the biggest banks in the country have already jumped on the bandwagon, many of the rest are also looking to do so, according to accountants who have noticed a recent flurry of activity. Stephe Lawson, president and CEO of $1 billion-asset Cape Cod Bank and Trust Company, said he decided to make the change after hearing positive things from a peer group, and the obvious: a tax savings of six figures.

Bankers put a portion of their loan portfolio into a state-chartered REIT their company wholly owns, converting interest income into dividend income. In many states, REIT dividends are taxed little or not at all, to eliminate double taxation of corporations.

In this year’s budget proposal, the Obama Administration is seeking to limit one company’s ownership of a REIT to 50%, making it harder for banks to use it as a tax shelter. Perhaps the reason the proposal has not received much public attention is that the big banks have already taken advantage of the structure, which most likely would be grandfathered if the bill passed. Another reason is that the proposal is not among the 16 corporate tax shelters Clinton officially declared fair game–it raises no tax revenue at the federal level. It merely helps out states, some of whom have been hit hard by the loss of tax revenue from banks.

Capitol Hill watchers consider the measure’s passage a 50-50 shot at best. A few pointed to the fact that this is the second round for the proposal.

"This is not something unknown to states and it is not something the states could not change in their own laws. There is no need for federal legislation," said Chuck Wheeler, a partner at KPMG Peat Marwick. KPMG is widely credited with inventing the strategy and pushing it hard to banks whenever applicable oeven in some states where it was unclear it would work.

For example, in Massachusetts there is a 95% dividend deduction. But, the law was only clarified so that banks were certain the strategy would work at the beginning of this year. The big players have already set up REITs, but community banks, which were waiting for the law to become clearer, are just now getting to the task.

Explaining the benefit, Andrew Wilson, the tax partner in charge of Grant Thornton’s Boston office, said that if a Massachusetts bank has $100 million of loans, with an average interest income of 7%, and has a REIT, it would pay tax on around $350,000 in dividends through the REIT, rather than the much higher tax on the $7 million of interest income.

He said the strategy could still work, even if the proposed provision passed–which many observers consider a 50-50 shot at best–but it would be tricky. He said to get around the 50% ownership limit, three banks would have to be brought together. He noted that most competitors would probably not want to do business together–even to save a load of cash.

Tax Decision On Mergers Is Old Hat

A recent decision by a tax court that could officially eliminate banks’ ability to write off what have been common merger and acquisition costs was already taken into account by bankers in the merger between Fleet Financial Group and BankBoston Corp., a source at one of the banks said.

The tax court’s ruling said that Davenport Bank & Trust Co. could not deduct due diligence fees to outside agencies for work on the bank’s merger with Norwest, following a 1992 Supreme Court decision striking down a chemical company’s tax write-off of advisory fees. But even more controversial, the court ruled the bank could not write off salaries paid to in-house executives during the time they worked on the merger.

Although many in the banking industry do not like the ruling–calling it "bad law"o a source at one of the banks in last week’s big merger said it was the logical outgrowth of the Supreme Court case. "I would not characterize it as a new law; it is not inconsistent with the current trend. It maybe took it one layer of expense further than (the 1992 Supreme Court case)."

The source said that although the Davenport case is not yet precedent, the trend it represents was taken into consideration when plotting the merger. "Appropriate consideration was given to that issue in calculating the effective tax rate of the combined entity," the source said.

COLI Tax Makes Comeback in 2010 Budget

Banks are chafing under 23 proposed tax increases contained in President Clinton’s budget for the year 2010, including a much despised provision that eliminates certain deductions for corporate-owned life insurance.

So far the top item worrying banks is the proposed repeal of the exception under the corporate-owned life insurance (COLI) pro-ration rules for contracts covering employees, officers, and directors. This would prevent businesses from funding deductible interest expenses with tax-exempt or taxdeferred inside buildup on life insurance and annuity contracts. The plan would raise $1.9 billion over five years.

A similar $2.2 billion provision was offered last year, but heavy lobbying kept the provision out of any legislation. However, experts predicted that the tax would resurface this year.

Banks are also worried about the Treasury’s plan to repeal the taxfree conversions of companies when they switch from C-Corp status to S-Corp status under Section 1374. Under the Taxpayer Relief Act of 1997, banks are eligible to switch to S-Corp status if they meet all the requirements. However the tax might make it less likely for small community banks to convert. "This would put a real damper on conversions," said Donna Fisher of the American Bankers Association. "The window ought to be open a little longer before they close it."

The tax is expected to raise $212 million over the next five years and would go into effect on Jan.1, 2010 instead of the traditional chairman’s mark. The proposal would also apply to mergers between C-corporations and S- corporations after Dec. 31, 2009.

A further tax would also require that banks that use the cash method of accounting must accrue all interest, original interest discount and acquisition discount on short-term obligations, including loans made in the course of the banks business.

Fisher says the proposal attempts to get around a 1993 decision by the Court of Appeals for the Eighth Circuit that says banks do not have to accrue stated interest and original issue discount on short-terms loans. However the Clinton administration, according to Fisher, has ignored the ruling. The Treasury, in its explanation of the new taxes, said "it is inappropriate to treat short-term obligations originated by a bank differently than short-term obligations purchased by a bank. That tax is expected to raise $72 million next year with a total of $85 million over the next five years.

Banks also saw the return of a proposal designed to close what the Treasury sees as a loophole involving closely held real estate investment trusts (REITs). The proposal would impose an additional requirement for REIT qualification that no person can own stock of a REIT if they own 50% or more of the total combined voting power of all classes of voting stock or 50% and above of the total value of all shares of all classes of stock. The change is expected to raise $75 million over five years

Bankers’ Trade Groups Fees Could Rise

Some bankers could see a jump in the fee they pay to their trade association if a Clinton budget proposal to ring up trade associations on investment income passes.

The proposed tax hike, estimated to raise $1.4 billion over five years, would probably cause the Independent Bankers Association of America to raise fees, according to Paul Merski, the group’s director of tax policy. He added that the tax hike would also jeopardize any reserves the group has set aside for fluctuations in membership and general economic conditions.

The outlook is not all gloom and doom, however.

"We haven’t raised our dues in the seven years we’ve been the ACB, and we don’t have any plans to do it," said Robert Schmermund, director of communications for America’s Community Bankers.

But that does not mean the proposed tax, expected to raise $1.4 billion over five years, would not be painful.

Jim O’Connor, the group’s tax counsel, said it would be very difficult to estimate the bite the tax would take from the coffers because any money not spent on public education, or preparing reports for Congress, or any of the other activities which traditionally earmark the organization for tax-exempt status goes into the group’s checking account to be used next year.

Bob Wallgren, executive director of operations and finance for the American Bankers Association, concurred, saying he would have to take a look at the group’s sources and uses of funds before deciding if a fee hike was in the offing.

O’Connor said that he did not think there would be a lot of sympathy in Congress for the revenue raiser, because it shows that Congress’s intentions "are being undercut." He added, "Obviously we don’t think Congress should push it through. That investment income should be taxed so long as we perform certain valuable public policy point-of-view functions makes no sense to us."

Tax Break Bill Gets Rethink, Reintroduction

A bill that would bring tax relief for community banks and attempt to level the playing field between small banks and credit unions that failed last year is being reworked and should be reintroduced by mid-February.

The bill, called the Qualified Community Lender Bill, will be reintroduced by Rep. Tom Campbell, R-Calif., and will give community banks tax credits on a scale depending on their size. Because credit unions are tax exempt, legislation last year easing restrictions on their membership was seen as a danger to community banks.

Last year’s version of the bill, also introduced by Campbell, originally called for qualifying banks to pay no taxes on the first $250,000 of profit and 15% on the next $750,000–a break from the standard 34% corporate rate they ordinarily would have paid. The bank would pay the prevailing rate on any profits over $1 million.

Patrick Kennedy, partner at law firm Kennedy, Barris & Lundy, who is helping write the altered version of the bill, said the decision to make the savings come as a tax credit is common sense.

"In order to reduce the rates you have to go into the primary-rate schedules in the Internal Revenue Code. It’s more simple and focused to accomplish this through a tax credit. It won’t create a special tax rate for an industry," he said. He added that the savings for banks should work out to be the same as under the original bill.

To qualify, banks must have under $1 billion in assets and at least 60% of lending to the community, and have shareholders in the home state or a contiguous state.

Charles DeWitt, legislative director for Campbell, said the bill is in the final stages of preparation for introduction, including getting scored, or having the amount of money the Treasury will lose estimated to get a sense of the effect on the national revenue. Although Campbell feels strongly about the legislation, which has been pushed by several state banking associations, he will need to find some other piece of legislation to offset the loss from giving bankers tax credits. DeWitt said the bill would probably be referred to the House Ways and Means Committee, with perhaps some time in the Joint Tax Committee, which is the tax version of the Congressional Budget Office.