Local experts offer tips for making filing season less taxing

There is a line from Margaret Mitchell’s epic Gone With the Wind that

says, “Death and taxes and childbirth! There’s never a convenient

time for any of them.”

That statement may seem a bit harsh, but the reality is that most

tax-filers look forward to the April 15 tax deadline with the same

enthusiasm one usually reserves for the aforementioned death and

childbirth.

Whether that new tax bracket you finally landed in leaves you

owing Uncle Sam a chunk of your increased earnings, or you are

gleefully planning fun and frivolous ways to spend your refund (think

flat screen vs. weekend in Vegas), the simple act of filing a tax

return can produce panic in the most fiscally savvy adult.

To help navigate the maze of new laws, payment options and other

tax-season stress-inducers, local experts Rudy Baron, CPA and

President of Baron Accountancy Corporation and Christopher Wynkoop,

Wynkoop & Associates, CPAs, offer answers to some common questions.

Q: What are the advantages of using a professional tax preparer?

RB: The tax laws are just too complicated. The IRS instructions

say the average time to complete Form 1040 is six and one-half hours

and many hours more to complete the various attachment forms. That’s

just to complete the forms, not to do the research as to what is

deductible and what is not. That’s projected to take another three

and three-quarter hours for Form 1040 alone. Your time is worth much

more than the fee to prepare your returns. The solution is to use a

professional tax preparer. Ask your friends or business associates

for a referral or call your local Chamber of Commerce. The fees a

professional charges should be more than offset with tax saving

ideas.

CW: A tax preparer, using his knowledge of the latest tax laws,

can prepare your tax return to the fullest compliance of the tax

laws. He can also educate you with tax planning ideas that can save

you money in upcoming years. While no one can guarantee that you will

not be subject to an audit, a tax return prepared by an expert stands

the best chance of receiving a No Change at audit if one takes place.

Novices using tax preparation software answer the questions the

software proposes, but may fail to consider other deductions ideas

that are available.

Q: What are some common write-offs that filers may not be aware

of?

RB: Medical expenses, state income taxes, county (real and

personal property taxes such as boats, RVs) vehicle registration

fees, home and second home mortgage interest, points on some

refinances if used for home improvements, cash and non-cash

charitable deductions and various miscellaneous deductions (subject

to some limitations). A contribution of $2,000 to Coverdell

educational savings accounts may be made until April 15, 2003. Up to

$2,500 of interest paid on student loans and up to $3,000 of

qualified tuition and school expenses can be deducted. Teachers and

other eligible educators can deduct up to $250 for money spent on

classroom materials, books, computer equipment and school expenses.

The maximum contribution of traditional IRAs and Roth IRAs has

increased to $3,000. Taxpayers age 50 or older can made additional

catch-up contributions of up to $500.

CW: Common write-offs that filers often overlook include payment

of prior years’ state income tax and DMV fees, proper deduction of

expenses related to ownerships in corporations or businesses, cars

and homes, dependency deductions, proper deduction for points paid on

home loans and education related expenses. Filers should also be

aware of the proper rules related to the deduction of home mortgage

and points.

Q: What are some of the biggest mistakes filers make?

RB: The biggest mistake is the lack of proper cost basis

information for securities sold. This is caused by the lack of record

keeping as to the original cost plus the value of any dividends that

are re-invested. When you receive dividends and pay the tax on them,

then re-invest them -- that amount is added to your cost basis. Using

tax preparation software is useful for a simple return. However, for

a more complex return, taxpayers do not understand the questions they

are answering and miss certain tax benefits. Most taxpayers are not

aware that if you use an SUV more than 50% for business and if it has

a loaded rating of more than 6,000 pounds, it qualifies for an

expense deduction of up to $24,000 the first year, plus other

depreciation deductions. However, if you did not make the election to

expense in a prior year, it is too late now. The election must be

made by the due date of your return.

CW: Many filers actually make mistakes with their filing status.

For instance, filing married filing joint, married filing separate or

filing single. Filers also make improper deductions of business

related expenses, fail to maximize on IRAs or pay their California

tax estimates for the wrong year, denying themselves the maximum

Federal benefit.

Q: How should you invest your tax windfall?

RB: If the President’s invest in tax reduction proposal passes and

dividends are no longer taxed, look to some higher yield preferred or

common stocks of quality corporations. But the windfall will probably

not be too large, so I might invest in a Caribbean, Mexican or

Alaskan cruise!

CW: Tax savings plans such as IRAs or Roth IRAs should be heavily

considered. Your investment advisor can assist you with choosing the

best investment vehicles to use in these plans. Paying down the

principal on your mortgage is also a smart idea. In the long run,

this may appear to be a poor tax planning idea (loss of mortgage

interest deduction), but is a great equity move.

Q: What payment options are available?

RB: You may pay by check, money order or credit card. If you pay

by credit card, a convenience fee will be charged based on the amount

you are paying. Fees may vary between the providers. If you cannot

pay the full tax, you may make installment payments for up to 60

months. However, you will be charged a late payment penalty on the

tax not paid by April 15, 2003 even if your request to pay in

installments is granted.

CW: Pay via withholdings from your paycheck. This is the best

option as payments are considered, by the IRS, as being made evenly

throughout the year and therefore, there is less chance of your

receiving an underpayment penalty. Also, pay quarterly estimates.

Estimated payments are due on April 15, June 15, September 15 and

January 15 of the following year. Use form 1040ES and 540ES and mail

directly to the IRS and the state, postmarked by these dates. Pay

estimates whenever you have the money. Although this may subject you

to some underpayment penalty for untimely payment of taxes, it is

better to pay what you can and have less to catch up on at the end of

the year.

Q: What is the best way to ensure a refund?

RB: You can ensure that you will receive a tax refund in the

upcoming year by over withholding or paying estimated payments that

are too high. Some taxpayers prefer to do this because it is a forced

savings program. But why give the government an interest free loan?

The better alternative is to do a tax projection for 2003 and pay in

amounts that will allow you to break even in April 2004. However, if

you find that you owe a higher amount for 2003 than you paid for

2002, you may want to meet the “safe harbor” rules for estimated tax

payments to avoid any underpayment penalties.

CW: The best way to ensure a refund is to be sure you have enough

paid (or withheld) during the year. This is best done by tax planning

for the year and ascertaining that enough taxes are paid in. Some

people like to get a refund, some don’t want the government to be

using their money so they do not want an excessive amount withheld

and others are happy to break even when they file their return.

Q: When should you file for an extension?

RB: You should file for an extension when you have not assembled

all the information necessary to complete your return. An extension

of time to file is just that, it is not an extension of time to pay.

Make the best estimate of how much you are going to owe and send it

in on or before April 15, 2003. If you underpay, you will be charged

interest and a late payment penalty.

CW: Returns should be extended when, by April 15, you do not have

all of the information to prepare a complete and accurate income tax

return. Remember that an extension extends the time to file a return

but not the time to pay. Therefore, extending merely because you do

not have the money to pay by April 15 may still subject you to

penalties for untimely filing and late paying. If you plan on doing

an IRA, remember that it has to be funded by April 15 even if you are

extending your return.

Call Rudy Baron of Baron Accountancy Corporation at (949)

640-0588. Call Christopher Wynkoop of Wynkoop & Associates, CPAs at

(949) 851-1632.