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January 2021 - Penny Wise

Each year, when the tax season rolls around, we get a number of new clients who want us to prepare their tax return.  Most times, they had been preparing their tax returns themselves, but the returns became too complicated and they needed professional help.  Unfortunately, we find that that these taxpayers often made mistakes in the earlier years that led to the overpayment of taxes and the potential for being singled out for audit.  Among the more common problems are:

  • Not taking legitimate deductions, such as a deduction for a home office, for fear that it might trigger an audit

  • Failing to consider “bunching” of deductions in alternative years to maximize “itemizing” versus use of the enhanced standard deduction.

  • Failing to deduct tax deductible expenses, especially travel, tolls, tips, taxi and other fares for lack of a receipt
  • Reporting income that does not need to be reported such as tax-exempt income or rental income from a vacation home that's rented less than 14 days per year
  • Paying IRS penalty notices out of fear, even if the assessments are incorrect
  • Failing to take deductions such as for charitable contributions because the credit card charges have not been paid until the following year

The combination of these mistakes plus a lack of proper tax planning caused these taxpayers to pay considerably more income taxes than necessary.  It wouldn’t be the first time we spent $700-$800-$900 for conferring/meeting/preparing even a 1040 return for an individual where they had never spent such before only to see they messed up or lost opportunities of $1,500-$2,000. Even when there are losses, an individual would want to “shelter” other income, that of their spouse’s, ensure getting “credits”, etc.  What's more, often the extra tax far exceeded the cost of the professional tax preparation.  Without wishing to sound self-serving, unless you are highly conversant with the tax code, you'll often come out ahead with professional help from a CPA.

Does Abo and Company have all the answers?  Nope (although we have many).  In the words of Marty Abo, “…probably one of our best attributes is that “we know what we don’t know”.  Still, when all we can do is raise the issue, unsure of all the ramifications, we embrace striving to help you in finding the answers.

Oh yes, individuals can often use preparation of their 2020 tax returns as a springboard for going over several tax, financial or estate planning issues we tax professionals might suggest.  They even consider tax projections to at least see what tax planning strategies, if any, can be implemented for 2021 before December 31, 2021.  We just dread having to possibly say even as far away as April 15, 2022 “…this is what you could have done”.  A bit beyond the concern for just “preparing this year’s returns” but we thought you should know