WASHINGTON — There’s a lot of really good tax help out there, but choosing the right solution for your situation can be as difficult as deciphering the tax code.
If you have relied on the IRS for help in the past, you’ll want to make alternate arrangements: The IRS said it won’t be able to handle even half of the normal call volume it gets this time of the year. And those who do get through can expect wait times of more than 30 minutes.
Tax preparation software such as TurboTax keeps getting better and easier to use, and for most people who get a W2 and don’t have other sources of income or complicated deductions, it’s a good solution. There are situations, though, where you need expert advice, and knowing when to call a certified public accountant or tax pro can save you significant time and money.
So here at Glassman Wealth, we did just that. We spoke to two experienced and distinguished CPAs in the D.C. area: Lauran Penn, from Snyder Cohn, in Bethesda, Maryland who specializes in divorce planning and estate and family wealth planning; and Robert Baldassari, from Matthews, Carter & Boyce, in Fairfax, Virginia who specializes in closely held businesses and medical practices.
They outline a few examples where someone should reach out to a CPA or other qualified tax professional for help.
1. You own a business or are a partner in a business in multiple states
The D.C. area presents challenges for taxpayers because of the close proximity of Maryland, Virginia and the District. It’s not unusual to find a business owner or partner who lives in one area, such as Maryland, and works in another, such as D.C.
Baldassari, whose clients include doctors and lawyers with practices in multiple states, says that when you have multi-state activities, it’s time to hire a tax professional.
“I have a group of doctors that are in a partnership, and while they live and work in Virginia, their partnership has offices in Maryland and Virginia. They have to file a Maryland tax return even though they don’t go into the Maryland office,” Baldassari says.
He also points out that if a business owner lives in one state and has a business in another, that owner gets credit for the taxes paid to the non-resident state.
2. You’re getting a divorce
There are many advantages to seeking tax advice before the settlement of a divorce, including whether alimony or child support is paid, whether to sell a house that is owned jointly by the couple before the divorce is final, and even what investments each person will receive.
“For alimony or child support, it depends on who’s paying and who’s receiving it. Paying alimony is more advantageous than child support for the person who’s paying it because it’s tax-deductible. It’s considered income, and therefore taxable, to the person who’s receiving it,” Penn says.
In structuring a divorce, Penn advises that the couple think about how they want to handle a home they own jointly.
“If they sell it before the divorce is final, they would both get a $250,000 exclusion from their income. Should one person take over the ownership of the home, then that person will only receive $250,000 as an exclusion. They need to consider what affect this decision will have when they eventually sell the home,” Penn says.
Divvying up investments in a stock portfolio can also complicate matters. If some stocks have a higher cost basis than others, or other stocks have losses, all of these things need to be considered to treat each person equitably.
“These are the complicated issues that a tax professional should take a look at and that people shouldn’t try to do on their own,” Penn advises.
3. You own rental property
If you own a condo or home that you rent out on a continual basis, or a vacation property that you use for both rental income and personal vacations, it’s best to consult with a CPA about what you can and can’t deduct.
Rock-bottom interest rates and appreciating property values have created refinancing opportunities for rental property owners. How you use any equity that you take out when you refinance will determine the tax deduction you will receive.
“If someone refinances a rental property and takes out $100,000 and uses some of it to pay off a credit card, some to put into investments and another portion to renovate their home, we have to go back and break it down as to what the money was used for,” Baldassari says.
The IRS has tracing rules, and not all of the interest on the new loan may be tax-deductible if used for personal reasons, he adds.
4. You work from home
Calculating the amount you can deduct for a home office is easier now that the IRS has essentially created a simplified option for home offices.
“The simplified option is based on the square footage of the office. You can deduct $5 per square foot, not to exceed 300 square feet, without it being a red flag for an audit,” Penn says.
“Your mortgage deduction and real estate taxes remain intact, and there’s no depreciation recapture when you sell your home.”
This works well if you have one room that you use for business in your home. Keep in mind that there are limitations if you use this method; for example, there’s no home depreciation deduction. In some situations, it makes sense to do the calculations to see whether it will result in a bigger deduction, Penn says.
5. You pay the medical expenses of a family member
With an aging population that’s living longer, medical and nursing care expenses can quickly grow beyond their means to pay. Families that step up to help their parents or other loved ones may be able to deduct some of those expenses.
“Most people think they can’t deduct medical expenses they are paying for a parent or loved one if that person is not their dependent, but in many circumstances, they can,” Baldassari says.
One of his clients is paying the medical bills for his sister who has Alzheimer’s. His sister is not his dependent, yet he pays for most of her round-the-clock nursing care. Some of the annual support he provides — in his case about $100,000 a year — is deductible.
“There’s a set of rules for situations like these. They’re not easy to find, but a CPA or an enrolled agent would know about them,” Baldassari says.
Penn says the buzzwords people need to know to seek professional tax help are divorce, international accounts or businesses, multiple states and multiple businesses.
Not all tax preparers are qualified to handle complex tax situations, Baldassari says. Certified public accountants have completed advanced education and are bound by continuing-education and ethical requirements.
Penn and Baldassari agree you need to seek out tax advice before the end of the year, when there’s still time to take advantage of any planning. Come April 15, it may be too late.
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