Every year it seems our tax system is getting more complicated. I am always looking for that simple tax return that is so basic that I feel bad charging my customer. I will ask them just to cover the costs and call it good. But that is not ever the case. No matter how simple the tax situation is, there is always something during the tax interview that throws a wrench into my vision of simplicity bliss.
One example is home sale right. You qualify for the $250,000 or $500,000 capital gains exclusion and everything is going great. My customer is thrilled, and I am happy because I might receive compensation. Then I realize my customer is self-employed and uses actual costs to claim a home office deduction. Oh no, that means depreciation recapture on the home. Now the tax return requires form 4797, so much for a simple tax return. Now the home sale is partially taxable because of the depreciation taken. Now my customer is not getting a refund but instead they may owe. Here is where they shoot the messenger. The tax honeymoon is over fast.
Second, example is a simple short-term rental you know your typical Airbnb or Vrbo. Just file a 1040 with a Schedule E, easy Peacy. Now I start the schedule E, which is basically a profit and loss statement for the rental. My first question for any vacation rental is "is it purely rental or is it mixed use?" 99.99% of the time the answer is rental only. Really? You have a vacation house at the beach, and you never use it personally. Yet your social media posts show you throwing parties all summer long? Now things are getting complex both tax wise and ethically. Now I ask my customer how many days personal and how many days rental. Once again, our tax honeymoon is feeling strained. I inform my customer that he has two choices the Bolton method or IRS method to allocate expenses. Once again, my customer insists he never uses it personally and I see my payday drifting away. Then I proceed to accounting for the depreciation and I see he is using the residential 27.5 years. I inform my customer that short term rentals require the commercial depreciation 39 years, and he has been doing it wrong all along. Now another simple return has turned into a web of complexity, and I find myself with one less customer.
Third example is a college student. This should be super simple. Normally the student is a dependent and claimed on their parents return. Super easy right. Not so fast. The parents tell me the return is super simple, just file their 1040 and please prepare for no additional cost prepare our sons. Cool, I think this is super easy. Mom and dad get the credit for the American opportunity act and the student just files for his part time job at Starbucks. Cool, now I go and interview the student. First, I find out he is on scholarship. Dad did not mention this, and a full scholarship including room and board. Oh no, tuition and books are tax free, but food and housing are usually taxable. I inform mom and dad that their son will most likely have to pay taxes on the room and board. Now, their son will most likely have a tax liability and owe tax. This just the tip of the iceberg, because we discover the student fully supports himself and parents are not paying for any of the cost of his college career.
So much for his parents getting a tax credit. This is why it is so important to do tax planning at least 12 months in advance, April 15 is not the time to tax plan for the previous year. Remember everybody's tax situation is unique and it's probably more complex than it appears at first! Please contact me and let me handle your simple or complex tax challenges. Ray Wellman admitted to practice before the IRS
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