Q:

Subject: false choice

It seems like every year I’m faced with a false choice: fill out my own taxes with the help of tax software like TurboTax or work with a professional.

This isn’t CPA bashing. $200/hr to fill out forms seems pretty steep, but I would pay double that for advice that really saved me money. I would vastly prefer to work with a tax accountant who adds value by improving my tax return.

So is there a way to work with a CPA in combination with a package like TurboTax?

A:

You’re exactly right, and that is precisely what I tell other tax pros who are worried about TurboTax and other DIY tax software costing them a loss in business.  It is a waste of time to pay someone to just fill in tax forms without adding any of their knowledge and expertise, when you can just use TurboTax to do that.

As I’ve also said on several occasions, I have had some clients use TurboTax instead of my normal organizer as a means of sending me their year-end data. When I am finished, the final returns usually bear little resemblance to the original TurboTax version because I move things around and fine tune the return to be both legally correct, as well as coming up with the lowest tax possible.

If you haven’t already done so, you should check out my tips on how to select the right tax preparer for you.

Good luck.

Kerry Kerstetter

 

Q-1:

Subject: Question about contributions to an IRA

 

My question has to do with the contribution to a spousal contribution.  Here is the background.  My spouse does not work, and every year I have been making a  contribution to her IRA because my salary was under the limit.  I took that amount as a reduction to my AGI.  In March 2005, I made a contribution to her IRA. I now may have a problem for the tax year 2005. 

 

  Last year (2005), I got laid off from my work in August.  When this happened, I took a large part of my pension, and this caused our taxable income to go to $164K.  My question is whether I can take the contribution to my spouse’s IRA as an adjustment to my taxable income on line 32 of Form 1040.  I think I can. I am basing this on the fact that I was still unemployed at year end, and so neither my spouse nor I was covered by an employer retirement plan from August through December, and I thought the rule was that I can  take a total deduction for the contribution as long as I nor my wife had an employer retirement plan for any part of the year. Am I correct, or does my income level this year mean that I have to treat the contribution as a non deductible IRA contribution?.

 

  Thanks for your help.

A-1:

Unfortunately, your interpretation of the rules regarding being a participant in an employer sponsored retirement plan is completely opposite from the way the IRS and the courts interpret it.  If you or your spouse were covered for even one single day during the year, the elimination of the IRA deduction for evil rich people applies to you. 

I have always hated this rule, especially when it applies to people who are unwilling participants in company plans from which they will never receive much of any actual retirement benefits.

You should be working with a professional tax advisor, who may be able to help you get your AGI below the magic $150,000 level where the evil rich penalty is assessed.  For example, a loss from a side Schedule C business would help move your AGI in the right direction.

Otherwise, as you noted, you are limited to the nondeductible IRA since the Roth IRA has the same penalty on evil rich people.

Sorry to be the bearer of bad news.  It is very unfair; but that is how our tax code is set up.

Good luck.

Kerry Kerstetter

Q-2:

Dear Kerry,

 

     Thank you so much for this answer.  As a follow up question if I may, I want to know how to report the withdrawal from my employer’s 401K plan that I had to take when I got laid off.  Do I report it as “pension and annuity income” on line 16 on the 1040, or do I report it as an IRA withdrawal  I don’t think it is an IRA withdrawal, because I think a 401K plan is not a traditional IRA, so I was going to put it on line 16.  Am I correct?

 

      I want you to know that I enjoy your blog site.  It is one of the best that I have ever seen. 

 

     By the way, I totally agree with your comments in the attached e-mail.

 

     Have a wonderful day.

A-2:

A 401k is different than an IRA; so it is reported on Line 16 of the 1040.  Put the full amount in Box 16a and the portion that you didn’t roll over into an IRA or other retirement plan in Box 16b.

You didn’t say how old you are,  If you are under 59.5 years old, you will also need to include the taxable 401k withdrawal on Form 5329 (as well as state equivalent) to compute the early withdrawal penalty, which will then go on Line 60 on Page 2 of your 1040.

Again, it would be wise to work with a tax pro, who may be able to help you reduce the taxes and penalties.

Good luck.

Kerry

 

Q:

Subject: Great S vs C article

 

Hi,

 

This is a very good article.  But I still don’t know if I should covert to S corp or not.  I work full time.  And I also have a C corporation.  I have been doing very little business since I got my full time job, this year the business made about 5300 and I actually had to put in 3500 from my pocket into it.  I just finished doing the Turbo Tax Business for it, and it turned out to be 1300 loss.

 

So if I understand this correctly, and this was an S corp, I could somehow show that loss on my personal return? 

 

Do you think it would be best for me to convert to S corp?  Would it make any difference at such a small level and I’m the only owner.

 

Also is there anywhere I need to say on my personal or corporate return that I loaned my business 3500 last year?

 

Thanks,

A:

If you are serious about operating a business, you absolutely need to be working with a tax professional who can properly guide you.  No information on the internet or from strangers like me can do the proper job for what you need.  Neither can a tax prep program like TurboTax substitute for competent professional guidance.  This is especially true with corporations, about which you obviously don’t understand the fundamental basics.

As I’ve explained on my website, C corps pay taxes, while the net income or loss from S corps is passed through to the 1040s of the shareholders. 

The other thing you need to do ASAP is get your corporation properly set up on a double entry accounting system, such as QuickBooks.  Corporations are required to include balance sheet info as well as a P&L with their annual income tax returns.  Loans from shareholders will be disclosed in the Liabilities section of the Balance Sheet.

Good luck.

Kerry Kerstetter

 

Q:

Subject: Help.  I am lost.

HELP!!!

 

The following is taken directly from this page address on your web site.  

 

“{The following information is not intended to replace the services of a professional qualified income tax consultant who can better understand how these issues fit into your particular circumstances.  Trying to set up and/or operate a corporation of any kind without competent  professional guidance is asking for serious trouble.}

 

“I continue to hear attorneys and other allegedly knowledgeable authorities recommending the use of Subchapter S corporations, when that ends up costing the clients a lot more in tax dollars.”

 

In the first paragraph, you are telling me (an owner of a C corp.) to operate without competent professional guidance is asking for serious trouble.  Then, in the next paragraph, you tell me about “allegedly” competent professional guidance that could end up causing me serious trouble.

 

How in the world do I discern between the competent professional guidance and the alleged knowledgeable professionals?!

 

I have been in business for just over a year.  I need a competent attorney and accountant who understands C corporations…particularly a C corporation that is just me…who is an artist.  So how do I find that COMPETENT attorney and accountant?  The phone book???  Referral by someone who does not really know if the attorney or accountant is competent or competent in regard to C corps???  Utilization of the VLAA (Volunteer Lawyers and Accountants for Artists) who may or may not be competent…at least in regard to C corps or my particular situation???

 

Like the characters on the hit ABC tv show…I am lost.

A:

That has always been a dilemma. 

Unfortunately, we don’t have anyone to whom we could refer you. If you haven’t already done so, you should check out my tips on how to select the right tax preparer for you.

Good luck.

Kerry Kerstetter

Follow-Up:

Kerry, thank you for the reply — much appreciated!  I checked out the link you sent — good stuff.

All the best,

 

Q:

Subject: nice to have found you

Kerry,

I have  a rather unusual background. I am a CA CPA who left the field about six years ago after getting my audit hours from KPMG and then went to work as a Longshoremen  at the Port of LA. I still work at the docks but my very flexible schedule allows me to pursue other interests. I am currently working for a small tax firm 35 hours a week helping prepare all types of tax returns. I am pretty rusty and was wondering if you had any suggestions of tax courses you can recommend that will help me improve my tax & acct skills.

God Bless America

Thanks

A:

While the H&R Block class does a good job of covering the basics, there is no training of any kind that can beat hands-on real life experience.  Your best bet would be to work with a tax prep office that does a wide variety of different kinds of tax returns.

My current favorite reference book is The Tax Book.  Having a copy of that with you will speed up your learning process tremendously.

Good luck.

Kerry Kerstetter

 

The IRS threatens church leaders who talk about politics.

With the frequency of software updates nowadays, it is a major pain to reinstall a program from the original CD and then have to spend additional hours going though all of the updates that have been released since the original disc was produced.  This has long been the case with QuickBooks. 

I just received the latest copy of the QuickBooks ProAdvisor Newsletter, and it looks like they have addressed that very issue.  According to this announcement, they are making it possible to download and install the most current version of the 2006 programs directly from their website. Of course, this will only be useful for those with very fast broadband internet service since the files will be humongous. 

As an experiment, I clicked on the link to download the current version of QuickBooks Pro, the least expensive QB flavor.  (The Simple Start version doesn’t count because it is not a true QB program and is a big waste of money.)   

It shows the file size as 463 MB, which would take all night on the slow DSL service we have up here on our mountain top.  Those with fast cable access should be able to download the file in much less time.