Tax Guru – Ker$tetter Letter

I have been receiving questions like this one from Ohio CPA Dana Stahl from other tax pros every year since the 1980s:

I’ve seen lots of advertising by TurboTax on TV lately. I wonder if this may cut into our tax prep business to some degree, as has been predicted many times by various commentators (who say user-friendly tax software will take away much of our market!). One story concerning me: I heard from a tax client who said she wasn’t coming back this year. She said she took my data from her 2003 1040 & inputted it into TurboTax, which resulted in an additional $7 refund. Therefore, I must have screwed up when I should have gotten her another $7. I told her to send me a copy of that 1040, and that this was probably due to rounding or something. Oh, well, another one bites the dust.

My reply:

Assuming that your client’s TurboTax actually came up with the exact same figure for taxable income as your program did, a slight difference in the tax is quite possible based on the method the programs use to calculate it. If they do an exact dollar percentage calculation, there will be one figure. If they use the IRS tables, which use $50 wide brackets, there will most likely be a slight difference.

I have seen the tons of TurboTax commercials on TV. My opinion on TurboTax and other consumer tax prep programs as a threat to our profession hasn’t changed one bit since they were first made available back in the 1980s. If there was ever a perfect illustration of the old GIGO (garbage in, garbage out) maxim, tax prep software is it. This covers all tax software, including the heavy duty and very expensive programs that we professionals use.

I have never discouraged my clients from using TurboTax. In fact, I used to have several clients submit their annual tax info to me on a TurboTax print-out instead of my normal organizer forms. I would then enter that data into my tax program and the bottom line numbers never came out the same because I was able to use my knowledge to better enter the info to reduce the clients’ taxes. I don’t have as many doing this any more, as we have mandated most of them to use QuickBooks and to just send me a copy of their QB data file.

As I’ve said since the 1980s, form filler tax services, which just enter numbers onto tax forms (manually or via computer) with no thought as to the various options that may be available, do have a lot to fear about losing business to software like TurboTax. This could very well be the case for the super simple 1040A and EZ clients, which are the bread and butter of the assembly line tax prep outfits. However, we all know that with each additional tax schedule and type of transaction to report, there are dozens of options for how they can be reported in order to minimize the tax hit. This takes much more brain power than the form fillers have and makes those of us who keep up on the tax rules worth the big bucks we charge. I know it sounds crass, but clients who are too dense to understand this aren’t who want to be working with.

Just as with the emphasis on doing your own work and not sending it to India, you may want to highlight something like the fact that you and your staff are entering more than numbers into your computers. You are entering your years of experience and vast knowledge, things that are not included in cheap do it yourself programs.

Anyway; those are my thoughts on that.

Kerry

Indiana GOP Governor Proposes Tax Hike – How does this quote differ from what we have long heard from DemonRats?

“I ask the most fortunate among us, those citizens earning over $100,000 per year, for one year, to pay an additional 1 percent on the income they receive.”

This is too much like Dick Gephardt’s classic description of people who do well as “winners of life’s lottery.”

Bush 2006 Budget Will Not Address AMT or ‘Other Tax Policy Issues‘ – it seems that there’s a limited amount of political capital available for Bush, so he has to prioritize and Social Security reform appears to be winning the contest for his attention at this time.

Bipartisan Group Pushes Permanency for State Sales Tax Deduction – Otherwise, we will only have it for 2004 and 2005 1040s.

Homeowners can expect bigger property tax bite

Q:

Hello, I saw your website and was hoping you may be able to tell me what the allowable tax free gift amount is for 2005? Has it increased from the $11,000 in 2004 to $12,000 for 2005?

Thank you kindly,

A:

The annual exclusion is still $11,000 for 2005.

Unlike some tax items that are adjusted each year in small increments to account for the inflation rate, this is only allowed by law to be adjusted in $1,000 increments when the cumulative CPI change since the previous increase warrants it.  This means it may be another few years before another hike is required.

You can see more on this at the IRS’s website.

Kerry Kerstetter

CBO Forecast Shows Runaway Spending—Not Tax Cuts—Causing Deficits – Why it always makes me sick when the media and their Fellow Travelers just readily accept the premise that Bush’s tax cuts created or worsened the deficit.  As was the case after the Reagan cuts of the 1980s, the rate cuts resulted in increased revenue and prevented the deficit from being even worse than it would have been. The drunken sailors in DC need to be stopped in their wild reckless spending sprees if there is any hope of ever seeing anything resembling a balanced budget again.

It has been no secret that one of the issues that I have long felt strongly about is the Social Security Ponzi Scheme.  Ever since we analyzed its financial criteria in my very first college accounting class in 1973, I have understood what a sham it is for most people.  We compared it analytically with other similar programs, such as private annuities and life insurance policies, and found it was far worse from an investment perspective than any of the other options.  That was almost 32 years ago, and it has become even worse since then.

For the past several months, one of the best places to find articles and links to news coverage of the Social Security mess has been at the Club For Growth’s blog.  I make a point to check it every day, as well as subscribe to their RSS feed via my Bloglines account.  As the volume of information on this important topic has exploded, with so many outright lies, the Club has established a blog style web site, Social Security Choice, devoted exclusively to discussing the Social Security system from a free market capitalist approach. 

Andy Roth of the Club has done an outstanding job, in a very short time (I just heard about it last Friday), of assembling an interesting mix of people, including a certain opinionated CPA, to write on this topic from our various perspectives.  As I do in my own blog, I intend to address the Social Security issues from the viewpoint of a real world tax practitioner and from how they affect my clients, readers, and seminar attendees in regard to the payment in of the SS taxes, as well as the maximization of the benefits; all very important issues that I have been dealing with for 30 years now, and continue to do on a daily basis.

I do feel very honored to have been invited to join this esteemed group to contribute to the capitalist side of the debate on improving the Social Security system.  It will be an uphill battle getting the capitalist message out to counter the wider coverage that the liberal media have.  However, as was proven during the elections last November, the new media outlets, such as blogs and talk radio, can overcome the lies and Socialist agenda of the conventional media.

To avoid unnecessary repetition, I will only be posting my thoughts, as well as comics, on the SS issue on this new blog and will continue adding other tax and financial items here on my personal blog.  I suggest that you bookmark this new site, and/or add its RSS feed to your reader in order to keep up with the truth on this very important issue.  I have also added a link to it on the very top of my blogroll on the right side of this page. 

The volume of lies and distortions will only get larger in the coming months, as this matter works its way through the legislative/digestive process that our rulers in DC use; so having at least one source that you can trust for accurate information should help us all be better informed and ready to recognize the lies that will continue to pile up from the Left.

‘Survivor’ Winner Arraigned on Tax Evasion – The latest on someone who portrays himself as being so smart, yet is really so stupid.  All of the stories I have seen on this “accidental oversight” of over a million dollars of income give the impression that Hatch prepared his own tax returns.  This is actually a positive angle to the story; because I would hate to think that there was a professional tax preparer who would be so stupid and oblivious that s/he would fail to include this income that everyone in the country knew about.