Before you know it, tax season will be upon us. Here are a few of the most common mistakes and issues Chet Burgess deals with. Burgess is an enrolled agent who also owns Brookwood Tax Service in Atlanta Ga.

Q: What are some of the biggest mistakes individuals and small business owners make on their tax returns?

A: Believe it or not, some of the most-repeated tax return mistakes include failing to sign the tax return, failing to attach W-2’s and other income documents and errors in the names or Social Security numbers of taxpayers and dependents.

Over the past year or so I have reviewed prior-year returns of several new clients with recent rental real estate investments who either miscalculated the correct depreciation deductions for the properties or, in several cases, took no depreciation at all on their returns. On a typical residential rental property, the annual depreciation deduction usually amounts to several thousand dollars.

Q: Can someone take off-the-shelf software, like TurboTax, and use that to compute their tax return? Or, is the IRS Code so complicated that you have to hire a professional? (Full disclosure: My husband and I use TurboTax to file our family’s tax return and have for many years.)

A: The major off-the-shelf tax software packages work very well for taxpayers with W-2 income, who own their own homes and have a few bank accounts or mutual funds as investments. Those software packages are generally written to try to “fit” many of the most common tax situations as broadly as possible.

As your financial life gets more complicated, and the financial issues become more numerous and more complicated, it’s possible that the software may not handle all of these issues correctly. Or, the software will have a programmed tendency to offer a “default” choice rather than presenting options to the user.

Examples of options that may require some additional side calculations include:

Selecting the most beneficial education tax break for college expenses among the Hope Credit, the Lifetime Learning Credit and the Tuition and Fees Deduction;

Trying to decide if a traditional IRA or Roth IRA would be the better choice, weighing both current-year and future projected tax benefits;

Running calculations for a married couple using both married filing jointly and married filing separately to determine which filing status is best for that couple in that year;

Making proper return entries for securities investments, including researching basis for stock and bond sales, knowing how to enter original issue discount on a bond or if such an entry is required, understanding the various tax issues of publicly-traded real estate or oil and gas limited partnerships, stock and index options, margin interest and the investment interest deduction;

Advising clients on the proper tax return reporting of incentive and non-qualified employer stock options and planning techniques available to minimize the potential impact of alternative minimum tax on the exercise of ISO’s;

Setting up proper depreciation schedules for rental real estate investments or knowing the rules for reporting income and deducting costs of occasional rentals of a vacation home;

Determining if a business owner can benefit from claiming the Section 179 first-year write-off for purchase of business assets — in fact balancing first-year and later-year depreciation options for any business asset is an area of tax planning where an experienced tax pro can usually add considerable value to the equation;

Allocating income, personal exemptions and itemized or standard deduction amounts between states for taxpayers who moved from one state to another during the year.

When you have more complicated tax issues, there may be an opportunity to do some tax planning, or choosing among several possible avenues for which there is more than one technically “correct” answer with varying possible tax outcomes in the current year and potentially in future years.

RESOURCES

Chet Burgess, EA
Brookwood Tax Service, LLC
4 Montclair Dr., NE
Atlanta, GA 30309-1527
404-915-6268
www.brookwoodtax.com