Fabulous Financials

The Tax Man Cometh…For Real This Time

I just got a call from my new accountant. He told me there’s good news and bad news, then he asked me, “which one do you want first?” Ugh! Don’t you hate that!?! I’m like, “Dude, stop playing with me!” but I was nervous as hell. LOL!

The Good News

My amateur calculations were WRONG. I mean, REALLY wrong. Ha! Ya see, I know what I know but I also accept the harsh reality that I don’t know everything. For the things I don’t know (uh, just about anything outside the realm of money and parenting), I prefer to stay in my lane and pay someone else to do it for me. But - I’m not one to accept ignorance and totally rely on someone else’s word. If I’m paying you to provide a service, I’m also paying you to educate me. Hmph! What I look like? I don’t plan to need you forever. LOL

In an attempt to understand what I did wrong, here are a few of the mistakes I made:

1 - When calculating my rental income (Schedule E), I deducted the expenses directly related to the rental (i.e. repairs, cleaning, advertising, travel, etc.). However, since the house was my primary residence, I didn’t know I could deduct the mortgage interest, insurance, and taxes paid after converting to a rental.

• This change significantly reduced my AGI.

• Not only did this change significantly reduced my AGI, but after removing mortgage related expenses from my itemized list, I was able to take the higher standard deduction.

• Since this change reduced my AGI, I was also able to qualify for the student loan interest deduction, the upcoming tax rebate, and Roth IRA eligibility.

2 - My rental property is a business. Well duh! But I knew nothing about depreciation (Form 4562), determining the “basis” value, applying the MACRS formula, etc.

3 - I reported my side business income from freelance and online revenue (Schedule C) but forgot to calculate the self employment taxes (Schedule SE) to pay social security and medicare taxes.

4 - Since I itemized for the first time last year, I had to claim my state refund as federal taxable income. However, when filing state taxes, the calculation begins with the federal AGI, but I forgot to remove the refund from state taxable income.

5 - Since I claimed partial residency in two states, I had to report how much income was earned in each state. It was easy to pull the info from each W-2, but for everything else, I applied the weighted percentage based on the division of my W-2s. Umm, how about no!! You have to actually calculate that stuff. Turns out, I earned way more in VA than I did in MD, which significantly affected both states’ calculations.

6 - When claiming partial residency in two states, I didn’t know I could apply the taxes owed to one state as a deduction for the other state.

7 - I also didn’t know if you own property and generate income in a state, even if you don’t live there, you have to file a non-resident tax form. So I had to file two different forms for MD.

8 - My relocation package should not have been included at all. Although I do need to claim it as income, it’s handled separately. I have to give my employer a copy of all W-2s and federal forms, then they will file it for me using special rates that are published in April. Who knew?!?

Those were just the big ones, but there were lots and lots of lessons learned. Did I tell you how much I love this accountant? Not only is he sharp and thorough, but he took the time to explain everything to a nagging and inquisitive client. Yea, that would be me. LOL Oh and his bookkeeper is sweet little old lady. I swear she looks about 80 years old. I can’t help but wonder how in the hell she’s still crunching numbers, but who am I to question her skills? I’m not a hater. LOL Anyway, she said she has something for BabyGirl when we stop by on Monday. Awww.

The Bad News

He reviewed my previous returns and found a few errors. He strongly recommends that I submit amended returns and pay the additional amount owed to clear the air. The total due is only a few hundred dollars, so I told him to make it do what it do. Actually, I said “Make me a honest woman, baby!” LOL

He also has a few recommendations for 2008 and beyond that he’d like to discuss on Monday. Music to my ears! But the effort exceeds the quote we discussed since he had to do so much to clean up my taxes. Exactly how much is yet to be determined but he promised that it won’t be more than $xxx. Hmm, I need a breakdown of that $xxx and we’re gonna have to discuss the terms. I’m not concerned about the additional costs because it WILL be negotiated, but no matter what, I’m convinced that I need him in my corner. He’s competent and I like his style. Besides, he doesn’t mind my incessant phone calls. LOL! Anyone who’s willing to work with me (perfectionist, type A personality) and my money is worth their weight in gold.

The Tax Verdict

A refund from feds (2007), a bill from feds (2004-2005), a bill from MD, and a refund from VA. Net effect is a bill for ~$600. I can live with that.

[1st image credit: hooperfinancial.net]
[2nd image credit: myweb.cableone.net]