Friday, April 24, 2015

Tax season takeaways keep on coming


With the income tax filing sprint behind us, advisers and accountants are taking a look back at 2014's results and thinking about what they can do better for 2015.

As readers may recall, the 2013 tax filing season was an ugly one. Clients and advisers were trying to get their arms around the American Taxpayer Relief Act of 2012, which brought with it a top marginal income tax rate of 39.6% for single filers with taxable income over $400,000 ($450,000 for married-filing jointly).

At the time, advisers reported that clients were shocked by the size of the checks they had to write out to the federal government, even with ample warning leading up to the filing season. Admittedly, even this reporter learned a few costly lessons last April.

This year was again a tough one for accountants and advisers, albeit for different reasons: There were new tax forms related to health insurance coverage, for instance, and clients continued receiving late and corrected 1099 and K-1 statements.

“It feels like we went through battle, and we're exhausted and tired,” Craig M. Steinhoff, a certified public accountant and principal at Hill Barth & King. “We thought we were prepared for battle, and some of us were, but there are some lessons learned.”


Some clients tripped on their own bad decisions in 2014.

Jonathan Gassman, a CPA and personal financial specialist at The Gassman Financial Group, had a client who socked away a large sum of money into three mutual funds near the end of the year, just before the funds distributed their capital gains and declared dividends. “They were only in the funds for a couple of days but still had realized significant income because they got in before the dividend and capital gains,” he said.

The tax bill came to $60,000, thanks to the poor timing of the transaction.

Mr. Gassman says he would've suggested the client hold off on the investment until January or at least until after the distributions have been made, but he had been left out of this do-it-yourselfer's decision.

Another client decided to borrow from an IRA in 2014, erroneously believing that he had until April 15 to pay for it. Wrong: Borrowers have 60 days to return the funds to the IRA without incurring taxes and a penalty. “You could've saved yourself a few thousand dollars,” Mr. Gassman said.


New for the 2014 filing season, advisers and accountants had to ask clients about their health care situation: Did they have coverage? If so, did they have it all of last year? Did they get it through work? If not, did they receive tax credits to help cover the cost?

People who bought health care coverage last year through the exchanges received Form 1095-A in the mail, which had details those people needed to file a federal income tax return. Form 1095-A is also essential for those clients who need to file Form 8962 and claim a premium tax credit.

The problem is 800,000 people received erroneous information on those forms in February. Affected clients wound up waiting for corrected forms in what became a “Herculean nightmare” for accountants, Mr. Gassman said.

“It's a tremendous burden on the tax preparer to be the police for health insurance coverage,” he said, noting that it took hours to grasp the forms. “A lot of people don't understand the rules. Even the accountants don't understand the rules.”

“The first round of 1095-As were incorrect, and that was a lesson learned on our part,” Mr. Steinhoff said. “Don't assume that just because you got a form that it's right. Do your due diligence, and make sure it's what you expect to see.”


In a perfect world, clients would respond to accountants' requests for the pertinent tax prep documents in late January and be prepared to file by the end of February or beginning of March.

Accountants' efforts to wrap up their clients' tax returns in a timely manner were stymied by the late distribution of Form 1099, or receipt of an incorrect form altogether.

“There's been a trend in the last few years where 1099s are issued and then amended or corrected,” Stephen J. Bigge, a partner at Keebler & Associates, said. “In mid-March, they get a notice that says they're getting a corrected 1099. Basically I'm doing close to 75% of my returns in the last three to four weeks of tax season.”

Mr. Steinhoff noted that clients who bought homes or refinanced residences in 2014 received Form 1098, the mortgage interest statement. At times, the forms failed to account for the amount that the client paid at closing, which required an adjustment.

Don't forget that Schedule K-1, which is necessary for investors in master limited partnerships, can also come with mistakes.


With tax forms freshly filed, now might be a good time to circle back to those clients and talk to them about where they stand for 2015. Advisers and CPAs can also look for additional opportunities for clients who are in the highest tax bracket.

“It would be great to sit with other advisers in the company and get the top 10 mistakes that clients made this year,” Mr. Gassman said. “Clients who are in the highest tax bracket are good candidates for tax planning and investment planning ideas. They have time between now and Dec. 31 to make the changes to save on taxes and grow wealth prudently.”