Musings on taxes and DOMA (defense of marriage act)

I am doing taxes again this year, I love doing OTHER peoples tax returns. Each one is a puzzle but the puzzle comes with a prize (usually) if I get a refund for the customer. I've had customers hug me, thank me, try to give me tips, and generally it's a good time for anyone to get the annual tax thing over. I've also had people cry at my desk, have their eyes glaze over when they realize what they are having to pay, and sometimes it's not a good time for all.

I've also worked with people whom I am certain are lying to me. People who are trying to game the system, people who are not being totally truthful and some who are blatant fibbers. Why? because the tax code is so complicated, so convoluted, and so difficult to decipher, that many people know that they can get more money from the government by not declaring what they really should.

There are 5 filing statuses:  Single, Married filing jointly, married filing separately, head of household, and widow(er).  Single and married filing separately both get the same personal deduction amount and married filing jointly just gives 2 people the same deduction as 2 single people. Head of Household and Widower statuses require that the person with this status have children, and as such, the person with children gets a stepped up personal deduction than would a single person or a married person filing separately.  Here's where all the problems begin.

Two people, living together, maybe married, maybe not, with children. Only one person in a household is allowed to file Head of Household and declare dependent children. What happens when 3 generations are living in a house? Often, more than one of the adults with children will file Head of Household in order to get more income deducted and often, to receive additional earned income credit that can net thousands of dollars in refundable cash to the working parent.

Here's an example:

Married couple, with 3 children living in their house. One of the children, age 19, has a child of her own.  The correct way for this family to file is this:  Married filing jointly, with either 4 dependents (their 3 children and the grandchild, if in fact all 4 lived with them all 12 months and all 4 depended on them for support) OR MFJ with only 2 dependent children, and with the one child who has her own child filing single along with 1 dependent child, if in fact this adult provided more than half her own support and also more than half the support of her dependent child.

What usually happens is this:  Single man with no dependents; wife files as head of household (even though they are living together) with 2 dependent children; adult child also files as head of household with one dependent child.

The reason this family files this way is to maximize the filing status credit, which is higher for head of household, and also to maximize earned income credit payments to the children's parents.

It's a system that's unwieldy, difficult to understand and apply to the situation, and ripe for fraud. The IRS frequently sends letters out to Head of Household taxpayers asking for proof of household expenses, proof of the child's actual dependency, and proof of residency. Many people end up owing the IRS thousands of dollars of money that was refunded and paid out, but then disallowed later when the proper documentation could not be shown as proof.

The religious right believes that marriage is only between a woman and a man, and therefore our federal social security benefits and tax code should only allow MFJ status for one man + one woman. The groups demonstrating for homosexual, and individual rights, argue that marriage should be an individual choice, and our federal social security and tax laws should base individual rights on individuals, rather than religious teachings.

I have a better idea. Let's just simplify the tax code and make it 1 deduction for 1 person. That's it. No married filing jointly or separately, no head of household or qualifying widower, just 1 person, 1 deduction amount. That way, we don't have to ask, did you live with your spouse for the last 6 months of the tax year? Did anyone else live with you who is also filing head of household? Right there, it would simplify so much, tax-wise. It won't matter if you are married in the church, or married legally, or just living together, or even if you are of the same or different sex. One person, 1 deduction, 2 people living together, they file separately, with 1 deduction each. They can then split up all the deductible expenses, however they want. If 2 people are married, or living together, but only one is working, then that non-working person can be a dependent on the primary taxpayer's tax return. After all, they are supporting that person, yes?

If the government wants to credit more money for people with children, then they can beef up the child tax credit; the earned income credit is already there for people with children, but I wouldn't mind if more money went to people with children.

I used to feel strongly that married people should only be a man and a woman. In my older age, now, I am thinking more of the individual rights of our citizens. The United States of America was founded on the principle of individual rights, and I'm thinking that even though I personally wouldn't want to marry someone of my own sex, why should I be in favor of not allowing someone else to do it? After all, they aren't harming anyone, they aren't stopping me in my own 'pursuit of happiness'.  Actually, the LAW is hampering these people of their own 'pursuit of happiness' and I don't think that's ethical, in light of our constitution.

Here's another conundrum: a married homosexual couple with children (homosexual marriage is legal in certain states) is required, by federal IRS law, to file thusly: 1 head of household with dependent children, + 1 single person.  If a heterosexual married couple filed thusly in any state, today, that would be fraud, as a married couple living together CANNOT file separately legally, either as 2 singles or as 1 H of H + 1 single. They can file married filing separately, but they will lose many credits available to MFJ and to H of H. In effect, the IRS actually legally grants a homosexual couple a richer amount of deduction, simply BECAUSE their marriage is not recognized by the federal government. Hmmm. I wonder if all those homosexual married couples realize what they might lose if DOMA is struck down?

The IRS tax code is a monster of confundity; there are tax lawyers who make a living researching and deciphering details of the code. If you call the IRS, and ask one question multiple times, you will receive multiple answers. My suggestions could possibly simplify that code, and perhaps make life simpler for many people. Anybody out there agree with me?

IRS Tax Season!

It's tax season. Most of those who were expecting a refund have already filed and  probably are spending that money, helping our businesses and economy flourish.

The rest of us procrastinators, who are dreading that final determination of just how MUCH we are going to pay the IRS, are waiting for the last minute. This year we get 2 extra days, until April 17, thanks to some obscure (to me, anyway) holiday in Washington D.C. which normally falls on April 15th. In 2012, it falls on a Sunday, which gives all those D.C. workers a holiday on Monday the 16th, meaning that the rest of the country gets until Tuesday April 17th to file our taxes and to mail off that check for owed taxes. 

Since many people aren't familiar with D.C. happenings, at our tax office we expect a rather humdrum Monday and Tuesday. Clean up. Maybe I'll file my own taxes (late, natch) on  the 17th.

The IRS requires all paid tax preparers to ask questions this year of ALL clients regarding off-shore accounts. Do you have over $10,000 in foreign accounts? Do you have signature authority over a foreign account or trust of over $50,000? I have yet to hear of anyone saying yes to these questions.

Did you know if you have a foreign account with less than $10,000 that you are required to report to the IRS your income on that account? Penalties are imposed if you have an account over $10K and you don't report it, but the IRS expects you to report ALL foreign income on your return. I am not a betting person, but I would not hesitate to bet that many expats have an account that may be earning a bit of interest in an account well under $10k but that they aren't reporting that little bit of income. 

The IRS put a new set of "filters" on their servers this year that accept electronically filed returns. The IRS wants everybody to file electronically: it's more accurate, requires fewer employee handling, and was supposed to be faster. The filters are said to "find" more anomalies, mistakes and red flags sooner than a year or two after one has filed.

What actually happened was a severe slowdown around February 7th/8th in return processing. The IRS website "Where's My Money" began the season with a statement regarding preparation processing taking "7 to 10 days". Once the pipeline got hung up, the website closed down to traffic briefly, then when it was again functional, the site restated the time frame as "10 to 21 days". Reality for certain customers was a refund wait of 4 to 6 weeks for apparently no reason. It seems that the IRS didn't accurately plan or prepare for the influx of so many returns so fast after Jan 30th, when all wage earners are supposed to receive their W2s. Your government and mine at work. Slowly.

Processing appears to be back to normal at the time of this writing (March 14th) but could clog up again easily during the last weeks of the season. While I don't think this will bother too many people who need to pay the IRS more money, it seems to me that the government department in charge of collecting taxes all year long should be able to effectively plan for processing the returns that they require us to file. 

I'm still working on my own tax return and that of my mother, who passed away last year. Her return is not a complicated one, but I determined that both the Social Security Administration and the Federal Pension people sent incorrect 1099R forms. A recipient must survive the entire month to be able to receive a month's Social Security wages, so the payment sent to her in September was required to be refunded to the SSA because she died in August. The Personnel Payroll payment sent to her in August was automatically withdrawn once I notified them of her passing. It seems the payment for August was actually for July but she is required to be alive the entire month AFTER the payment. Nevertheless, both 1099R's included the payment that was given back to them. Of course, they  had no intention of correcting this mistake until I notified them of it, and I am awaiting corrected documents so I can file correctly.

Did you know if you don't owe any tax, you are not required to file a return? Most people file, anyway, just to collect any taxes that have been withheld. If you don't file, and you DO owe tax, you are assessed a penalty for not filing and then interest on the money owed. No penalties or interest if you didn't owe any money, and if the IRS owes YOU money, they won't pay you any interest or penalties on the money you claim.

In our office this tax season we have seen a number of clients who haven't owed any tax for a few years, and haven't filed, either. They come into our office with reams of documents. In many cases, we file a return for them for the current year, plus the past 3 years. The IRS will accept returns and amendments for only the prior 3 years, unless you have been deployed in the military, in which case you get a break and can go back farther. 

This tax season we are ALSO visiting with many people who suspect that their prior year returns were incorrect, or they are certain that the prior returns were wrong, due to a nasty gram sent to them by the IRS. Once we've reviewed their filed return along with the IRS findings, many times we determine that the IRS has incorrectly determined that the person owes too much money. In one case, a person with a rental property incorrectly determined the depreciation on the rental for the last 3 years and we found $848 in additional tax refunded to him for EACH of the last 3 years. In another situation, a person (doing his own taxes on Turbo Tax) did not accurately declare stock sales of around $80,000, and the IRS wrote him a letter stating that he owed another $20,000 in taxes on the sales.  YIKES! this poor person was in a panic, but not to worry, a quick call to the brokerage house to get the basis (purchase price) of each piece of sold stock allowed us to correctly document the Schedule D for investment sales on an amendment to his return. He actually only owed about $300 in back taxes, and we submitted the 1040X along with the broker statement. Whew. that was a nice thing to be able to do for someone.

My dad used to say, I'm off to the salt mines. Well, me, I'm off to the computer/paper mines. Contact me if you need help with your taxes - I can help.

Anniversary of WWII Bombing of Hawaii....and the last day to sign up for a Medicare Advantage Plan

Today is December 7th. A day in infamy, when Hawaii was bombed and the United States joined in to fight World War II.

It's also the last day for Medicare Advantage sales for January 1, 2012 effective dates.  Up until this year, most Medicare Advantage, or Medicare Part C, sales for the following calendar year were accepted from late October up until December 31st. For those who waited until the last minute to sign up at the end of December, problems arose when they tried to use the coverage for prescriptions or to see a provider just after the new year without an ID card. Because of this issue, Medicare imposed a new enrollment time period from October 15 through December 7 for this year's enrollments, giving everyone at CMS and at the insurance companies a chance to process all applications and get those all important ID cards into the hands of the senior enrollees prior to the January 1 effective date. Seemed like a good plan.

I wonder who chose the enrollment dates? I would not hesitate to guess that it wasn't someone who lived through WWII back in 1941 when the bombs were sneakily dropped onto Oahu. If the person who picked this date for the last day to enroll was actually someone who remembers December 7, 1941, they would have picked December 6th, or December 8th. Just not December 7th.

 My guess is it's some worker bee at CMS who flunked US History and had no idea that he or she picked such a famous date in our history.

Or I could be completely wrong. Maybe it was someone who studied history and thought that December 7th was a good date to pick for the last day of the annual election period for Medicare Advantage plans. Maybe the person who picked the date thought, well, I bet all those seniors will remember THIS date as the last date they can enroll!

Bombs away.....but hopefully not on US soil ever again.