To give an idea of what you can save by having a professional review your work, I’m going to post the ten largest examples of savings I found when reviewing self-prepared returns this past tax season. Actually, some of the items where I caught the same mistake on multiple returns are condensed into one entry, so this probably represents 20 or so returns. Plus I compiled this list from memory, so I’m probably forgetting a few. To keep this from getting too obnoxiously long, I’ve split it into two parts. Without further ado, here are the biggest savings I found, numbers 6 through 10:
10) ~$2,000. VA educational benefits treated as taxable, allowing the American Opportunity Credit to be claimed. (Saw this multiple times.) VA educational benefits are generally non-taxable, but some types may be treated as taxable, allowing the American Opportunity Credit to be claimed. When a few thousand dollars in VA benefits are received, the taxes on that income will typically only be a few hundred dollars, while the American Opportunity Credit can be worth up to $2,500. It’s well worth it to recognize the income and pay a few hundred bucks in exchange for $2,500.
9) ~$2,000. QTP distribution treated as taxable, allowing the American Opportunity Credit to be claimed. (Saw this multiple times.) The rationale is basically the same as #10. As an added benefit to this approach, QTP distributions are typically only partially taxable (and not taxable at all when applied to room & board costs), so the tax you pay is reduced but the American Opportunity Credit remains the same.
8 ) ~$2,500. HSA contribution after Dec 31 and passive losses/depreciation corrected. This taxpayer was was doing their own return after having a professional prepare the prior year return. Several items were missed in transferring information (would have been caught if they’d used our Data Conversion service!). By correcting the depreciation information and picking up the passive losses, I helped this person save ~$1500. I also pointed out that with a family HSA, he could contribute another $2950 to the HSA before April 15 and have it apply retroactively to 2009, saving another ~$1000.
7) ~$4,000. Savings found via education credits and early withdrawal penalty exceptions. This one was very rewarding because of how much it meant to the client, who was recently unemployed and trying to support a child in college. This forced them to take an early withdrawal from a retirement account incurring substantial penalties. In addition to the QTP treatment described in #9, I also pointed out that they were eligible for a number of exceptions to the penalty for early withdrawals. By using the exception for room & board expenses related to education, and for health insurance costs for an unemployed individual, I helped them knock another $2000 off their tax bill. The total savings of around $4000 were a huge help to this family.
6) ~$5,000. Avoiding early withdrawal penalties can result in big savings. This couple bought a home qualifying as a “first-time purchase” at the same time they were putting a child through college. They knew they could exclude $10,000 of the distribution from penalty because of the home purchase. They didn’t know they could each exclude $10,000, or that they could use their child’s educational expenses to offset the penalty even though the distribution was actually used for the home purchase. The extra $10,000, plus nearly $40,000 in educational expenses, resulted in savings of almost $5,000.
That’s all for this post. Part 2 will be posted in a few days and the smallest savings amount on the rest of the list is about $8,000.