Warning: Rant on Tax Software

[jennypenny]

tick tick tick ... am I the only one not done?

At least I resolved the final issue last night. I'm going to fill out a new set of forms today now that I know where everything goes. I wrote up extensive notes so I'll know what to do next year, although if my income is the same or higher I will probably incorporate. (then I'll have to learn how to do those taxes LOL)

Turbo Tax was better than Tax Cut, but I wouldn't rely on either.

[JL13]

Welcome to the dark side. I promise it's not so bad!:D

What were the main complications, if I may ask?

[jennypenny]

We had three real estate transactions (two sales and a refi) that one didn't handle well. I was really surprised at simple mistakes like Taxcut didn't ask for the points even though they are fully deductible under a certain level*. The other issue was the home office calculation. Some home improvements can be expensed instead of depreciated, and it wouldn't let me do that. The biggest problem I had with both was that when I adjusted something on one form related to real estate, it would automatically adjust other forms. It was like a game of whac-a-mole. I couldn't find a way to adjust both forms without it overriding something on me that I didn't want it to touch.

Maybe it's just me? We're kind of at the 'peak tax' stage I think with income from salary, trading, gambing, business, and royalites, as well as foreign investments, education expenses, real estate transactions, and excess medical expenses. I'm a little stunned at the amount of supporting paperwork I have to scan when I'm done. It can be measured with a ruler. Actually, looking at the pile, I'd need a yardstick. Nuts.

Not to sound like an asshole, but I'm not an idiot and I struggle with this. How do people who don't like math or aren't methodical or detail-oriented do this? Do they all hire people? Do they do it incorrectly and hope for the best? Do they not report anything complicated?

*edit: I misspoke a little. It did ask for points but defaulted to spreading them out instead of taking the full deduction this year. Both programs seemed to default to this. They treated all home improvement expenses this way by default even though some can now be deducted in full. The second part is a big deal because someone can purposely keep home improvements under a certain level to expense them all at once. At least, that's how I understand it. Maybe I have it wrong?

[jacob]

@jp - Like health insurance, those who can't do math or read legalese(*) don't have the ability to deal with multiple forms without making a single error and who don't have the money to pay someone who can will often pick the option to "not do it at all and hope for the best". This strategy can work for many years until it doesn't. At that point the resulting fall-out can be spectacular. It's not a surprising strategy/consequence either when dealing with a system whose complexity has been optimized to benefit the smarter than average cookie. The other strategies are also common.

(*) Compare the requirements for dealing with a tax form to the results standard adult literacy tests and you will see that a surprising large fraction of adult population lack the skills to deal with them. And so they often don't.

Also consider the different levels of tax services. A typical walk-in tax preparer or a typical piece of software will only ensure that the numbers you give them are filed correctly. They are in no way intended for tax-planning (you aren't getting tax planner services) and thus won't do more than trivial optimization.

It's a case of knowns and unknowns. Software operates in the known-known space. It will only do what you tell it to do. It won't tell you what you don't know or what you should do. It won't deal with stuff that you don't know and which wasn't programmed into it.

PS: Home office deductions and depreciations is advanced stuff. Even experts go wrong (due to ignorance) or fail to fully optimize and those who don't become legendary because the differences often amount to thousands of dollars.

[IlliniDave]

Mine are far less complicated than jp's, but somewhat more complicated than average, and it can often be a struggle for me even with a decent tax software package as an aid. I fully "get it" when it comes to the comments about the absurd level of complication a person can quickly get in to. It's one of the reasons I tend to favor things along the line of flat/"fair" taxes, or a simultaneous repeal of the 16th amendment and establishment of a VAT (both would need to happen together). I get a fair amount of advantage from the present system, and stand to benefit even more in the future, but akin to what jacob said, the present system disadvantages a lot of people, especially those who it's arguably intended to be more "fair" towards (people with moderate income and moderate financial sophistication).

I've actually considered getting into the tax prep arena as a part-time gig during the time of year it's too cold to enjoy "my" lake. The one time I sought professional help with my taxes I wound up figuring out and ultimately teaching the paid preparer how to do what I was uncertain about. Waste of $330 bucks.

[Tyler9000]

Maybe it's just me? We're kind of at the 'peak tax' stage I think with income from salary, trading, gambing, business, and royalites, as well as foreign investments, education expenses, real estate transactions, and excess medical expenses. I'm a little stunned at the amount of supporting paperwork I have to scan when I'm done. It can be measured with a ruler. Actually, looking at the pile, I'd need a yardstick. Nuts.

Not to sound like an asshole, but I'm not an idiot and I struggle with this. How do people who don't like math or aren't methodical or detail-oriented do this? Do they all hire people? Do they do it incorrectly and hope for the best? Do they not report anything complicated?

Yikes -- "peak tax" does sound painful.

Most people have only one or two standard incomes, and two-thirds of people take the standard deduction and don't itemize (not because they can't handle it, but because it's the better deal for them).

That said, I've always hated the tax system for how intentionally complicated it is. The biggest lobbyists against fair/flat tax reform are the tax accountants and software providers.

[JL13]

The home office now allows for a simpified method that's something like $1 per square foot and you can eliminate many pages of forms and avoid depreciation recapture.

In general, the way I deal with the issue of complication and documentation is avoid transactions that cause much paperwork. This requires knowing when it's a futile effort to even attempt to deduct certain items. for example the unreimbursed medical expenses. You can only deduct what goes above a 7.5% AGI floor. Which means for a married couple earning $150,000 combined, you can only deduct the amounts in excess of $10,000! it's unlikely you had that much out of pocket?

Can you quantify how much taxes all these forms actually saved you? Often times these tax programs (if they even get it right) go through the process of completing these forms and the end result at the bottom is $0 - no deduction allowed. Which means you could have just ignored it altogether.

I will venture a guess that many of your complicated issues could be totally ignored and just focus on the main forms that matter.

[jennypenny]

Most of the forms are triggered by income, so I can't really get away with not filling them out. I made a profit on the real estate sales, so I had to report those. I'd skip the education expenses, except that DD has a scholarship (which gets reported) so I have to do that one, too. We have to report profits on foreign investments, so I also do the foreign tax credit. If I'm filling out all of those forms anyway, it makes sense to do all I can to lower the tax burden.

The Safe Harbor home office deduction is $5 sq ft. It's a great option unless you have high housing costs. My real estate taxes are $10K/year and my home office is 7% of my house, so that deduction alone is more than the Safe Harbor deduction. When you add in other costs like utilities and (expensed) home repairs, it's way too much money to leave on the table. And yeah, we hit $30K in excess medical expenses last year. What can I say? We're a genetically challenged family with bad teeth.

I'm not trying to argue with you JL. I appreciate the comments. Some of this is my own fault for doing 47 things at once to try to diversify our income. It's also because I can't walk away from money just because I'm having trouble learning how to fill out the form. I can be a little OCD about that kind of thing. (maybe more than 'a little' lol)

[Dragline]

It's times like these I find refuge in Form 4868.

[jennypenny]

I'm *this close* Dragline ... so tempting.

[JL13]

@JP

Sorry if I came across the wrong way, just trying to offer some help for next year. Taxes repeat every year, so any help I can provide this year could save you time next year.

$30,000 on dental?? Holy cow! Dental tourism maybe?

Selling of a rental/business property requires some horrible reporting re: passive losses, depreciation recapture. Yes definitely I can imagine how terrible that is for you.

One tip for foreign tax credit - you can omit form 1116 if you have less than (IIRC) $600 in foreign taxes paid out of a brokerage. Just plug the number right on the 1040.

[jennypenny]

@JL--Our dental isn't that bad. It was mostly medical (we have some heavy duty medical needs here). That was higher than it's been the last few years. We've had years with $75K and $100K though, so I'm grateful it wasn't that high. That's why whenever I talk about our family budget in other threads, I say it's not including medical expenses because our medical budget dwarfs any ERE budget. Next year I won't have any real estate transactions, but I'm sure I'll find some new and interesting ways to earn money that trigger even more forms.

Hey, I just realized the car I bought is a hybrid. Can I get a credit for owning one of those? That would be a new one for me.

[jacob]

Hey, I just realized the car I bought is a hybrid. Can I get a credit for owning one of those? That would be a new one for me.

You can get credit for buying a new one if it qualifies.

https://www.irs.gov/instructions/i8910/ch01.html

[Dragline]

I'm *this close* Dragline ... so tempting.

I do it every year . . .

[JL13]

You're both making me rethink this rental property purchase.

[bryan]

Probably going to go ahead and file an extension.. waiting on an excess contribution to be withdrawn from a slooow HSA provider.

Any idea when turbo tax goes on sale after the deadline?

[jennypenny]

You can get credit for buying a new one if it qualifies.

It's only new to me. It's an '06 Highlander. I'd lose my street cred around here if I bought anything newer.

[Dragline]

Highlander? "There Can Be Only One!"

https://www.youtube.com/watch?v=dOFsG6_r4wo

[jennypenny]

Triple digits baby (including the worksheets), but I'm done!

No extension for me. I'm going out of town and the last thing I wanted was to come back to this mess. I've learned my lesson the hard way--I'm doing the paperwork quarterly from now on so I don't have to muck around with it all at once. That was my biggest mistake this year.

[George the original one]

Ooo, this is a game I can play, too!

90 pages for Fed and 18 pages for Oregon (both including worksheets).