Clients' strangest ideas about taxes

April 24, 2024 4:22 PM

Every tax season brings its own craziness — in no small part because of clients' notions about taxes.

We polled tax preparers about their clients' biggest misconceptions this year, and the responses ranged from the understandable to the far off, from the nuances of returns to the work lives of preparers.

"'The rich don't pay taxes.' 'Cash is not reportable as income.' 'The IRS has bigger fish to fry,'" said Morris Armstrong, an Enrolled Agent and registered investment advisor at Armstrong Financial Strategies, in Cheshire, Connecticut.

"You'll get a big refund when you buy an electric car," said Larry Pon, a CPA in Redwood City, California.

Robert Seltzer, a CPA at Seltzer Business Management, in Los Angeles, said that he's had to tell many clients, "'No, you need to pay your expected balance due by April 15. The government is not giving you an interest-free loan.'"

"They don't seem to have a sense of humor about the tax they owe," added Scott Kadrlik, a CPA and managing partner at Meuwissen, Flygare, Kadrlik & Associates, in Eden Prairie, Minnesota.

Here are more misconceptions, myths and just plain wrong ideas from clients from the season just past.

Start me up

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A client starts a business and incurs expenses and no revenue, said Gail Rosen, a CPA in Martinsville, N.J. "They're excited for this tax loss but, unfortunately, these are known as start-up expenses, which are not deductible until the first sale is made," she said. "A client also starts a business without consulting us on the best type of entity."

"'I'll sell a few items on eBay and make a few bucks.' They end up losing money when you factor in the increased cost of their tax return with their new eBay business," Rosen added.

"'Set up an LLC so you can deduct all expenses,'" Pon said. "This got Kevin Durant and Danny Trejo in trouble when they deducted all their personal expenses on their LLC."

Office space

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"Self-employed people are often scared to take the home office deduction for fear that it will lead to an audit. In all my years practicing, I haven't seen one client audited due to deducting a legitimate home office," Rosen said. "A taxpayer who is an employee and works from their home many times thinks that they are entitled to a home office deduction. Unfortunately, the tax law changed in 2018."

Where the heart is

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"People believe that in the year they buy a home, they're suddenly going to get a big tax refund," Rosen said.

"Where the taxpayer actually resides or is domiciled can, for some, be most frustrating," added Joseph Bigane, a CPA at JFB Tax Consulting in Downers Grove, Illinois. "A few states, like New York, create a statutory residency which is triggered if you spend more than 182 days in the state, irrespective of where you 'live.' This can result in you owing tax to both the statutory state and the state where you reside."

Stated plainly

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"There is a misconception among Illinois residents that the estate tax exemption is $4 million in Illinois," said Daniel Rahill, a CPA, JD, LL.M., and wealth strategist with Wintrust Wealth Management in Chicago, and past chair of the Illinois CPA Society. "In fact, when you exceed a $4 million estate by just $1, the tax applies and the exemption falls all the way down to $40,000.

"A second misconception is that Illinois does not have a gift tax and does not tax gifts like federal law does," he added. "While Illinois does not have a gift tax, all taxable gifts made during a taxpayer's lifetime that are tracked on a federal Form 709 are added back to the Illinois estate taxable income."

Golden years

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"I had a client who didn't take a required minimum distribution for 2023 from an inherited IRA because IRS notices gave a pass to those subject to the 10-year rule for 2023," said Mary Kay Foss, a CPA in Carlsbad, California. "Unfortunately, because she was less than 10 years younger than the decedent, the notice didn't apply to her. We had to apply for a penalty waiver and make sure she took the missed RMD ASAP."

Lack of passive aggression

"Wealthier individuals who don't really know about passive loss carryovers on their rentals if their income is over $150,000," said Brian Stoner, a CPA in Burbank, California. "They assume they'll always get at least their $25,000 rental loss, but if they had a good year otherwise, it can become a passive loss carryover until they have some passive income to offset against it or they sell the property."

Your job's a cinch

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Some misconceptions have to do with preparers' work.

"'My other tax guy let me do it,' Armstrong said. "You better have a good cite if you want to argue a point. And, 'You ask a lot of questions!' Yes, we do."

"'Tax pros can prepare a complete and accurate tax return based on a client's self-prepared return on any over-the-counter software,'" said Manasa Nadig, an EA and owner at MN Tax and Business Services and a partner at Harris Nadig in Canton, Michigan.

"We don't have a quiver full of tax-saving tips to apply any time, including between now and the due date," Kadrlik said. "And they all know we are working around the clock but still want to sit and chat."

"Your tax preparer is not waiting around for you to get your information to him or her," added Bruce Primeau, a CPA and financial planning consultant with Avantax in Prior Lake, Minnesota. "If you drop your stuff off on April 14, it's not likely going to get done by the 15th."