As the year winds down, tax practitioners are encouraged by more than the usual holiday cheer as they foresee both a pain-free and a profitable tax season ahead.
"It looks smoother than last year," said Alan J. Strauss, CPA, J.D., a Chestnut Ridge, N.Y.-based preparer. "There shouldn't be as many revised K-1s and 1099s. I still have one or two returns that have revised K-1s that I have to amend from last year."
"It should be a trouble-free season," agreed enrolled agent Larry Novick, a Holliston, Mass.-based preparer. "Other than the sales tax, not a heck of a lot has changed. Even tax planning is simpler. I have people planning to get into the 15 percent tax bracket so they can qualify for the 10 percent tax on capital gains."
"The only thing that sticks out is the AMT - the awful mean tax," quipped Novick. "A lot of taxpayers who plan sales based on the lower capital gains rates will get stuck with a 28 percent alternative minimum tax. Maybe that's how they'll deal with the deficit - leave the AMT in place, even though there's so much talk about the unfairness to middle-class taxpayers."
William White, CPA and chief executive of OnLine Taxes, agreed. "With the low capital gains rates you can save money in one place and then find that you haven't saved at all," he said. "The income tax changes have continued to reduce regular income tax rates, but they haven't affected the alternative minimum tax that much. That's one of the biggest surprises to clients, because they've been led by the media to think they'll get a huge bonus because of the tax cuts."
Liberty Tax Service's chief executive John Hewitt said that he looks forward to continued growth for the tax-preparation business. "There have been two million jobs added since November 2003," he said, "but over the last two years there has been no increase in tax filers because of high unemployment. Usually there's a million and a half more filers every year, so this coming season should have a million and a half to two million additional ones."
"About 61 or 62 percent pay a preparer to do their taxes," he observed, "So there should be a million more paid returns if everything else goes as it normally does."
"I'm optimistic it will be a decent year for tax preparers," said Chuck McCabe, chief executive of People's Income Tax, a 14-office firm based in Richmond, Va. "I'm not aware of any obstacles other than increasing competition for independent firms and continued aggressive expansion by the majors."
"H&R Block has felt the pressure from Liberty Tax Service and Jackson Hewitt, and they all are adding a lot more offices," he said. "This could hurt the independents that concentrate on low-end, bank-product returns."
McCabe, founding chairman of the National Alliance of Tax Business Owners, is encouraging independents to focus more on the middle and upper-end markets. "We still need the mass market to be competitive, because that gives us critical mass to keep prices lower," he said. "But the independents should reduce their dependency on the lower end because there's no long-term future in going head to head against Block, Liberty Tax Service and Jackson Hewitt."
Instead, McCabe sees business executives, small business owners, professionals and financially independent seniors as target markets. "All four of these segments have returns that tend to be more complex, and they also don't have the time or interest to do their own returns," he said.
Still time to plan
There's still time to do end-of-year tax planning, according to Strauss. "That's what we do every year between Thanksgiving and Christmas," he said. "One of the things we look at is the number of people who need to take a minimum pension or IRA distribution. They can either take it this year or by April 1 of 2005 - it depends on their financial circumstances."
"Congress has given us more material for tax planning than the typical advice to defer income and accelerate deductions," said Brent J. Rose, J.D., tax advisor at New York-based Fiducial. "The percentage of adjusted gross income limitations can eliminate some deductions, so there may be losses that you won't be able to take if you take them this year instead of next year."
The small business expensing election is still $102,000 for this year, he noted. "But the American Jobs Creation Act made heavy SUVs - over 6,000 pounds - subject to a reduced expensing limit of $25,000. And those under 6,000 pounds are subject to even lower expensing limits under the luxury auto rules."
"The rules for deducting donated cars to charity will change on January 1," Rose said, "and after then taxpayers will no longer be able to take blue book value for the donation. If a taxpayer is thinking about making a donation of a vehicle to charity, he should do it now, because the rules will get much tighter in 2005."
Although bonus depreciation was not extended as part of the Jobs Act, a vehicle purchased after the October 22 effective date of the act but before the end of the year will still qualify for a 50 percent write-off, noted Rose.
Mel Schwarz, legislative affairs director in Grant Thornton's National Tax Office, agreed. "Taxpayers only have until the end of the year to purchase new assets and place them in service," he said. "In order to qualify, the assets must be ready and available for their intended use before 2005, not just purchased."
Novick predicted that many do-it-yourself filers will be confused by the new option to deduct either their state sales or income tax. "They'll take both, and I don't see how the IRS will catch it," he said. "Look how long it took them to match K-1s to tax returns."
Hewitt said that the confusion is good for preparers. "Even though the option won't apply to that many, five to seven times that number will have a question because a sales person told them their car or boat is deductible. And a lot more will itemize to take advantage of it."
Strauss advised preparers to get an early start. "Any work you can do ahead of time, do it," he said. "If you let it build up, it can snowball."
Although many preparers find that pre-scheduling their clients saves time during tax season, Strauss finds it unnecessary. "I can pretty much tell from my repeat clients when they will come in. If they came in the third week of February last year, they'll come in that week this year," he said. "And April 14 there will be the same nine people that come in April 14 every year. There's a repeat pattern."
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