Feb 22

Free Tax Preparation: Tales of a Fee-Only Advisor

by Dick Schlote

We’re only two weeks into the tax season and already the stories of woe surface.  As usual, our politicians have added complexity to the tax code and we have a new set of filing requirements:  new forms, tax rates, credits, challenges, etc.

For the fourth year I am volunteering as a Tax Aide with AARP helping others prepare and file their 2010 returns.  This is a service for anyone, not just retirees, to have their tax returns prepared and filed by a trained tax preparer for free. This is done across the country.  Check your local area for a schedule.  In the Syracuse area there are about 40 volunteers with schedules at libraries and community centers.

In the first three days of my volunteering this year, here are some interesting experiences:  One told me of the largest paid preparer (rhymes with clock) quoting them $85 for a simple 30-minute tax return, with no itemized deductions.

Another told me it cost them about $100 to do their own tax on line, a fee for federal, one for state, one for efiling, and one for direct deposit.  Not bad for a return that would have otherwise cost $200-$250 by a paid tax preparer.

One lady had a Form 1099 distribution for about $97,000.  I asked what it was and she told me her “financial advisor” had changed companies and transferred her annuity to the new company, but that it was not taxable to her.  She was right about the taxability, but didn’t realize that there would be a nice commission for her financial advisor and probably a new redemption fee schedule imposed on any withdrawals, typically for 5-10 years.

Another similar situation with less favorable consequences for the tax payer was a lady with six distributions from her IRA.  The total of the distributions was over $60,000, one in the amount of $33,000.  She didn’t remember taking all of them.  She also told her consultant she wanted enough withholding so that she didn’t owe taxes at year end.  No NY State withholding was taken on any, and no federal withholding was taken from distributions of $10,000 and $9,600.  As a result of all of the distributions, she ended up in a higher tax bracket, her income was high enough as to make most of her Social Security (for which there was no withholding) also taxable, and she would owe $6,000 for federal and $3,000 for NY State.

She told me her financial advisor also changed companies, that he calls her regularly to buy or sell investment products, that she doesn’t remember all of the distributions, and that she doesn’t know how she will come up with the $9,000 tax payments in April.  I suggested she call her consultant to see if it would be possible to reverse any distributions that were made within the last 60 days, avoiding the tax on those amounts.  Sadly, there are many issues here to be resolved, perhaps even legal issues.

In my many years as an advisor I have processed  thousands of IRA rollovers, transfers, distributions, etc.   As a fee-only investment advisor with Rockbridge, I have a fiduciary duty to act in the best interest of my clients.  Unfortunately most people don’t understand that financial advisors and brokers who accept commissions do NOT have a fiduciary duty.  I wish more people understood the difference between a fee-only advisor and an advisor who gets paid to sell products.

If you are planning or expecting any distributions from your IRA accounts, call your advisor to discuss the tax implications.  You may not be able to avoid the taxes, but at least you will be prepared.

It’s only the middle of February and already I have had my share of tax-related situations.  One thing for sure, it is a great way of helping people through the maze of income taxes.  The AARP program is not for business returns, high income taxpayers, or for those with complex returns, but we can prepare returns with itemized deductions and most tax credits.

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