I have never used a pre-packaged client questionnaire in my practice, nor did we in my mentor’s practice. We have always requested original documents from the client – W-2s, 1099s, 1098s, Closing Statements, and so on. I have several self-created worksheets for special situations - medical expenses, employee business expenses for specific professions, rental expenses – that I send to applicable clients in my January mailing. But when it comes to the important stuff – mortgage interest, real estate taxes, items of income – I want to see the original documents.
In many cases I attempt to reconcile various items on the form to supplementary information – especially in the case of mortgage statements and W-2s.
New Jersey is somewhat unique in its form of billing real estate taxes. The bill is calculated and paid on a quarterly basis. While the amount is determined by calendar quarter, the payment is due February, May, August and November. When a client buys or sells real estate, or both, I must determine the actual real estate tax paid in each property on a quarterly basis, taking into account adjustments made at closing for the number of days of ownership within a calendar quarter (except if the Closing is, for example, on June 30th).
In the case of a property with a mortgage, as I expect is the case everywhere, about 90% of the time the real estate taxes are paid from an escrow account maintained by the mortgage holder.
Several years ago, in the course of reconciling the taxes for a client who sold one home and purchased another, I discovered that she had paid real estate taxes on the home sold for one of the quarters twice – once via mortgage escrow and again as an adjustment on the Closing Statement. Her lawyer did not discover this FU, and the municipality certainly did not contact either the former or the new owner to say that the tax had been overpaid (this is New Jersey now).
I told the client of this FU and after much leg work and frustrations on her part contacting both the mortgage company and the municipality the error was finally acknowledged and she got a refund of the double payment.
As a strange coincidence, when the same client sold her home again recently the exact same FU occurred – which I again discovered. And again she was able to get a refund of the overpayment. I should go back and see if she used the same lawyer at both closings.
In both of the above instances we are talking about $1,500 - $2,000 in double payments.
New Jersey does not treat certain items of income and certain employee benefit contributions the same as Uncle Sam for purposes of the state income tax. Disability benefits, while partially or fully taxed on the federal return, are exempt from NJ Gross Income Tax. While treated as “pre-tax” for federal purposes, employee contributions to Section 125 plans for health insurance premiums or medical flexible spending accounts and contributions to 403(b), 457, 414(H) pension plans - just about any type of employer pension other than the basic 401(k) do not reduce state taxable wages.
In many cases the federal wages and NJ state wages reported on Form W-2 differ. In such a situation I try to reconcile the difference, using the final pay-stub whenever available.
A while back I sent the following message to a client after attempting to reconcile the final pay-stub to the W-2 –
“Your W-2 may be incorrect. The ‘non-tax’ amount of $5,359.00, which is deducted from your total income in determining the federal wages reported in Box 7, is $5,238.00 for your tax-deferred annuity . . . and the $120.00 ‘Section 125 Dental Insurance’. You also had $1,900.00 in “Section 125 Health Insurance”. This $1,900.00, if part of a Section 125 cafeteria plan, should be ‘pre-tax’, and should reduce your federal wages further. I suggest you check with your Payroll Department to see if there was an error made.”
The client’s response –
“Thanks for the heads up regarding my pre-tax insurance. Enclosed is my amended W-2 form. The HR Department and our new controller were impressed that you caught the mistake when they didn’t. At first when I called them they thought I was crazy. But alas, you were right, and lucky for all involved.”
The correction added $551.00 to the federal refund.
In another instance I noticed that a client’s employer, an out-of-state company for which my client was the only New Jersey based employee, did not treat the employee 401(k) contributions as pre-tax for NJ state wages on the W-2. They were also set straight.
I am not telling these tales to solicit new clients – my readers should know by now that I am not looking for any more 1040 clients (if anything I am trying to “thin the herd”). Or to, like TAX MAMA, “toot my own horn”. I just want to show you that it truly pays to use a competent, independent tax professional. Their potential value goes beyond just preparing the 1040.
No tax preparation software that I know of would have uncovered the FU’s discussed above. And no employee of Henry and Richard, Jackson Hewitt or Liberty would find such FUs – or even care – as it would not increase their fee (unless they charged a % finder’s fee).