QUESTION: Have you ever come across any figures that estimate just how much time we taxpayers waste every year preparing our income tax returns? And does anyone really think tax reform is going to bring the preparation time down?--E.I.
ANSWER: Runzheimer International, a Wisconsin consulting firm that specializes in cost-of-living data, estimates that the average American taxpayer spends 22 hours a year preparing tax forms. Translated into dollars, that equates to $220 per taxpayer per year on average, Runzheimer estimates.
Add to this cost the $50 per person that is estimated to be spent every year on advisory books, manuals and computers, and the total national cost for preparing tax forms is about $16 billion, the consulting firm estimates.
Initially, tax reform was touted as a tax-simplification proposal. No more. Almost everyone familiar with the new tax laws now expect many taxpayers' experiences with tax reform to be nightmarish the first two or three years, while the new rules are phased in.
In other words, expect the 22-hour figure to rise, not fall--unless, of course, droves of taxpayers choose instead to ship off their tax-return headaches to professional tax preparers.
Q: My husband and I are forever getting junk mail from mortgage brokers and other types of lenders touting super-low interest rates or the latest in creative financing. Usually, I just throw it away before I even read the stuff. But one the other day caught my eye. It was pitching 15-year loans instead of the typical 30-year ones. The hypothetical payment they worked out showed that the monthly bill would be somewhat higher but not ridiculously so, and my husband and I are considering it. Are there any drawbacks we should know about?--L.T.
A: Fifteen-year repayment periods have been increasingly popular among home buyers because lenders are usually willing to offer a lower interest rate than is available for conventional 30-year mortgages.
The drawback is that the 15-year loan locks you into making a higher payment every month until the loan is paid off. If you have any doubt that you would be able to meet a more rigorous payback schedule, there is a compromise you might consider--but only after weighing the costs of refinancing and the difference between your current interest rate and the rate on a 15-year mortgage.
Keep the 30-year repayment schedule officially, but make an extra payment whenever you can. Most lenders permit borrowers to accelerate their repayments without a penalty. And by doing so, you could pay off the loan just as quickly as you could with a 15-year repayment schedule but avoid getting locked into a payment you sometimes can't afford to make.
Q: I raise horses as a hobby. It's an expensive hobby, as you might imagine, which is why I'm wondering whether any of my costs might qualify as tax deductions. Are hobbies treated just like small businesses for tax purposes?--B.H.
A: No. Under U.S. tax laws, taxpayers may write off such expenses as business expenses only when the activity generating the cost is undertaken to make a profit. That is not to say that the activity--horse raising, say--has to be actually profitable. You may lose money on it year after year and still qualify for tax writeoffs--but only if your motive is to make a profit.
As you might imagine, the government has a tough task determining motive in such cases because there is no rule on the books laying out when an activity is considered a money-losing, for-profit business and when it is considered a mere hobby. But accountants say their rule of thumb is that an activity was set up as a money-making venture when it makes a profit in any three of five consecutive years.
Horses are an exception. The general rule in the case of a venture involving the breeding, training, showing or racing of horses is that it is considered a for-profit business if it makes money in any two of seven consecutive years.
If your venture doesn't meet this test, there is a slim chance that you might be able to deduct part of the expenses under the category of miscellaneous itemized deductions. Beginning this year, individual taxpayers may deduct certain miscellaneous expenses, including hobby expenses, unreimbursed employee business expenses and investment expenses, to the extent that the sum exceeds 2% of their adjusted gross incomes.