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Painful Lessons: Hiring a Tax Pro Doesn't Mean You Come Out Ahead

May 28, 2000|LIZ PULLIAM WESTON

Q: You're a big fan of getting professional help with taxes, but how do you know your professional is doing the right thing? We just discovered that our tax preparer completely misunderstood how our company's tax-saver plan works and somehow added it to our income as a taxable benefit, meaning that we've probably been overpaying our taxes for years. Then he tried to tell me that I should reduce how much I put into the plan so that I could take a dependent-care credit. My husband and I both work full-time and have a six-figure income. Does that make any sense?

A: None. Zip. Nada.

Another reader had a similar problem a few weeks ago, and it still baffles me that tax preparers don't know the rules on employer tax-saver plans and dependent-care credits. Yes, they're complicated, but they're also quite common. It's slightly more understandable if your tax preparer doesn't have any other clients who have kids, but even then he or she could buy a copy of "J.K. Lasser's Your Income Tax 2000" and figure out how it works in about 15 minutes.

Tax-saver plans allow employees to set aside pretax money for child care or, separately, out-of-pocket family medical expenses.

Note the term "pretax." If you and your husband both work and the money is used for child care, it isn't taxed when it comes out of your paycheck, and it's not taxed when you use it to pay your child care or medical bills. (You typically pay those bills yourself and then reimburse yourself from the tax-saver plans, but the effect is the same--no tax due.) The maximum tax-free reimbursement is $5,000; anything over that is taxable. The benefit is also taxable if one of you doesn't work (unless the nonworking spouse is disabled or a full-time student) or if one of you makes less than $5,000; your tax-free benefit is limited to the lower-earning spouse's income.

For two-income couples or single parents, tax-saver plans for dependent care are the best thing since sliced bread. The only downside of tax-saver plans is that they interfere with your taking a dependent-care credit, but the tax-saver plan is by far the better deal for most people.

The dependent-care credit depends on your income and is equal to 20% to 30% of up to $2,400 of child-care expenses for one child and up to $4,800 for two or more kids. If you use a tax-saver plan, though, every dollar that goes into the tax-saver plan reduces that $2,400 to $4,800 base. So if you put aside the maximum $5,000 allowed into the tax-saver plan, you've essentially wiped out your ability to get a dependent-care credit.

That's no big deal. If you're in the 31% federal and 9.3% state tax brackets--which is where you would be, at the very least, with that six-figure income--your $5,000 contribution to the tax-saver plan is saving you about $1,870 a year. The maximum dependent-care credit you can get if your income is more than $28,000 is $480 for one child or $960 for two. Clearly, you're better off with the tax-saver plan.

As for heading off such tax-preparation problems in the future: The best way, as I told the other reader, is to find a tax preparer who handles lots of other people like you. Also, try to get your return done early in the tax season, when the preparer has more time to answer questions, and be sure to scrutinize the return before you sign off. You may not understand all the nuances of each deduction and credit, but you should be able to spot that weird addition to your income.

Hiring a professional doesn't mean you abdicate your responsibility to learn as much as you can about tax law and your own tax situation. You should keep up with changes in the tax law and have at least one good, updated tax book handy.

That doesn't excuse your tax preparer for blowing it, of course. He should be willing to file amended returns for you free, given the extent of his error. And get going. Your ability to claim a refund expires three years after the return is due.

Divorce? Hire a Lawyer

Q: Just wanted to say you were right on the money with your advice to the soon-to-be-divorced woman. She asked about how to divvy up the value of their home, and you told her to hire a divorce attorney because there were likely to be other assets involved. I have been through what she is going through, and it is definitely not worth skimping on legal advice when so much is at stake. Our assets were worth about $1 million, including a pension worth about a third of that. My ex-husband initially offered to buy me out of his pension for just $50,000. With the help of my attorney, who was able to see the big picture, we reached a fairer but still amicable agreement. We women have to support each other, especially at such a tumultuous time.

A: Actually, the advice was unisex; it's just as likely that a man will need to be compensated for his share in his wife's assets as vice versa.

Some people shy away from getting legal advice because they're afraid getting lawyers involved will make an ugly situation worse. Calculating the value of a pension is no job for amateurs, however, and you shouldn't let a desire to be nice overpower your need for an equitable settlement.

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Liz Pulliam Weston is a personal finance writer for The Times. Questions can be sent to her at liz.pulliam@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053. She regrets that she cannot respond personally to queries.

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