'Tax Girl' Answers Your Questions

Tax season is here and like a Facebook relationship, 'it's complicated.' That's according to Kelly Phillips Erb, the self-proclaimed 'tax girl.' She joins host Michel Martin to answer common tax conundrums.

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MICHEL MARTIN, HOST:

So, now that we just told you about all the financial advisors you shouldn't listen to - at least according to Helaine Olen - we're going to do a 180 and tell you why you might want to get some help with your taxes, especially if you work for yourself or get part of your income from freelancing.

And here's the unwelcome headline. It will probably be even more complicated to file this year than most, and if you're someone who relies on a return, you may not get it as quickly as you are used to. And we know that you have other questions because we reached out on Facebook.

Here with some answers to those questions, is Kelly Phillips Erb. She's known as the Tax Girl. She writes a column for Forbes, but she's also a practicing tax attorney and she's with us now from member station WHYY in Philadelphia.

Kelly, thank you so much for joining us.

KELLY PHILLIPS ERB: Thanks for having me.

MARTIN: You've been telling us that Congress has actually made this tax season even more onerous than usual. Why is that?

ERB: Well, there's a lot of reasons. One is that people are just angry, because, in the midst of all the sequestration talk, people are having to pay for services they don't think they're getting. But what's made tax season in particular rather complicated is the fact that the new tax deal that was finalized in January of 2013, actually affects 2012 taxes.

So tax season actually got off to a rocky start. Instead of opening as planned on January 22nd, tax season didn't open until January 30th. And even then, there were actually a number of returns that weren't able to be accepted for processing until mid-February and, in fact, tax professionals just got an email on Monday from IRS announcing that the rest of the returns could finally be filed, so it's a late start to the tax season. A lot of people are really frustrated, but that, again, doesn't change the tax deadline, which still remains April 15th.

MARTIN: You were telling us, though - and I think a lot of people know this for themselves, that a lot more people are freelancing or relying on independent contracting - whether they want to or not, to either supplement their income - and, for a lot of people, it's most of their income. And you're saying that this can be really hard to figure out and that a very high percentage of the people who come through your door with problems...

ERB: Sure.

MARTIN: ...work for themselves. Why is this so hard and what are some of the things that people who freelance or who are independent contractors need to know, that people who derive most of their income from, you know, working for a company, don't need to know?

ERB: Well, folks that work for a company, your regular nine to five job - at the end of the year, you get your W2 and it has all the information right there on it. It has how much income you've earned and then it has how much withholding has been taken out on your behalf throughout the year. And it also shows how much you've paid in to Social Security and Medicare and how much your employer has paid in.

When you work for yourself, that doesn't happen. You're responsible for figuring out how much income you've earned on your own. And that can be complicated if you're one of those folks, especially freelancers that might have 20 or 30 different jobs that paid different amounts at different times. You're not going to have the withholding at the source, which means you have to figure out the tax on your own and you have to make estimated tax payments during the year.

And then complicating matters even more, self-employed people pay self-employment taxes, which is basically their equivalent of FICA or Social Security and Medicare taxes, and a lot of people forget this when they're figuring out how much to set aside and that's where they get into real trouble.

MARTIN: A lot of people asked - when we reached out for questions on Facebook - a lot of people asked, what can I write off? For example, Cory Otinwes(ph) says he makes $45,000 a year, but does freelance design work on the side for extra income. He says he couldn't afford any major investments for his freelance work, but can he still take a write-off?

ERB: Oh, sure. I mean, it gets a little bit tricky, depending on whether or not that's your actual business or if you're just doing something as a hobby. Believe it or not, the rules are different for hobby income than they are for business income. But pretty much, if it's a business that you're running - so you're doing it not just for fun, but to actually raise money, which is what it sounds like he's doing - then you can deduct anything that's considered ordinary and necessary. That's actually what the IRS - the criteria that they use. So, pretty much, anything that's accepted in your field and anything that's reasonable. Kind of a good rule of thumb, I always tell my clients, the laugh test. Like, if you can tell me without laughing that you need it for your business, then (unintelligible) that the IRS feels the same.

MARTIN: So what an opera singer needs - probably different from what Cory needs?

ERB: Oh, absolutely. And you know what? It even changes from geographic location to geographic location. It may be that, if he's doing design work, maybe he has a black room or something that requires weatherproofing or some other kind of special equipment that he might not need if he was somewhere else.

MARTIN: You know, speaking of weather, we heard from a lot of people who were victims of natural disasters last year, like...

ERB: Sure.

MARTIN: ...Hurricane Sandy or the derecho storms on the east coast. We heard from Cayenne Lamb(ph) from Brooklyn who asked how she should file the expenses that she had to pay for repairs. Is there special tax treatment for that?

ERB: There is, and the IRS has a really great publication and I don't have the number handy, but it's the casualty and loss publication because you can actually deduct what's called casualty losses. Obviously, you can't deduct everything and, if you've been reimbursed by your insurance company, you're not going to be able to double-dip, but to the extent that you have an actual loss that was beyond your control that was the cause of a natural disaster in a declared disaster zone, then you can take that as a loss on your taxes.

And the IRS does have special treatment for different storms, depending on where you live and how you were impacted. So you should check because, in certain circumstances, you might also get an extension and, in certain circumstances, you can carry back a loss that you might not have been able to carry back before.

MARTIN: You know, to that end, I think there's often a lot of focus on people trying to get away with something with their taxes, but in your experience as a tax preparer, what's the biggest problem? I mean, is it that people really are trying to get away with stuff that they shouldn't be, or is it that people don't know or aren't really taking advantage of all the legal things that they are allowed to do in order to minimize their taxes?

ERB: I think it's the latter. I mean, obviously, you know, you're always going to have a segment of the population that's going to want to get over. It is what it is and I've seen them. They come to my office, but I actually think that the most taxpayers leave money on the table because they're scared of IRS. They're scared of making a mistake. They're scared of an audit, or they don't take very good records. When they make charitable donations, they think to themselves that it's not going to add up or they go on a business trip and they think that they'll figure it out later and so they don't get receipts and then, around tax time, they get nervous, so they just don't include it, which, you know, in most circumstances, quite frankly, if you don't have documentation, absolutely, you should not include it.

But I think most taxpayers tend to under-deduct than over-deduct. I think parents in particular because they don't realize a lot of the deductions that are associated with having children and, as a parent, I can tell you, having kids is pretty expensive, as well. But, in terms of education credits, deductions for tuition and fees, child care, those kinds of things, I think most people don't take advantage of them.

MARTIN: You were telling us at the beginning of our conversation that there's a lot of anger out there, in part because of, you know, everything that we've been hearing about in the news and the fact that the IRS wasn't even prepared to accept returns...

ERB: Right.

MARTIN: ...until this week. Has the IRS said to people, well, if you got your tax return in 10 days last year, you should expect 15 days or 20 days now? What do we know?

ERB: Well, it's really complicated. Again, I know those are the kinds of answers that people hate, but what's happening is that most people who file early are expecting a refund and there's a reason for that. You know, if you're going to owe money to the IRS, you're not going to rush right out and get your taxes done so you can write that check.

And, this year, not only was tax season delayed, but the IRS was actually overwhelmed by the amount of filings that happened all at once because tax preparers were still accepting returns. They just put them, basically, in a queue and said, OK. Kind of unleashed the hounds on January 30th.

So the IRS issued a kind of a plea to taxpayers, the - please, stop checking the where's my refund tool on the IRS webpage because they were being inundated with requests from folks trying to figure out, you know, where exactly is the refund. And the reality is that refunds are going to be delayed this year. They were averaging - last year, I was hearing eight to 10 business days and that's what IRS was kind of touting. This year, it seems like it's closer to between 10 and 21 days.

MARTIN: OK. Well, so don't count your chickens before they hatch, I guess.

ERB: Absolutely.

MARTIN: Don't go out and spend that refund before you actually get it. Finally, Kelly, how do you know - here you are, Joe/Jane Taxpayer, and you just want to do the right thing and you just want to get your taxes in and not get a visit from Uncle Sam's representatives...

ERB: Sure.

MARTIN: ...and you want to be fair to yourself and fair to the government. How do you know who to trust?

ERB: Well, I think there's a couple of things. I'm always kind of fascinated by taxpayers and how they react to money and discussions about finance because people don't think twice about offering opinions about where to go to get their hair done, the best place to get your nails done, the doctor that I really, really like to use. But they don't share information about their financial professionals.

I absolutely would ask around and then don't be afraid to ask questions when you're actually getting your return prepared. I actually have a couple of taxpayers right now that will come in to me and they'll say, you know, I claimed an education credit, but I don't even have kids. And I will say, why did you do that? And they'll say because their tax professional told them that they could. And, again, that's the point at which you need to say, you know what? But you have to explain to me why that makes sense because it doesn't make sense to me.

MARTIN: That was Kelly Phillips Erb. She's known as the Tax Girl. She's a tax attorney and contributor to Forbes and she was kind enough to join us from member station WHYY in Philadelphia.

Thanks, Kelly. OK. Now, get back to work.

ERB: Thanks.

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