TOP 5 MISTAKES THAT MAY BE COSTING YOU MONEY AMANDA HAN & MATTHEW MACFARLAND
We reviewed Carol’s prior year tax return to find out
that her CPA incorrectly prepared her individual tax
return showing her to be a passive investor in the
partnership rather than as an active business
owner. Because of this error, Carol left $30,000 of
tax write-offs on the table! Fortunately for Carol, we
were able to simply check a box in the tax return for
her to claim that $30,000 tax write-off. So if you are
a business owner or someone who receives a K-1
from any of your businesses or investments, make
sure you speak to your tax preparer to ensure you
are not erroneously being limited on your tax writeIf you invest in real estate, make sure you speak to
offs by the passive loss limitation rules.
your tax preparer to ensure that are claiming real
estate
professional
correctly
and
that
any
Mistake #4: Missing Carryforward Tax Benefits
appropriate election is in place before you send off
your tax returns. On average, the tax savings
There are a lot of things on our tax returns that
between a real estate professional and someone
move with us from year-to-year, better known as
who is not a real estate professional is anywhere
“carryforwards.” For example, if you have had
between $5,000 or more each and every year.
certain types of ta x deductions, losses, or credits
that you were not able to use in the past for any
Mistake #3: Limited by Passive Loss Rules
reason, these generally get “carried forward” to
your future tax returns, from one year to the next.
This next example is a common situation that we
see time and time again. One of our clients, Carol,
is a retired teacher that operates a home-based
health food business with her friend Joyce. Based
on the suggestion of her advisor, Carol and Joyce
correctly formed a partnership to jointly run the
business. As with many businesses, not every year
was a not a profitable year. For Carol and Joyce’s
business, it was especially bad the first year and
they suffered losses of around $30,000. After
meeting with their tax preparer, Carol was shocked
to learn that after losing so much money, she still
owed taxes to the IRS.
Carryforward tax benefits being lost between the
years is yet another common mistake we see in
reviewing client’s prior year’s tax returns.