Q&A: Beverly Mumper, CPA

Beverly A. Mumper has been a practicing certified public accountant and certified financial planner on the Harbor for more than 30 years. Raised here, she’s a graduate of Montesano High School with degrees from Grays Harbor College and Saint Martin’s University. She lives in Montesano. She has two daughters, Cherie and Dana.

Her office is located at 2219 Simpson Ave. in Aberdeen. The phone number is 537-7556 and website is www.mumper.com. With income tax time upons us we turned to her expertise to answer some frequently asked questions.

As a CPA, what do you have to do to prepare for tax time each season? What else do you do besides income tax preparation?

There can be hundreds of tax law changes each year. Not all changes will affect everyone. I spend about 50 hours a year attending continuing-education classes to become aware of the new laws, to refresh my knowledge of continuing provisions and to develop tax-reduction strategies to benefit my clients. Each year I attend update courses in taxation of estates, trusts, partnerships, corporations and, my personal favorite, individual income taxation.

Also, since I’m a Certified Financial Planner practitioner (CFP), I attend courses in financial and retirement planning. It’s best for people to come in to see me for planning two years before they retire rather than two weeks after as sometimes happens.

I also do investment advisory work with client portfolios. I get paid on a fee-only basis (no commissions). My firm is a Registered Investment Advisor registered with the State of Washington.

There are rumors about the possibility of delayed return filing and refunds this year. What do you know about that?

There are certain provisions, known as tax extenders that expired on Dec. 31, 2011. Congress traditionally waits until the end of the year to extend these provisions each and every year. This year they dilly-dallied until the very last minute.

There would have been a delay in the processing of tax returns for everyone (to the end of March) because the IRS would need time to reprogram their computers and to redesign forms. Then the tax preparation software providers and tax preparers would scramble. The tax filing deadline would remain at April 15.

But there’s good news. The tax extenders issue was resolved on Jan. 1, the very last minute. Congress initially thought the very last minute was Dec. 31 until someone pointed out that since Jan. 1 was a holiday, they had an additional 24 hours. Congress proudly got it done on Jan. 1.

The IRS announced they will be ready to process returns for most taxpayers starting Jan. 30 but there will be a delay for some taxpayers with more complex returns because the IRS needs more time to reprogram for certain issues and test their systems.

What are some of the most important changes to the tax codes that people should be wary of this year?

Since Congress simply extended the 2011 tax provisions to cover 2012, there seems to be no major changes that will affect the 2012 returns.

How much has Congress’ wrangling on procrastinated fiscal issues affected the work of tax preparers and taxpayers?

It’s very difficult for us to do the needed tax and financial planning for our clients when we didn’t even know what the tax rates, deductions and credits would be for 2012 much less 2013 and beyond. When a client would ask during the year if a certain credit was available, I had to say “maybe or maybe not” depending on what Congress decides.

We didn’t know until Jan. 1 if certain important deductions and credits would be in effect for the 2012 tax returns. How can we solve the puzzle if they hide some of the pieces?

If Congress had not acted on Jan. 1, most of our tax rates and other tax provisions would have gone back to the levels in effect in 2000. It would be like traveling back in time but without a time machine. The taxpayers would have seen huge tax increases. The estate tax exclusion would have been reduced from $5 million to $1 million.

What are some of the possible tax implications for future years you see coming down the road as a result of all the political haggling in D.C.?

If there is a proposal to create a tax benefit for a group of people, Congress has to find a way to pay for it usually by reducing the tax benefits of other groups. Congress, by the way, doesn’t use the words tax benefit. Congress calls them “expenditures.” For every new tax benefit, there must be a corresponding reduction of “expenditures” somewhere else. I’ve read that certain tax “expenditures” have been targeted for at least 40 years and may be targeted again because of the tremendous “cost to the government.” Some of the targets are the home interest deduction, local taxes, including the sales tax, tax-free employer provided health care and tax-free life insurance.

Home interest deduction:

I usually don’t make predictions, but sooner rather than later, the home interest deduction will be reduced or eliminated for the high-income taxpayers ($250,000 or higher).

A recent New York Times article stated that “one of the reasons the home interest deduction is so vulnerable is that both Democrats and Republicans have recently favored capping deductions.”

The article went on to say that households realized tax savings from the home interest deduction in the amount of $83 billion in 2010 according to the Reason Foundation. The bulk of the savings were enjoyed by high earners.

Sales tax deduction:

The sales tax deduction has been eliminated for most of the country, except for a later revision that allowed a deduction for the greater of the state income taxes paid or sales taxes paid. Since Washington doesn’t have a state income tax, taxpayers here opt for the sales tax deduction. This provision has been extended for 2012 and 2013, so we’re safe for those two years.

Tax-free employer provided health insurance benefits:

Another tax “expenditure” Congress is eyeing is the tax-free treatment of employer provided health insurance.

This is how this benefit works. An employer provides medical insurance for the employees. The employer gets a tax deduction for the insurance premiums paid. This is tax expenditure in the eyes of the government. However, this very valuable benefit is not included in the employee’s W-2 which means it is not taxed, another tax expenditure. The government counts this as two tax expenditures for the same transaction.

The government has considered reducing or eliminating the employer’s tax deduction but is concerned that the employer may cancel insurance coverage, and the employees wouldn’t be able or willing to buy a replacement policy. This may result in even more uninsured workers. So, they are thinking along the lines of making the insurance benefits at least partially taxable on the employee’s W-2. I don’t see this benefit going away completely, at least not right away. I do see that benefits over a certain level may be taxed eventually.

What sorts of things should taxpayers save receipts for?

Taxpayers generally should save receipts if they itemize their deductions, own a rental or own a business. Generally save receipts for any item that was deducted on the tax return. Save the receipts until the statute of limitations expire, usually after three years.

If a person purchases real estate, collectibles or other investments, save the purchase records to be able to prove your cost for when you later sell it.

How long should people keep their old tax returns and records, and why?

The general rule is to keep the tax returns forever (until death or possibly three years after death).

Here are some reasons to keep a copy of each return:

I know someone who discovered gaps in his Social Security earnings record when he applied for Social Security benefits. Many years before he retired, his former employer had sold its business to another company. He was retained as an employee of the new company. Both companies issued W-2s to him and he reported his income properly. However, the first company, as an oversight, failed to report his earnings to the Social Security Administration. His lifetime Social Security benefits were reduced a bit because he was unable to find his W-2 for that period. It could have been worse if several years of omissions had been involved.

Sometimes there are errors in the calculation of pension benefits. Past tax returns with the attached W-2s could be helpful to prove earnings.

In the case of a divorce and possible spousal support, it may be helpful to have tax returns to support a history of a spouse not working outside of the home.

How long does the IRS have to audit my tax returns?

The IRS generally can go back three years to audit a return. They can go back six years in the case of a “substantial error.” In the case of fraud, there is no statute of limitations. The IRS can go back forever. Remember, the IRS doesn’t have to prove guilt; the taxpayer must prove innocence.

What are some of the basic recommendations you would make to anybody preparing their own tax return?

Someday, but not anytime soon, I’m going to retire. I will not do my own return even if it becomes “simple.” I’m going to hire a CPA who is young enough so that I can stick with him or her for the rest of my life. If I won’t do my own return, why would anyone try to do their own? People don’t know what they don’t know.

The bulk of my clients have been with me for a decade or more.

What do you like most about being a CFP and CPA?

I like meeting with people and helping them with their tax and financial issues. I have the best clients in the world. It develops into a long business relationship. After a while, I’m working with multi-generations associated with the original clients.

What do you like the least?

Congress’ inaction and late-December tax changes every year is getting tiresome. But this has been going on as long as I’ve been a CPA so I’ve almost gotten used to it.