With April 15th fast approaching, it’s time to pull out your old tax returns and figure out where you put last year’s receipts for your charitable donations. For many years HBS students have been going to Lewis Weinstein of GenerationTax to help them sort through the maze of tax rules and regulations in hopes of reducing their tax burden to Uncle Sam.
Weinstein, a third generation accountant, recently sat down with the Harbus to discuss his best practices and lessons learned as a long-time veteran of preparing tax returns on behalf of HBS students.
Harbus: How long have you been working with the HBS community?
LW: I have been filing returns for 17 years and have been working with HBS students for the past 11 years. In fact, my first HBS client – Mark Hulak – is still a client today. Despite having a transient client base, over 80% of my clients choose to stay with me because I have the historical information on their taxes from previous years, in addition to key information about their work and personal situations, making it very easy for me to carry that information forward and make the process much easier for them.
Harbus: Why is it important for students who have recently made the transition from professional to student to sit down with a tax advisor?
LW: According to the IRS, 52% of all tax payers use a professional tax preparer. The three main reasons why a majority of people use a professional tax preparer include the following:
1. Time – Many people simply don’t have the time to complete their own taxes.
2. Complexity – Many people don’t have the aptitude to research the areas that relate and/or affect their taxes, particularly the more complex their taxes become.
3. Fear – Many people simply want to know there will be someone there to help them if and when they are ever audited.
Harbus: Can you explain in greater detail when and how a student’s education expenses may be tax-deductible?
LW: Section 162 of the Internal Revenue Code states, “There should be allowed a deduction of all ordinary and necessary expenses paid or incurred while carrying on in a profession”, allowing some taxpayers to deduct a large portion of their education expenses, thereby greatly reducing their tax burden.
This however does not apply to all students, but rather to a smaller subset of students who meet the following very well-defined set of criteria:
1. Education must not be a minimum educational requirement for the tax payers’ profession. For example, a doctor can not deduct their pre-med expenses and a lawyer can not deduct law school expenses. In contrast, for most MBAs, their undergraduate degree will likely have satisfied their minimum education requirements for their profession.
2. Education cannot qualify the tax payer in a new trade of profession. While this requirement is slightly more ambiguous, this condition reflects that the tax payer must maintain that their graduate study in of itself can not qualify them to do anything new than what they were already qualified to do prior to entering graduate school. Instead, the education must maintain or improve skills they already have. For those who come from non-business backgrounds and did not have strong business skills prior to entering HBS, such as those in the military or from engineering backgrounds, may not meet these criteria.
3. The education must maintain and improve skills needed in the tax payer’s profession.
As mentioned earlier, you must be “carrying-on” in your profession. The IRS has a rule of thumb that says if you take off a year or less from your employment you are still considered to be carrying on in your profession.
Well, where does this put the HBS student who takes off 18 or 24 months to obtain his MBA? If that student had business skill prior to grad school, most people could argue that the MBA maintains and improves their “business” skills. In fact, many years ago there was an HBS student who had deducted his MBA expenses and was audited by the IRS who challenged him by saying he was not carrying on in his profession. The court however, disagreed, ruling that the student was carrying on his profession because the HBS program was for a definite and temporary length of time, representing a temporary hiatus not a departure from his chosen profession. The student did in fact re-enter the workforce in a similar position from what he had been doing prior to HBS promptly upon graduating.
Each case is clearly individual and if any student feels he or she might match these criteria their next step should be to investigate whether they do meet these criteria, which is something I have helped many HBS students do. If in fact there is a match, the student might be in for a significantly reduced tax burden.
Harbus: What common mistakes do you see with your student clients?
LW: To clarify, I work with all sorts of clientele, in addition to students. Across the board some of the common mistakes I see include the following:
1. Individuals who forget to carry forward their capital losses from the previous year
2. Individuals who have itemized on their federal return in the previous year and then received a refund from the state, often fail to report that state refund on their federal return the following year.
3. Individuals who paid the state for 2001 in 2002 often don’t realize that that payment qualifies as an itemized deduction for their 2002 return.
4. When individuals figure out the gains and losses on their stocks, many don’t realize that they can use the LIFO or FIFO method to determine their cost basis, which can have a clear impact on their tax burden.
5. If somebody has worked at two different jobs in one year, they sometimes can overpay on their FICA taxes. In 2002, the maximum amount of wages subject to FICA was $84,900. If an individual worked at one employer and received $84,901 in compensation and then went to a second employer within the same year and received an additional $50,000 in compensation, the new employer may not realize the individual is already maxed out on their FICA obligations. If this is the case, the individual can take a credit for the additional FICA taxes paid.
For those students who have further questions for Louis he can be reached at 1-800-640-9797 or at email@example.com.
Author’s Note: This Harbus editor did in fact engage Weinstein for some much needed tax relief, and is pleased to report that she is regularly checking her mail box in eager anticipation of her 2002 refund.