My roommate and I were talking about taxes this evening for over an hour and found out that H&R Block messed up on his taxes for 2006 and we suspect other years in the past as well. He is looking through his paperwork right now to locate the other ones and to double-check. His situation is similar to mine in regards to rental income, so here it is without further ado (I'll call my roommate John so you understand the flow):
- The past 3 years John has had a house in his hometown that someone has been renting from John while John bounces around job to job away from his hometown.
- The amount the renter pays is pretty much equal to the mortgage, taxes, and insurance, with John taking care of repair expenses.
- H&R Block (at least for John's 2006 return) had him use the 1040A, which does not have a spot for rental income and expenses.
- Rental income and expenses go on the 1040 line 17, utilizing Schedule E to document the numbers.
- They actually stuck the interest he paid to the mortgage company as interest income (as if John had $100K in the bank making 4% interest).
- He therefore paid taxes on interest he indirectly paid on!
I reminded who will work the hardest for him...himself. He assumed that they will do the job right since they have no reason to intentionally mess up his taxes. He'll probably be sitting down in the coming weeks and be making himself $200/hr in fixing the mistakes made on the 2006 (and probably ones before that as well).
For those of you in the same boat as me with rental income and expenses, I recommend reading 1040 Schedule E and understand it fully. I am still bouncing back and forth whether to have an accountant (not H&R Block type place) do ours or not. Here's our special circumstances:
- Cancellation of Debt (need to document that we were insolvent at the time of cancellation)
- Rental income within our home (need to calculate percentage of house that is ours vs. rented out)
- Daughter born (easiest of them all to add to form)
Next year I am certain we'll be going to an accountant, but this year I'm uncertain. What do you think?