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CNN Sunday Morning

Interview with Jim Underwood

Aired March 03, 2002 - 11:40   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
FREDRICKA WHITFIELD, CNN ANCHOR: Welcome back. 'Tis the season that most Americans fear and dread, tax season, (UNINTELLIGIBLE) but we've got a lot of help for you. The April 15th deadline for most Americans to file their tax returns is just weeks away, and this morning we're going to give you some free advice on how to handle your returns this year and how to get some of those questions you have answered. Joining me is Jim Underwood. He's a certified public accountant with Tarpley & Underwood, P.C. All right, thanks for joining me this morning.

JIM UNDERWOOD, TARPLY & UNDERWOOD, P.C.: Good morning. Nice to be here.

WHITFIELD: Lots of questions. It's always such a complicated time because there are so many changes in the tax law every year.

UNDERWOOD: There are.

WHITFIELD: So to get us started, let's go to a young man who we caught on the street who has a question. Let's roll that tape now.

UNDERWOOD: OK.

ANDY WIGAND: I'm Andy Wigand (ph) from Toledo, Ohio and my question would be, why are so many of the tax forms so complicated, and is there some way to cut through the Byzantine complications of the forms so that the average person can fill out their taxes?

UNDERWOOD: That's an excellent question, and it would seem like our tax system could be much more simple, much more logical, but part of what has happened over the years is that the tax code has been designed to implement a lot of social policy. There have been a lot of changes that have been made that are targeted towards certain groups of taxpayers.

For example, in this year's returns, there are at least 26 different credits, and 52 different phase-out ranges, really at the middle-income taxpayer level that make for complexity that really isn't warranted. Computer software helps with this, but it's almost a necessity anymore. There have been a lot of moves towards tax simplification, to try to simplify the tax code, but again there's so many things that are caught up in it in terms of social policy and things that are trying to be accomplished there.

WHITFIELD: Yes. People feel really cheated because they're having to pay hundreds of dollars to hire someone, such as yourself.

UNDERWOOD: Right.

WHITFIELD: CPA, just to get some of these, you know, some of this paperwork done, even if you know their form should be pretty simple for their personal income or lifestyle.

UNDERWOOD: Part of the problem is, it's the people who have the least income who have credits, such as Earned Income Tax Credit, Child Dependency Credits, things of this nature that are very complicated to calculate who's eligible to get them. But unfortunately, these credits are targeted towards the people with least income, and the least ability to pay for assistance in answering the questions.

WHITFIELD: OK, we've got an e-mail too. "What's the criteria for Earned Income Tax Credit?"

UNDERWOOD: That's one of these, again there's not a simple answer to the criteria. It's a phase-in of different income levels, depending on your filing status, whether you have no children, one child, two or more children. So it's a specific calculation that you look at.

The instructions to the Earned Income Tax Credit are contained in the instruction booklet, but that's why it's just another example of the complexity, because it will depend on your exact situation again what your income is, what your family situation is, how much if any of that credit that you actually get.

WHITFIELD: We're also inviting people to come to the CNN Center. If you happen to be in Atlanta, where you can ask you question live, and that's where Brian is. He's in the CNN Center and he's got a question for you.

BRIAN: Yes, how you doing?

UNDERWOOD: Brian.

BRIAN: My first time married filer. Is it more beneficial to file separately or together?

UNDERWOOD: Almost always, it will be more beneficial to file married, filing separately. There are a few circumstances where, when you separate your income, if one spouse has high medical expense deductions for example that you would lose because of the income limitation, then sometimes you'll find that married filing separately is more beneficial that way.

We also see it on occasion where couples will file, married filing separately because they keep their finances separate, and one spouse doesn't want to be liable for the tax obligations of the other. But most of the time we'll find people filing married jointly.

WHITFIELD: OK, now earlier in the week we talked with Dora. We ran into her on the street here in Atlanta, and this was her question. DORA: My name is Dora Ricks (ph) and I'm from Fayetteville, Georgia and my question is, I switched from a 401 (k) with my employer and became an independent contractor, which made me eligible for an IRA. So how does the IRS know that I was eligible for both in the same year?

UNDERWOOD: That's a good question.

WHITFIELD: Interesting, yes.

UNDERWOOD: And that happens a lot when people change jobs and they go from employee to self-employed. When she files her tax return and reports a self-employment income, it will go on a Schedule C, Income from a Trade of Business. That Schedule C income is a trigger. The IRS sees that and knows that she is perhaps eligible for the IRA contribution.

There's a potential, however, because of income limitations, that while she is otherwise eligible, because she has self-employment, if her income rises past certain thresholds, and again depending on marital status and other things what these thresholds are, then she may be able to make a contribution but may not be able to fully deduct it.

WHITFIELD: OK, I hope Dora is watching in order to get that response, because I wouldn't be able to (inaudible). All right, now Dennis also has a live question. He's in the CNN Center. What's your question, Dennis?

DENNIS: Hello, I'm a Canadian who works in the U.S. I have a small company here, and I pay taxes in the U.S. I get my wages from here. My question is, when I take that money across to Canada, I pay an extra 20 percent on top of that. Short of moving to the U.S., is there any other way to get around paying so much taxes?

WHITFIELD: That seems like a pretty common dilemma these days.

UNDERWOOD: We had that on a lot of cases, and the answer there will depend on his actual tax status in the U.S. and the situation where he is in the U.S. If he is here as a resident alien, with a green card for example, he files taxes as a U.S. citizen on all of his worldwide income, regardless of where it's earned.

If he pays taxes in Canada, for example, on that same income, he is more likely than not entitled to a credit for all or a portion of that tax as a reduction against his U.S. tax. So that in most cases, there's not truly a double tax.

If he's here just on a temporary work visa, then you're got a different set of rules that the Canadian-U.S. tax treaty come into play and you have to figure out which treaty provision controls there.

WHITFIELD: Great. All right, thanks very much, Jim Underwood, for joining us this morning, with Tarpley & Underwood, P.C., appreciate it and of course we'll probably have you back, because April 15th is still yet a few weeks away. UNDERWOOD: Yes, it is.

WHITFIELD: We got a little time to get our tax preparations going, but a lot of us still have a lot of questions. So thanks very much.

UNDERWOOD: Thank you.

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