Taxing Situations

As an AARP volunteer Tax Aide for a second tax season, I completed about 100 returns and reviewed many others prepared by other volunteers. I volunteer two days a week from February 1 to April 14 at two different senior centers and continue to make observations based my clients’ tax situations.

The Tax Aide program is free and not limited to seniors or AARP members. Even though most clients are retired seniors, we can serve all ages and incomes. Only more complex returns are out of scope.

It is not unusual to be helping someone whose spouse has recently passed away. I had a couple of situations where the death was in 2023 which had allowed them to continue to file “married filing jointly” last year. As I prepared the 2024 return, they were hit with the implications of now filing “single.” Their standard deduction is essentially cut in half. If their income and withholding stayed the same, this meant a big tax bill. This led to difficult conversations where I explained that: 1) they had to come up with the money to pay this year’s taxes; 2) they were potentially on the hook for penalties associated with under withholding because they owed more than $1000; and 3) they had to consider increasing withholding for the current year to avoid a penalty next year. As many of our clients have low incomes, these prospects were daunting. If I saw someone where the spouse died in 2024, I was able to counsel them to increase their withholding now so they did not get caught short next year.

I saw a smattering of W-2G forms. These represent gambling winnings, usually from one of our local casinos. Not surprisingly, the state and city have taken their cut and this is disclosed on the W-2G. A friendly single man nearing retirement brought in a W-2G showing about $1,600 in slot machine winnings. I congratulated him on his luck.

I did the return and then the reviewer and I got to talking to him about whether he had any offsetting losses. In the end, he made a quick trip to the casino and obtained a report for the year based on his membership card. His losses for the year from playing the slots were $15,000. He had no idea.

I was thinking about his situation as I was driving home that day. I would never do what he is doing… I have actually never been inside a casino. On the other hand, he was single. He had a well-paid government job for which he had a significant portion of his pay directed to his pension plan. Gambling presumably represented his preferred entertainment. If he went to the casino to play the slots a couple of times a week, who am I to say that was wrong?

In the end, we could not deduct the losses… and he had to pay taxes on the $1,600. After seeing the whole picture, I was less inclined to think he was lucky.

One lady came to me who had not used our service before. She had been widowed a few years ago and was anxious about sharing her information with a stranger because she and her late husband had used the same small local accounting firm to do their taxes for the last 40 years. She knew them and trusted them.

She handed me last year’s return in a nicely bound booklet and pointed out the reason she came to us: the invoice tucked in the back was $360. A friend at church sent her to us. It was one of the simplest returns I did all year since all she had was social security, a pension and a few dollars in bank interest. She went away happy because she would keep this year’s refund instead of paying most of it to the accountant.

We have a fair number of clients who owe zero tax on either their federal or state return. Some tell me that a friend told them that they don’t need to file anymore. While technically correct, we are taught to counsel them that filing prevents someone appropriating their social security number and filing to scam the system.

More so this year than last, I am seeing clients come in with IP PIN numbers. These are six-digit numbers provided annually by the IRS to tax payers who request this identity protection. Think of it as similar to the multi-factor authentication numbers online accounts text to you. The only difference is that for victims of tax identity fraud, these are mailed to the taxpayer near the end of the calendar year. Note that these numbers are different from the PIN you are asked to put in if you e-file.

One morning two out of the first three clients had IP PINs because their social security number had been compromised with a fraudulent tax filing. One man in his mid-eighties told me that his daughter had to spend hours on the phone with the IRS straightening out the fraud. He said he would never have been able to work through it without her. You don’t have to wait until your identity is stolen to get an IP PIN. The only catch is that if you proactively apply, they don’t mail you the IP PIN… you have to sign on to your IRS account each year to get it. I’ve decided to apply for one for myself…preemptively protecting my identity.

I readily repeat my observation from last year: this is challenging and sometimes frustrating work. It is also interesting and rewarding. Assuming each of my clients would have paid $360 to have a paid preparer do their taxes, I put $36,000 in the pockets of people who need it for their daily expenses. Multiply that by 28,000 tax aide volunteers across the country. Not bad.