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Tax Preparation Costs

Stephen Greer

February 13, 2015

Was your tax-prep bill high last year because of investments in alternative assets?  Your cost for income tax reporting on these assets can swamp your investment returns.

A recent Wall Street Journal article reported on the phenomenon that is driving up tax preparation costs for a number of wealthy tax payers.  People invest in private-equity funds, hedge funds and other partnerships without understanding what the annual accounting costs will be.

The article notes that one CPA estimates tax preparation cost at $500 for each publically traded partnership they report on a tax return.  The total invistment in such partnerships is often relatively small.  For a $20,000 investment, this tax compliance cost would amount to 2.5% of the tatal amount invested.

The costs are driven by an explosion in the number of tax return entries that these partnership K-1's disgorge to the IRS to report seperately stated items of income, deduction, credit, and alternative minimum tax information.  If a taxpayer fails to report each of these detatils, even small amounts, they can trigger nuisance letters or examinations from the IRS.

Protect yourself:

  • Examine the total amount invested in each, individual publically traded partnership.
  • Press your investment advisor about an investment's accounting costs before buying in.

Read the full article at http://www.wsj.com/articles/act-now-to-lower-your-2014-taxes-1415379734


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