ChatGPT can write essays, poetry, letters, and more, so we posed the question—can it do our taxes? Our company, TaxBuzz, decided to take the technology for a test drive, asking, “What status I should use when filing my taxes?”
It offered typical definitions of the IRS’ various filing options. Then came the best advice of the day: “You can consult a tax professional to help determine the best option for you.” While ChatGPT might be able to give you a CliffsNotes-style answer to your query, expecting a how-to tip or complete strategy isn’t in the cards.
This brings up quite a few questions. When it comes to the US tax code, there are numerous gray areas and concepts that are set up for interpretation. There might be several ways to solve a problem, but will the AI be able to parse that out? Right now, it seems the answer is no.
According to ChatGPT, “If you find an answer is incorrect, please provide that feedback by using the Thumbs Down button.” In addition, ChatGPT “will occasionally make up facts or ‘hallucinate’ outputs.”
When it comes to analyzing the tax code, expertly trained humans have access to trusted and verified libraries of information that they can use to verify tax strategy claims. ChatGPT simply doesn’t have the same level of brainpower or education as a human tax professional.
We must realize that the tax code is complicated—so complicated that the AICPA recently sent a 163-page letter to Congress with suggestions for simplifying it. More importantly, everyone has their own preferences regarding tax preparation and tax planning.
ChatGPT’s current version was only trained on data sets available through 2021. So, if you are asking for tax advice, there’s a good chance something has changed in the tax code. ChatGPT’s service agreement is pretty clear: “The services are provided as is. We do not warrant that the services will be uninterrupted, accurate or error free, or that any content will be secure or not lost or altered.”
We put ChatGPT to the test for tax advice on real-world scenarios.
Question: My client got married last year. He was a resident of California last year and his wife was a resident of Florida. Can I file them married filing separately and not split income since his wife only has Florida income?
ChatGPT response: Yes, if your client and his wife choose to file their taxes separately, they can file using the married filing separately status. Since your client was a resident of California and his wife was a resident of Florida for the tax year in question, they will likely need to file state tax returns for both California and Florida, respectively.
Under MFS status, your client and his wife will report their own incomes, deductions, and credits on their separate tax returns. Your client will report his California income and his wife will report her Florida income. They will not need to split their income since they are choosing to file separately.
However, it’s important to note that filing separately can sometimes result in a higher tax bill compared to filing jointly, as certain deductions and credits may be limited or unavailable for MFS filers. It’s a good idea to compare the tax outcomes of both options (filing jointly vs. separately) to determine which filing status will result in the lowest tax liability for your client and his wife.
Our analysis: If the taxpayers were married on the last day of the year, their option for filing their federal return is either married filing jointly or married filing separately. When a couple resides in a community property state, their income on their MFS returns must be allocated by community property rules. In this case, California is a community property state, but Florida isn’t, so they would each report their own income on their MFS federal returns.
ChatGPT is in error because Florida doesn’t have income tax—no state return is required by the Florida resident. ChatGPT also didn’t address the community property issue, which was the gist of the question. The California resident would report their own income on a California MFS return.
Question: Parents gave their daughter a mobile home they owned for a long time. She sold it a few months after the gift, so is she entitled to long term treatment of the sale?
ChatGPT response: The tax treatment of the sale of a gifted mobile home will depend on several factors, including the value of the home at the time it was gifted and the length of time the daughter held the mobile home before selling it.
If the mobile home was gifted to the daughter and she later sold it for a gain, the gain would generally be treated as a long-term capital gain if she held the mobile home for more than one year before selling it. In this case, the daughter would be eligible for preferential long-term capital gains tax rates, which are generally lower than ordinary income tax rates.
However, it’s important to note that the daughter’s basis in the mobile home would generally be the same as the parents’ basis in the property at the time of the gift. If the parents’ basis in the mobile home was relatively low compared to the sale price, the daughter could have a substantial capital gain even if she held the property for only a short time. It’s also worth mentioning that if the mobile home was gifted to the daughter and she sold it for less than its fair market value at the time of the gift, she could potentially claim a loss on the sale, although the specifics of the loss calculation would depend on the facts and circumstances of the transaction.
In any case, it’s advisable for the daughter to consult with a tax professional to determine the specific tax treatment of the mobile home sale and to ensure that all tax obligations are properly accounted for.
Our analysis: If a property is given during a donor’s lifetime, the donee (gift recipient) keeps the same basis as the donor for gain property. For loss property, the donee’s basis is the fair market value, which prevents the donee receiving tax benefits from the economic losses which occurred while the donor owned the property. Basis is also increased by the amount of gift tax paid, if any. The recipient’s holding period includes the donor’s holding period.
ChatGPT is in error because its analysis purports the daughter must hold the property longer than a year to get long-term capital gain treatment. That’s incorrect because the holding period includes that of the donor. ChatGPT also purports that the daughter could claim a loss if she sold the mobile home less than the date of death fair market value. This isn’t true either, because she must use the properties fair market value on the date she sold it, negating any loss other than the sales expenses.
We only shared a couple of examples to the responses from ChatGPT from our queries; we used actual questions posted on our tax practitioner technical support forum. ChatGPT provided incorrect answers 100% of the time—though usually on the right track, it missed nuances of the tax code.
Unlike previous technology, ChatGPT and AI tools aren’t going away. We plan to integrate the search tool within our TaxBuzz vertical search engine and tax and accounting professionals websites, where the AI pulls its information from our thousands of trusted experts, guides, and published advice versus the vastness of the web. The goal here is a better user experience—whether it’s faster answers for tax professionals doing research or consumers looking for quick advice.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Lee Reams II is the CEO of TaxBuzz and CountingWorks and has spent the last 20 years developing and executing tools that help small tax and accounting firms thrive.
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