By Christian Hudspeth, CFP®
“Should I hire someone to do my taxes or could I do this myself?”
This is a question I often received in my days as a professional tax preparer several years ago.
Being in the fortunate position of having plenty of business, I had an honest response that depended on the asker’s financial situation during the tax year as well as how comfortable they felt dealing with tedious money matters.
Plenty of people were more than capable of doing their own taxes, but too many others who were trying to save a buck by not hiring a professional certainly missed out on thousands of dollars in tax savings.
Or even worse, some of them put themselves at risk of paying thousands of dollars on tax penalties or suffering through an audit by not getting their work double checked by an expert.
Here are four key questions to help you decide if this is the year to work with a CPA or other tax professional:
- Are you self-employed or a business owner?
Whether you are a sole proprietor, freelancer, a gig worker (Uber, Lyft, Favor), or the owner of an S-Corp, filing taxes for a business can get complicated. And because entrepreneurs who file on their own sometimes forget to report all of their income correctly or take more deductions than they may legitimately claim, business owners are often targets for an IRS audit.
See if you know the answers to these questions:
- What counts as start-up or research & development (R&D) expenses?
- How does the home office deduction work?
- Is a new business vehicle purchase tax deductible?
- How does depreciation on business assets work?
And what about what you don’t know? Do you know the list of tax-saving deductions you might be missing out on in your particular business situation? In my experience, a good tax preparer’s fee was easily paid for in tax savings they found for a business owner, sometimes 10-fold. And the tax prep fee is even tax-deductible from business income.
2. Do you own rental/investment properties?
Most landlords I came across were excellent at keeping track of their rental income and expenses. But they had a few blind spots and didn’t know some lesser-known IRS rules, like how having their tenant repair their property or put up a fence counted as rental income. Or how replacing an oven or air conditioning unit was not a regular tax-deductible expense, but rather an “improvement” that could be depreciated over time.
The real complexity came when these landlords sold their rental property. Many didn’t know they’d have to pay a depreciation recapture tax on all the depreciation expenses they claimed on the property over the years. Or that improvements to the property (remodels, ovens, fences) added to the cost basis of their property, which could greatly reduce the capital gains taxes they owed the IRS on the sale.
3. Does your employer award you stock, options, or other financial incentives? Or do you have taxable brokerage accounts with stocks, bonds, MLPS, ETFs or mutual funds?
Unlike with tax-advantaged retirement accounts (IRAs, 401ks, Roth IRAs and the like) which only impact your taxes when you withdraw or contribute to them, the game is completely different when you hold investment securities in taxable brokerage accounts.
Most people know this part: The amount of taxable income depends on the gains (profit) you made from your investments.
But did you know the commissions you pay on each trade, the amount of time you hold the security, the dividends you reinvest, and even the amount of time between a sale and repurchase of a security all affect your capital gain and the tax rate you might pay?
The complexity really goes up if your employer offers stock options, an employee stock purchase plan (ESPP), or restricted stock units (RSUs). Many employees leave thousands of dollars in tax savings on the table by not working with a tax professional and financial advisor on the strategy behind these valuable incentives.
4. How much is your time worth?
According to the IRS, the average tax filer spends 13 hours preparing their return. While business tax returns took 24 hours on average, even the typical non-business filer took 9 hours with all the research, reading, clicking around a tax website, paying, and e-filing involved.
If you earn $50 to $100 per hour, that could cost you $450 to $1,300 for your time alone – which is a realistic estimate of the cost of non-business tax prep fee anyway. Unless you enjoy reading about tax law changes, you may dub that time as “hours you’ll never get back.”
This is to say nothing about possible errors. If you made a mistake on your return, do you have the time, energy, research skills, and desire to pay penalties, file an amended return, or cooperate with the IRS on an audit that could take hours or up to several months to complete? With many reputable tax preparers offering accuracy- and audit-assistance guarantees, many people will choose peace of mind over the alternative of going it alone.
The Takeaway
Unless you crave learning about taxes, have only simple forms of income (W2 wages only or 1099-R), or have the luxury of time researching the answers to many of the complex issues mentioned above, do yourself a favor and work with a professional to have your taxes filed efficiently and accurately.
The potential tax-saving opportunities are magnified when your tax professional works in tandem with a trusted financial advisor and financial planning team. While a CPA may look at ways to reduce your taxes in a given year, a solid financial planning team can:
- Spot missed potential tax deductions,
- Map out your taxable income (and tax brackets) years into the future,
- Execute well-timed Roth IRA conversions,
- Plan for tax-optimized withdrawals,
- Identify tax-smart donation strategies that don’t always require itemizing,
- All to potentially save you thousands of dollars in taxes over your lifetime.
What choice will you make this year?
More from FMP Wealth Advisers:
- 5 Secure Act 2.0 Tax Changes Coming to Your IRAs, 401ks in 2024
- This Tax Season: Using Itemized Deductions to Save Money on Taxes
- When is the Best Time for a Roth IRA Conversion?
*The information presented here is not specific to any individual’s personal circumstances. FMP Wealth Advisers is not providing investment, tax, legal, or retirement advice or recommendations in this article.
**To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
***These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
