While many taxpayers may not require professional help to prepare their tax return, those taxpayers with even a modestly complex tax situation can often benefit from professional help. These benefits include: making sure your tax return is prepared correctly and according to the law, helping identify tax deduction opportunities that you may otherwise miss when preparing your own tax return, and assisting in tax planning issues such as estimated payments, IRA planning, and other tax minimization strategies.
So, who should and should not consider hiring a tax professional such as a CPA or Enrolled Agent (EA) to have their taxes prepared?
If any of the following describes your tax situation, you most likely do not need to work with a tax professional:
- You only have a W-2 or income from Social Security.
- The 1099s from your bank or investments are only one page long.
- You are using the standard deduction, or your itemized deductions are straightforward.
If this is you, doing it yourself with tax software or a less expensive tax preparer will most likely be fine.
On the other hand, if your tax situation includes any of the following, you might benefit from hiring a tax professional:
- Stock and mutual fund sales. While 1099s from stockbrokers have improved over the years, they still can be very complex and sometimes have missing information.
- Schedule A. If your itemized deductions include state taxes, investment interest, charitable donations of stock, or disaster losses, you may benefit from the expertise of a CPA firm.
- Schedule C. Self-employment income is subject to both income tax and self-employment tax. As a result, Schedule C mistakes can have a big impact and result in paying too much tax or leave you vulnerable to IRS penalties.
- Rental property. The rules around rental property deductions and loss limitations are complex, especially if you have multiple properties. Vacation home rentals and renting property to a business you own also come with their own sets of rules.
- Schedule F. Farming and ranching, even on a small scale, are different from almost all other kinds of businesses.
- IRA strategies. Funding your retirement is not limited to choosing between a Roth or a traditional IRA. CPAs can help you with advanced strategies such as Roth conversion strategies, back-door Roth contributions, and solo 401(k)’s.
- K-1s. Reporting the information from partnerships or S-corporations correctly is not always easy to do. For example, basis issues can limit your ability to deduct all of your losses. K-1s from publicly traded partnerships (PTPs) can also be especially tricky to get right, especially when you sell those interests.
- Advanced tax planning strategies. These can range from net unrealized appreciation (NUA) analysis to estate and gift planning to charitable giving strategies. Taxpayers who take advantage of these methods can reap substantial tax savings while honoring their long-term financial goals.
- Estimated taxes. The IRS safe harbor method for calculating estimated tax payments is simple to follow, but it may not be right for every situation.
- State filings. While Florida has no state income tax, most other states do. If you have income from other states, or if you spend part of the year in other parts of the country, you may need to file income tax returns in multiple states. This can be unexpectedly complicated, even with just one or two additional states.
- Stock options. Companies ranging from tiny startups to Fortune 500 corporations use these as performance incentives. However, reporting them correctly is rarely as simple as just entering the numbers on your W-2. Plus, certain stock option transactions can result in significant Alternative Minimum Tax (AMT) consequences.
- Willing to pay a professional to get it right. You could muddle through any or all of these on your own or use a low-cost option like a store-front tax preparer. However, these options may cost you, either in the form of paying more tax than necessary or getting the attention of the IRS with an incorrectly prepared tax return.
Not sure whether you need a professional to prepare your tax return? Feel free to contact our offices and we will give you an honest assessment.