Tax season is in full swing now that the IRS has begun accepting tax returns. You may asking yourself if you should hire a CPA* or someone to prepare your tax returns.
Can't I Just DIY?
Of course! Advances in technology are increasingly making it easier to move data such as wage and withholding information, brokerage transactions, and even crypto transaction information into commercial tax preparation software. Furthermore, the Tax Cuts and Jobs Act of 2017 significantly increased the standard deduction. This means fewer people are itemizing on their tax returns which can help reduce complexity. In fact, the Tax Foundation, a non-profit that focuses on tax policy, estimates that less than 15% of filers will itemize for 2019 under the current law compared to approximately 31% under the old rules (https://taxfoundation.org/standard-deduction-itemized-deductions-current-law-2019/). If your tax situation is rather simple and/or you're comfortable navigating tax rules, you may be just fine taking the DIY approach. Many of the softwares will allow you to begin preparation for free (and pay when you file) and you can decide if you feel you need additional help or you're good to go!
Keep in mind that tax is effectively applied law. There's a misconception that it's black and white when in reality, there is so much grey and "it depends." Your particular facts and circumstances can mean drastically different outcomes compared to someone else. Tax software helps getting the data into the system easier and provides tools so that you can prepare your own tax returns which is not the same as having a professional preparer.
Ok, still on the fence and need a little more guidance? See below for some common situations that might warrant bringing in a hired professional.
Independent Contractor Status (1099 Income)
Your tax situation becomes a bit more complex once you move from employee to independent contractor. For example, as an employee, you have taxes deducted and withheld directly from your paycheck including federal income, Social Security, Medicare, and state income taxes (if applicable). Certain municipalities even have their own taxes. As an independent contractor, you are essentially your own mini business and are responsible for directly paying your own taxes including income and self employment taxes. Failure to do so can result in not only a big tax surprise in April but also penalties and interest. Furthermore, you may be entitled to deduct certain businesses expenses against the income. Working with a CPA or tax preparer throughout the year can help ensure that you're taking care of your tax obligations as well as taking advantage of tax deductions that you may be entitled to.
Basically, the above situation but on steroids. As your operation moves from being more than just you, tax preparation starts to get more complex. For example, in today's mobile work environment, hiring remote employees can open you up to tax exposure in different states. Payroll and employment taxes are now due not just for you but also your employees. Employee benefits including insurances and retirement plans have their own tax ramifications. Choice of entity for taxation purposes becomes more relevant at this stage. Tax plays a major role in succession and exit planning. Furthermore, having a trusted tax advisor to help round out your team can help provide ongoing expertise.
Rental real estate is its own niche. Rental real estate has tax benefits that are not as easily afforded to other investments but come along with much more complexity - non-cash tax deduction for depreciation, different capital gain rules on sale including depreciation recapture, and the ability for tax-deferred exchanges to name a few. A CPA can help you with tax diligence on the front end to make sure you're set up going forward, such as calculating the correct depreciation, selecting the right entity structure for you, and helping you properly set up books and records (this is a business after all). If you're looking at purchasing rental properties, it's worth considering hiring a competent preparer at least for the first year to help you get set up. However, rules can and do change so paying for the extra set of eyes each year might be a great investment.
Stock options, RSUs, ESPPs, SARs, ESOPs, and the like have their own complexities. Working with an experienced tax professional throughout the year can help you analyze and make more informed decisions with an eye toward tax.
Complex Investments or Random Complexities
Perhaps you're a partner in a business and receive a K-1 or you own master limited partnerships (MLP). Or you're a day trader or an active real estate trade or business. Maybe you have one-time credits that you're not sure about such as energy efficient property purchases such as solar panels. Maybe you have household employees and need to pay the "nanny tax." Again, these situations may benefit from having a tax guide along the way.
Peace of Mind
Bringing this full circle, just because you can doesn't mean you want to or should. Fortunately, there are people that love this stuff and want to help. The tax landscape continues to change and some of these changes such as the Tax Cuts and Jobs Act of 2017 and the recent SECURE Act have been dramatic. Working with an expert that keeps up on these changes can provide peace of mind.
Interested in learning how taxes play a part in your financial plan? Schedule an intro call with us!
The above is for general information only. Consult with competent investment, tax, or legal counsel to best understand your unique circumstances before implementing any strategy. Read our firm's disclaimer here: https://www.windingtrailfinancial.com/disclaimer.