As tax season winds down, many Americans will once again ask themselves this age-old question: Why didn’t I hire a professional to prepare my taxes?
While many adults competently crunch their own numbers with programs such as TurboTax or work with a storefront accountant, as life becomes more complex and assets become more diversified there are many good reasons to enlist a highly skilled tax professional, financial advisors say.
Not only do accountants know the correct way for their clients to represent the most recent year’s financial activity and take deductions (so as to avoid punishment for mistakes), but they may also open clients’ eyes to deductions or other legitimate tax filing approaches that save them money and provide them with additional investable assets.
A professional accountant will provide guidance on how to collect information needed for a return and also represent you and absorb liability for you on returns they prepared should you receive any inquiry—whether a casual request or full-on audit examination—from the Internal Revenue Service.
Here are five reasons and types of circumstances where advisors say you may want to hire a tax professional:
You’ve begun itemizing deductions or have investments that generate paperwork.
If you’ve got a full-time job, workplace-provided automatic retirement account, and rent an apartment, you may not need a tax professional. But if you begin itemizing deductions—whether for mortgage interest, child rearing-related expenses, or more—you may need help from a tax pro, says Diane Bourdo, president of the Humphreys Group in San Francisco.
“When you graduate from standard itemization and your investments are throwing off K-1 or 1099 forms, it may be time for an accountant,” she says. “The point of working with an accountant is accuracy, and also optimizing your approach.”
The cost of DIY exceeds the price of hiring professional help
Ironically, one reason financial advisors recommend that clients work with a tax professional is that using one can often help the investor save money. If an $800 tax preparation process saves $2500 on a tax bill because a CPA flagged deductions the investor didn’t know they could take, that means an investor has more investable assets and savings for the future.
Some consumers may be unaware of or afraid to take certain types of deductions, or not know that certain types of gestures—moving money into a retirement account before the annual tax deadline, for instance—can help them with both their tax bill and overall financial plan.
You run a small business
Small business clients are those the most likely to itemize deductions. However, with itemized deductions they run the risk of either incorrectly taking those deductions available to them (thus making themselves vulnerable in the event of an audit) or lacking the confidence or awareness to tap the full array of deductions for which they’re eligible.
Additionally, some small business operators—whether they’re sole proprietors or work loosely with partners or a few employees—may need expert assistance in what form their business should take. Whether a business is a limited liability corporation, incorporation, S Corporation, etc., that can influence both tax and financial planning and the dollar amounts and treatment of retirement savings options.
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You’re debating retirement savings plans
A financial advisor and a CPA may both bring valuable insight to the table when it comes to choosing a retirement plan outside the realm of an employer-provided 401k. For workers with small businesses or for whom their employer doesn’t provide retirement accounts, debating whether a SEP or SIMPLE or other IRA type is appropriate given income levels and business structure is a decision both types of advisors should help with.
“We’ll make a recommendation to a client, but we’ll also ask them to check in with their tax pro,” says John Flavin, an advisor with Synergy Financial in Seattle. “The accountant looks in the rearview mirror, but the advisor looks forward, through the windshield, at what’s coming.”
Bourdo second’s Flavin’s depiction, noting that the relationship between an investor’s tax professional and financial advisor often leads to a “chicken-and-egg” scenario, but that the back-and-forth has value.
“A CPA may want you to max out your contribution to a retirement account, for instance, because their motive is to save you money or lower your bill on a tax return,” she says. “A financial advisor looks at the bigger picture and may know about other expenses or plans that are upcoming and which might indicate a need for cash on hand, or that alter the CPA’s advice.”
You’ve gotten IRS notices about your returns
Whether the IRS has small questions on a return that can be resolved with phone or electronic communications, or the agency is calling you in for a full-on audit requiring explanations and proof of income and deductions, being called to account for your tax preparation skills is extremely stressful and time-consuming.
Those who are self-employed, work in an industry where tips or barter are common, have a home office, or who are undergoing a major shift in income (an inheritance, a purchased investment property, a career change) may wind up filing returns that raise flags with the IRS—and if the IRS finds errors on your return, they may impose fees for miscalculation as well as penalties atop those fees.
About 1% of tax filers are audited, but the percentage is notably higher once a household income rises above $200,000. Among households earning $100,000 to $199,000, some 0.65% are audited—while households in the $200,000-$499,000 range are nearly three times (1.75%) as likely to be audited. Are you fortunate enough to make over $5 million? The downside is that one in six (16%) of those in your earning category are audited.
Financial advisors often incorporate tax planning into their work with clients, helping them assess the tax ramifications of investing and withdrawing invested assets and how to mitigate against future taxable events (capital gains on a home sale or securities sales).
If you work with the right tax professional, they may be able to provide valuable insight as you approach retirement and need to consider the tax ramifications of your particular assets, Flavin says.
“All is not equal in the tax world—some accountants are more helpful than others when it comes to looking ahead,” Flavin notes. “But a good accountant can help you deduct and do it right, and spot patterns that you can optimize.”
Tax planning is a facet of good financial planning–so paying a professional to contribute to that portion of your financial plan, as well as covering your annual reporting obligations to the IRS, is a smart move for investors whose financial lives have grown increasingly complex.
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