Whether you will owe money or anticipate a refund, you probably dread filing your taxes. A stream of W-2s, 1099s, K-1s, and other tax forms trickle in through the mail until they fill up the shoe box. If you have a simple tax situation, you can probably file in an afternoon with some good tax software and a cup of coffee. If not, outsourcing may be the name of the game.
Filing taxes is complex and there’s a lot at stake. An enrolled agent (EA), accountant (usually a CPA), or tax attorney can all help with filing your taxes and can represent you in front of the IRS. For purposes of this article, I will refer to all three of these professionals as accountants. There are also tax services who train their employees for tax preparation, but their employees may not hold any of these important credentials. Listed below are some common reasons to hire an accountant to do your taxes.
Outsourcing your tax preparation makes your life easier
Outsourcing works well for tasks we don’t enjoy, don’t have the time for, aren’t good at, and can hire someone to do at a reasonable price. For many, this is reason enough to hire an accountant and offload most of the burden and stress. You will still need to compile documents, but someone else will be doing most of the heavy lifting.
You want strategic tax advice
Most accountants will be able to help you file your return and tell you how much of a refund/obligation you have. Accountants specializing in tax strategy will proactively look for opportunities to minimize your lifetime taxes. Tax strategies can mean accelerating or postponing income to take advantage of the differences in your tax bracket from one year to another. This includes Roth conversions, timing retirement account withdrawals and realizing capital gains, and bunching deductions to take advantage of itemizing. Coordination among you, your accountant, and your financial advisor can be helpful in developing strategies to reduce lifetime taxes.
You are at a higher risk for tax audit
Certain filers are more at risk for audits than others, based on the amount and type of their income. Hiring an accountant can ensure you are compliant and have representation before the IRS if you are audited.
- For tax year 2017, the IRS received nearly two hundred million returns and audited roughly one million. That’s about 0.5% of all returns.
- Non-business owner individual filers with income below $200k were audited 0.2% of the time. Those with income from $200k – $1M were audited 0.6% of the time, and those with income above $1M were audited 3.2% of the time.
- Audit rates increased for those with higher income, rental property, and businesses.
- For those with income below $200k,
- Owning rental property increased the risk of audit 4 times (0.8% vs. 0.2%).
- Owning a business increased the risk of audit nearly 5 times (0.95% vs. 0.2%).
You own rental property or have other real estate transactions
Keeping books on each unit you rent out and taking all eligible deductions is important. Keeping track of depreciation for multiple units can also be tricky. If you sell property, whether it’s your primary home or for investment, capital gains may be realized. Accountants keep records to ensure you deduct only eligible expenses and are prepared for potential capital gains taxes at the time of sale.
You give to charity and want to optimize your tax deduction
The passing of the Tax Cuts and Jobs Act in 2017 nearly doubled the standard deduction and either eliminated or capped many commonly itemized deductions. As a result, fewer people itemize meaning you might not receive a deduction for donating to charity. An accountant can work with you on a strategy called bunching, which involves grouping itemized deductions (like charitable giving) for multiple years into one year to push you over the standard deduction, allowing you to receive some tax benefit.
You’ve had a change in your family or filing status
It makes sense to check in with an accountant and possibly an estate attorney after changing your filing status due to marriage, divorce, a death in the family, or after having or adopting a child. Inheriting IRA funds will subject you to Required Minimum Distributions (RMDs). An accountant can help unearth opportunities and identify pitfalls to avoid during these transitions.
You are subject to Alternative Minimum Tax (AMT)
You may incur AMT in addition to regular taxes, as AMT uses a separate set of rules to calculate taxable income. In 2017, prior to the Tax Cuts and Jobs Act (TCJA), 30% of households with income between $200k – $500k and 3% of overall households were subject to the AMT. After the TCJA increased exemptions and phase-outs, households subject to AMT decreased to 0.4% of those with income between $200k – $500k, and 0.01% of overall households. If you’re subject to the additional tax, an accountant may be able to help you understand and possibly avoid the tax in future years.
You are dealing with the sale of stock options
Even if you understand the terms “granting”, “vesting”, “holding period”, “strike-price”, and “exercising”, hiring an accountant makes sense if you receive equity (stock) compensation. Stock options and other forms of equity compensation are subject to complex taxation rules and an accountant will help you understand what you own and how it relates to your tax obligation. In addition to being difficult to understand, some options, like incentive stock options, can trigger AMT. Careful planning can help you understand your opportunities, minimize taxes, and prevent unpleasant surprises.
You are self-employed or own a business
Owning a business makes you subject to self-employment taxes and eligible for several deductions. If you have employees, you probably issue W-2s or 1099s to your staff each year. Self-employed individuals or business owners may also have unique retirement saving options. An accountant can help you comply with legal requirements and advise you about types of business structures and retirement plan options.
You are anticipating capital gains or have irregular income
If you realize capital gains throughout the year, you may be liable for estimated tax payments. The same is true of irregular income, which may or may not have taxes withheld when received. Medicare surtaxes and Medicare’s income-related monthly adjustment amounts (IRMAA) can also impose additional taxes (or Medicare premium costs) if your investment income or Modified Adjusted Gross Income (MAGI) exceeds certain levels. If you have any control over your income (timing and sources), an accountant may be able to help you avoid or minimize these expenses.
You earn income or do business in multiple states
If you earn income in multiple states, you may be required to file in each state. An accountant will know your filing requirements and help you file in each necessary location.
An additional benefit of hiring an accountant to do your taxes
In many cases, we provide relevant information to our clients’ accountants to work on their tax strategy and compliance throughout the year. Accountants help us run scenarios to provide actionable insight into strategies we propose. Sensible Financial does not employ accountants and cannot provide tax advice, so being able to work in conjunction with client accountants helps us best serve you. If you are looking for a recommendation or have questions about hiring an accountant, please reach out to your advisor.