DIY or hire an expert
A friend of mine is also a tax client of mine. Recently they told me that their friends all ask they why they just don't do their tax returns themselves using one of the many oniine solutions. I offered a few examples of why an expert can make a difference that these non-intuitive software platforms cannot identify.
A couple of years ago I was doing a return for a longtime client. Very simple return. Two W-2 forms and a Form 1095-A. That is the form on which their health insurance marketplace coverage and Obamacre subsities are reported to the IRS. Because the client had underestimated their income when applying for marketplace coverage, they were going to owe the IRS just over $700. That is because they were being required to repay $750 of the advance premium tax credit subsidy they had received during the year.
But it was not yet April 15th. I did a little match and figured out that if my client put the $700 into a traditional IRA, their income for purpose of calculating how much of a subsidy they were eligible for; would be reduced. As a result the client saved $700 for their retirement instead of just paying the IRS. Online tax prep solutions use software that can do a deent interview, but software cannot come up with this kind of complex solution.
Here is another example. This was a client who had their own business. Aside from their sole=proprietorship, the return was fairly simple. The client's problem was they did not have enough cash on hand to fully fund a SEP-IRA before the filing deadline of April 15th. I explained to the client that if we filed for an extension of the filing deadline, it would give them another six months to put the cash together to make that SEP-IRA contribution. The extra time the client got by simply filing an extension saved the client over $4,000 federal and over $1,300 on state tax.
Sometimes it is a quirk in a state tax code that a client can take advantage of. We have one of those in California. People are often advised by attorneys, or friends, or their distant relative who fancies themselves a tax and law expert. LLCs do serve a purpose, but if you do not make an election to be taxed as a corporation, you are subject to the LLC fee. There is a minimum tax of $800 on LLCs (and other types of business entities) in CA. But LLCs are taxed on their gross sales and not their net income (revenues minus allowable deductions).
This is what that tax looks like
I have a long-time client who formed a new 2-member LLC and elected to be a partnership. The partnership had gross revenues of more than $500,000. So their total LLC fee and tax was $3,300. I advised them to make an election to be taxed as an S-corporation. By making that election, they cut their tax obligation to CA by $2,500. And because the entity is losing money thus far; they are paying no CA income tax on their personal returns.
A lot of tax returns are incredibly simple. If people want to do their returns on their own, more power to them. But there is a lot of value in the expertise of a professional. One last example.
Our proprietary software has a tool that allows us to demonstate the tax savings of converting a sole proprietorship to an S-corporation. For one of my clients whose return I did this year, those savings are over $8,000. Even paying the $800 minimum tax to CA, paying $600 for a payroll service and paying $580 for preparation of the corporate tax return, they will save over $5,000 by following my advise. Needless to say, they jumped at the opportunity.
So, what is the bottom line? There is value in consulting with a professional. In almost anything. You need to make the value judgment for yourself if you should or shouldn't seek out that level of assistance with your tax returns.
A couple of years ago I was doing a return for a longtime client. Very simple return. Two W-2 forms and a Form 1095-A. That is the form on which their health insurance marketplace coverage and Obamacre subsities are reported to the IRS. Because the client had underestimated their income when applying for marketplace coverage, they were going to owe the IRS just over $700. That is because they were being required to repay $750 of the advance premium tax credit subsidy they had received during the year.
But it was not yet April 15th. I did a little match and figured out that if my client put the $700 into a traditional IRA, their income for purpose of calculating how much of a subsidy they were eligible for; would be reduced. As a result the client saved $700 for their retirement instead of just paying the IRS. Online tax prep solutions use software that can do a deent interview, but software cannot come up with this kind of complex solution.
Here is another example. This was a client who had their own business. Aside from their sole=proprietorship, the return was fairly simple. The client's problem was they did not have enough cash on hand to fully fund a SEP-IRA before the filing deadline of April 15th. I explained to the client that if we filed for an extension of the filing deadline, it would give them another six months to put the cash together to make that SEP-IRA contribution. The extra time the client got by simply filing an extension saved the client over $4,000 federal and over $1,300 on state tax.
Sometimes it is a quirk in a state tax code that a client can take advantage of. We have one of those in California. People are often advised by attorneys, or friends, or their distant relative who fancies themselves a tax and law expert. LLCs do serve a purpose, but if you do not make an election to be taxed as a corporation, you are subject to the LLC fee. There is a minimum tax of $800 on LLCs (and other types of business entities) in CA. But LLCs are taxed on their gross sales and not their net income (revenues minus allowable deductions).
This is what that tax looks like
I have a long-time client who formed a new 2-member LLC and elected to be a partnership. The partnership had gross revenues of more than $500,000. So their total LLC fee and tax was $3,300. I advised them to make an election to be taxed as an S-corporation. By making that election, they cut their tax obligation to CA by $2,500. And because the entity is losing money thus far; they are paying no CA income tax on their personal returns.
A lot of tax returns are incredibly simple. If people want to do their returns on their own, more power to them. But there is a lot of value in the expertise of a professional. One last example.
Our proprietary software has a tool that allows us to demonstate the tax savings of converting a sole proprietorship to an S-corporation. For one of my clients whose return I did this year, those savings are over $8,000. Even paying the $800 minimum tax to CA, paying $600 for a payroll service and paying $580 for preparation of the corporate tax return, they will save over $5,000 by following my advise. Needless to say, they jumped at the opportunity.
So, what is the bottom line? There is value in consulting with a professional. In almost anything. You need to make the value judgment for yourself if you should or shouldn't seek out that level of assistance with your tax returns.
posted by me at 12:43 PM
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