If you are reading this, you probably prepare your tax returns yourself using commercial software like TurboTax. Or if you are a glutton for punishment, you complete the forms and do the calculations on your own.
By now, you should have received all of your tax documents for 2018 and you should be ready to prepare your income tax returns. You might have a W-2 from your employer. Or you might have a few Form 1099s from your clients or the doc review project you did. And the dreaded Form 1098E where you look at how much student loan interest you paid last year and think about what else you could have done with that money.
But you put off filing your tax returns. Most likely it’s because you have better things to do at the moment. But maybe it’s because you have been seeing or reading horror stories about shrinking refunds and higher tax bills thanks to the new tax law. So you are thinking about having a tax professional prepare your returns this year. But you wonder if it’s worth it.
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In a big-picture sense, I think it is worth it to have a professional prepare your income tax returns. Some say that using a tax professional is a waste of money if your tax situation is simple. Simple meaning you only get one W-2 from your full-time job and maybe a few 1098 forms. While that is true, I am talking about the value in the long run.
It usually takes at least two to three years of using a tax professional — preferably the same one — before they start providing value. During that time, they get to know you better and may give you customized tax tips throughout the year. Also, you have someone you can talk to as opposed to looking at all kinds of answers on the internet. Of course, this requires you to chat with them occasionally throughout the year rather than going to their office once per year during tax season.
Here are some situations where having a tax professional is worth the cost.
You are self-employed. If you own your business, I not only recommend having a professional prepare your returns but also having a tax advisor on call all year long. There are so many nuances and traps for the unwary both in the tax law and tax return preparation. I’ll likely write about this in detail in a future column.
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While paying for professional tax preparation service can be expensive for businesses, paying a tax attorney for an audit representation is even more expensive.
Also, for certain practices, a tax return preparer can be a reliable client referral source. Tax return preparers (generally CPAs, Enrolled Agents, and some tax attorneys) run into all sorts of people during tax season who may need a lawyer for estate planning, litigation, deportation defense, and divorces, to name a few.
You are on an income-based repayment program. If you are certain that you will be on an IBR program until your student loans are forgiven, I strongly recommend having a professional prepare your returns, particularly someone who is familiar with the cancellation of debt income rules and the insolvency exception. The right tax professional can help minimize taxes and IBR payments by minimizing your adjusted gross income on your tax returns. Also, a tax professional can provide guidance to minimize cancellation of debt income once the loans are forgiven.
You have anything outside of the U.S. U.S. citizens are generally taxed on their worldwide income. The tax laws also have all kinds of reporting requirements for U.S. citizens with overseas assets. If you have a foreign bank account with more than $10,000, you are required to file an FBAR. If the total value of your foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year, you will have to file a form for that as well. If you do not file these forms timely, you can be subject to stiff penalties and even be subject to criminal investigation.
Sometimes tax returns can be done on your own, usually when you have a full time W-2 employee job with no special circumstances. However, as your life gets more complicated, getting professional help is recommended as they can provide tax planning tips, minimize audit risk, and allow you to spend time on more productive (and less taxing) activities.
Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at [email protected]. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.