Doing your taxes vs hiring a pro
A lot of us like saving money. Doing your taxes using an online service like TurboTax or HR Block software vs. hiring a pro can do just that. But cutting corners could result in increased audit risk or wasted time filling out a return improperly. Mistakes are costly and can generate IRS underpayment penalties and/or ultimately force you to amend prior returns.
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Although I'm a CPA, I avoid tax preparation like the plague. Its not my business, my real interest, or my true expertise. That said, I think I can provide some common triggers for millennials to keep in mind that probably indicate it's time to hire help.
You Have Equity Compensation from a Start-Up the most common types of stock comp I see from clients working at tech companies in San Francisco are: (1) Incentive Stock Options (ISOs), (2) Restricted Stock (RSUs), and (3) Non-Qualified Stock Options (NQSOs). Guess what? They are ALL taxed differently and open the door to a myriad of tax planning issues.
ISOs can trigger the alternative minimum tax upon exercise of the options. RSUs (stock that has vesting and/or other restrictions) may create an opportunity with an 83(b) election. Its crucial to speak with a tax pro who has real world experience with equity compensation so you don't create unnecessary tax liabilities or miss out on tax saving planning strategies. Unfortunately, the majority of tax professionals I've met are not comfortable with this area of the code. Its a specialty and you will want to work with someone who knows their stuff. Academic knowledge is not sufficient. There are simply too many nuances that require experience with application of the code, court rulings, regulations, etc. They may charge a bit more per hour but it's worth doing the analysis correctly. You may even want to consider hiring out the tax prep as soon as you are granted shares or options of your companys stock.
You Bought a House- owning a home typically entails having a mortgage. Mortgage interest is the most common driver moving someone from the standard deduction to itemized deductions you don't get both the standard and itemized just the larger of the two. If you are itemizing deductions (which is likely the case if you own a home with a mortgage) you need to fill out a whole new form called the Schedule A. Now you encounter a boatload of new tax issues related to other itemized deductions which you DONT want to miss such as: certain medical expenses, real estate taxes, charitable contributions, casualty & theft losses, investment advisory fees, and tax prep fees.
You might say, Well I can report my medical expenses and real estate taxes easily enough. I believe you probably could. But our lawmakers don't like to make anything simple. There are special rules and limitations pertaining to most itemized deductions making the calculations anything but straightforward. Translation hiring help is probably wise to make sure you get this all right.
Self-Employed Persons & Independent Contractors- these people need two things in particular:
(1) a good bookkeeping system and
(2) a tax prep professional.
While W-2 salaried employees fill out their earnings information directly on the regular Form 1040, business owners and independent contractors must provide more background on their net income. The Schedule C is used to do this. It reports gross revenues and expenses broken down by category. You run into a host of complexity here related to how best to classify your expenses. You also need to consider which entity type makes the most sense. Should you file as a sole proprietor, an LLC, S-Corp, etc? Which items are allowed as deductible business expenses and which are deemed personal and therefore disallowed as deductions? What if you mix trips that are both for business and for pleasure? Do you have a home office? Do you entertain clients at restaurants or on the golf course?
Question could you still do your return being self-employed using online software? Absolutely. But, there is more opportunity to screw things up and/or miss tax planning opportunities. Doing a return online with a Schedule C will also take significantly more time.
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Posted in Financial Services Post Date 09/12/2021