by Amber Gilstrap
February 28, 2020
by Amber Gilstrap
February 28, 2020
It's nearly that time of year again. The stress. The procrastination. The arithmetic. The missing receipts. That's right; it's almost tax time!
Filing taxes and decoding IRS lingo may be some people's idea of a good time, but for the rest of us, it may make more sense to hire a professional tax preparer or accountant to take care of our tax returns.
But how do you know if you really need the help of a professional tax preparer? Ask yourself the following questions before deciding to hire a professional to prepare your taxes.
However mundane, everybody should understand the basics of the tax return process. Whether you prepare your return yourself or get help, you'll need to collect all of your relevant tax forms: W-2s, 1099s, and other forms stating your wages and income for the year. Your employers, vendors, and financial institutions should mail them to you by the end of January, but you're responsible for tracking them down if they don't arrive.
But tax forms are just the beginning.
You'll also need information about any deductible expenses you paid throughout the year like home mortgage interest, charitable contributions, and student loan interest (among many other things). If you started a business during the year, you'll need detailed records of income and expenses. On top of all this, you'll need to know which forms and schedules you need to file for each tax transaction.
If you're a full-time employee, don't have many additional sources of income, and don't own a home or have kids, chances are your tax return should be fairly straightforward. You can probably do your tax return by hand or with the help of free or inexpensive tax preparation software like TurboTax.
If you have one or more situations that complicate your taxes, however, or any of this makes you uncomfortable or confused, consider consulting a professional tax preparer or accountant.
The sale or exchange of stocks, securities, bonds, or any other investments is classified as a capital asset transaction. The phrases capital assets and capital gains tax scare a lot of people, but they're not that bad. Capital transactions are actually taxed at a lower rate than your ordinary income, but handling capital transactions does get tricky.
The tax basis of these assets is determined by a long list of rules. Taxpayers must also declare capital assets on a separate form. Many people know that you can deduct up to $3,000 in capital losses from your income, but what many do not know is that some limitations to this deduction apply when it's taken as the result of trading securities.
The bottom line? If you need to report capital asset transactions on your tax return, hire a professional tax preparer or accountant.
If you worked for payment during the year without paying taxes, you will need to pay self-employment taxes come tax time. Even though you may have a full-time job where you do pay income taxes throughout the year, you're still considered self-employed if you have side income.
For example, if you agree to design a Website for a company as a freelancer, chances are they will pay you as a contractor, not an employee. That means they won't withhold taxes from your pay. Don't rejoice just yet; they're not paying you "under the table". They'll report your pay to the IRS as a deduction using form 1099-Misc., and you need to report that income—and pay taxes on it.
Not only will you have to pay federal income taxes, you'll also have to pay self-employment taxes of just over 15%. That self-employment tax goes to Social Security and Medicare.
But wait, you say, "when I get a paycheck the Social Security and Medicare deductions are way less than 15%!" You're right; they're about half that amount. That's because employers pay the other half. When you earn self-employment income, you pay the whole thing.
Self-employment does have its perks, however. A big perk is you can deduct expenses related to your business. For example, you may be able to deduct all or a portion of the computer that you use to design client Websites. That said, the deduction game gets complicated, and filers with long lists of business deductions may run a higher risk of being audited.
So, if you earn self-employment income and want to take more than a few small business deductions, hire a tax preparer or an accountant. Not only can a tax pro limit your audit risk, they may also help you reduce the taxes you do owe by finding legitimate deductions you might have missed.
If you support someone financially, nine times out of ten, that person counts as a dependent and you can claim them on your taxes.
The exception? If you support a friend or a relative that isn't your direct descendant, you might not be able to claim them. (This is basically the government's way of preventing freeloading). For example, if a friend of yours has a job, but still needs extra financial assistance that you provide, there is a good chance you won't be able to claim them on your taxes. If you're uncertain, check with a professional preparer or accountant.
There are many types of tax professionals and their training and qualifications can vary greatly. Pros don't need any particular education or certification to prepare somebody's tax return, although they do need to be a Federally Authorized Tax Practitioner (FATP) to be able to represent you in dealings with the IRS. The most common FATPs are enrolled agents, certified public accountants (CPAs) and attorneys.
Follow this rule of thumb: Hire a professional tax preparer or accountant if you have a tax situation that confuses you or you think you might make a mistake on your taxes.
Don't be afraid to ask for help. Many people hire someone to do their taxes. If your taxes are very simple, it's possible that you could get away with a fee of less than $100. More complicated returns may cost a few hundred dollars, but your tax pro may also be able to save you five or ten times that much on your tax bill. Ask around and see who you friends and family go to for their taxes or stop by a nearby H&R Block.
There are still other options. Do you have a tax guru in your family? See if they'll help you with your taxes and offer to pay them something in return for their time. Sometimes it just takes a couple hours to learn the tax process and then you'll be set for life. My dad taught me how to do taxes when I had my first job at the age of 15. I've since taught several of my friends how to do taxes and they are always so surprised at how easy it really is.
Also remember that the IRS website is chock full of instructions and guidance on how to file your taxes. Going It Alone? Start your return for free with TurboTax, or try another online tax software.
This article covers a few of the most common reasons you may not want to prepare your own taxes. But I can't stress enough how important it is to do some research before embarking on your taxes solo. A professional tax preparer offers peace of mind for a small cost.