What are "complicated" taxes that require a professional? (USA)
What are "complicated" taxes that require a professional? (USA)
I always see advice about which software to use and there's always the advice that FreeTaxUSA is the best bang for your buck and does everything you need for when your taxes are "simple." I've used and thought it was great for years. But as my career has grown and no longer filed as a single I've begun to question when my taxes and earnings become "complicated" to the point where it is worthwhile to have a professional do my taxes. Are there general recommended bullet points or scenarios?
Here are examples of things I consider simple:
- W2 income and you're <= 24% income tax bracket
- most of your investments are in tax deferred/tax advantaged accounts (401k, IRA, etc)
- mortgage, car loan, etc
- married filing jointly, head of household, or single
- modest amount of charitable donations
And here are some things I consider "complex":
- married filing separately because you think it's more efficient for you
- owner of a business
- multiple real estate investment properties
- lots of after tax investments (5 figure profits on an average year)
- 1099 income with lots of expenses
- regular gambling income or other "irregular" income
The vast majority of people have "simple" taxes, so you really need a good reason to think you need a professional. That said, paying once and having them walk you through it can be educational.
I hired a professional to do my 2022 taxes. I had finally gotten access to an IRA that I inherited from my mother. She passed in 2014. Reading through the rules on inheriting IRAs, I knew I had missed RMD withdrawals, but I couldn't find satisfactory answers on how much I needed to pay. The pros were able to calculate that for me and told me the amount to withdraw. They also drafted a letter to the IRS explaining the situation and asking that I be excused the penalty for missed RMDs. I got a letter back from the IRS in February accepting the explanation.
How diverse is your investment portfolio? How many different stocks and securities have you sold last year? Were these subject to short term or long term capital gains? Did you rebuy any of those, making the security subject to the wash rule?
If you have a family, a house, multiple W-2s, 1099s, a retirement account, and a 529, things are still pretty “simple”. TurboTax does not let you use their free file if you’ve traded stocks, but for most other products, even some low volume trading in a brokerage account is considered fairly standard.
At the end of the day, it comes down to how organized you are, and how much time it will take you to do data entry. Usually, your tax documents have clear headers, and usually, these match up to the fields in the tax application. But not always, and the more documents you have, the more hours it will take, and the more likely you are to run into a speed bump that will cause frustration.
So, how much is your time worth to you? If it’s worth more to you than the cost of a tax professional, it’s an easy decision.
I filled out my taxes this year on TurboTax, FreeTaxUSA and TaxAct, both FreeTaxUSA and TaxAct messed up my state taxes to the point that they were basically unusable, TurboTax also messed up my state taxes... but it wasn't nearly as bad.
Of all three services, as much as I wanted to not use TurboTax, it had the greatest refund, so that's what I filed with.
We seriously need to get rid of personal tax crap for people who aren't making money from anywhere but their regular jobs, the government already knows how much we paid, shouldn't have to math it.
Anyways, just letting anyone that's curious know what it was like filing taxes this year.
Edit: One year I had a CPA do my taxes, it ended up with a larger refund, but it cost more, so it kinda washed out. Maybe ended up being a difference of like $20.
The only reason we switched from doing our own to paying a CPA is when my wife started operating her own business. This was more to have someone to ask questions about making sure she covers all of her tax obligations who can answer authoritatively and back us up if anything comes back to us in the future (since she is sole prop. and going it alone). We paid $200 the first year, and considering turbotax would have been about that much, getting our taxes filed for us was practically just a bonus. She charges a little more now, but it's still worth it IMO just to not have to deal with doing the actual paperwork and having someone who will help us out if anything does come back to us. I would say anyone who just has W2 income and maybe some stock sales doesn't have a complicated enough situation to warrant a CPA, and should just use FreeTaxUSA (and hopefully over the next couple years, the auto filing program with the government will eliminate the need for that, too).
I had no trouble handling my basic W2 and mortgage interest deductions.
Where it got tricky was when I had stock income from RSUs. I found a “professional” who sucked, so I figured out how to do it correctly myself and never looked back.
Also, if you have multiple mortgages due to a refinance, that can get tricky; TurboTax has a nasty bug on this so you might want to pay for an hour of an expert’s time if there’s any new scenario you don’t understand.
What's tricky about RSUs? Doesn't my brokerage account, fidelity in this case, just provide the forms I need to enter? I also thought if I sold the RSU's the second they hit my account there was not really a tax implication since taxes were paid from the gross RSU value so my net RSUs were a lot less than than actual gross grant number of RSU.
You already paid tax, but also got a 1099, so if you don’t enter the correct cost basis you will be double taxed.
rsu, iso = hire a professional, trust me.
Don't forget to consider the amount of time you spend figuring this out, and any peace of mind you'd gain by having a pro do them for you if you were ever audited or contacted by the IRS. So it may be worth the money to have someone so it, if it frees up your time to do something that is in your wheelhouse.