Choosing the right tax professional.
YOU MADE NICE GAINS WHEN THE stock market and your business took off. Now that it's time to pay Uncle Sam his due, you may wonder whether you should calculate your tax returns yourself or turn to a professional. Following are a few tips for selecting the appropriate tax preparer.
The first thing you should consider is your level of income and the complexity of your taxes. If you're single and earning less than $45,000 a year, and all your income came from a salaried job with very little from interest or dividends, you can probably prepare the forms yourself or go to a low-cost preparer. But if you have a higher level of income, and if the sources are varied and complex you probably require a preparer with greater expertise.
Preparing your tax returns yourself. The cheapest way to prepare your taxes is to do them yourself. This is suitable for individuals with short-form, straightforward tax returns, such as forms 1040 with Schedule A, on which you can itemize such deductions as medical expenses, interest on your mortgage and charitable deductions. There are numerous software programs and annual manuals available to help you interpret and keep up-to-date with the ever-changing tax laws. Some of the more popular software programs include Quicken's TurboTax and Kiplingers' Taxcut. The software programs, which are updated annually, are available in major computer and software stores and range in cost from $29 to $39. Updated manuals appear at the start of the year in major bookstores. Some of the more available manuals are published by J.K. Lasser & Co., H&R Block and Arthur Young.
Enrolled agents. The IRS certifies enrolled agents to prepare tax returns. Enrolled agents are typically accountants and bookkeepers who have learned the tax codes as a result of their experience. To obtain IRS certification, the individual must have had either five years of continuous employment with the IRS, applying and interpreting the tax codes, or must pass a two-day examination on taxes for individuals, small businesses, corporations and partnerships. Enrolled agents must also complete 72 hours of tax training every three years to maintain their certification.
In general, people who use enrolled agents fail into the 15% to 20% tax bracket and usually don't have investments, says Patricia Boyd, partner at New York-based Kahn Boyd Levychin, CPAs. Enrolled agents are recommended for individuals with short-form tax returns or for those who have few investments. Costs range from $100 to $125 for straightforward returns or $200 to $400 for more complex ones, such as returns with rental real estate income.
It's best to seek referrals from friends and relatives. The National Association of Enrolled Agents in Gathersburg, Maryland, can also refer you to someone in your area. Carver Clinton, managing director of Clinton Peer Accountancy in San Jose, Calif., warns that with the advent of the computer age and the prevalence of tax preparation software, many people think they're qualified to prepare taxes but aren't. Keep in mind that without IRS certification the preparer cannot sign off on your tax returns. Be sure to ask to see the preparer's accreditation.
Storefront preparers. Storefront preparers, such as the H&R Block chain, are also suitable for short-form tax returns. Costs range from $40 to $50 for simple 1040A tax returns, to $200 to $400 for 1040's more complex Schedule D and Schedule E forms. But don't expect much by way of tax planning advice. Tax preparers at such storefront chains are typically enrolled agents who are hired at tax time, Clinton says. Service can be impersonal. Don2t expect to have your return prepared by the same person should you return next year.
CPAs. Best suited for individuals with more complex returns and aggressive tax planning needs, certified public accountants cost more than enrolled agents. But the cost can be worth it, especially for business owners and individuals with investments, capitals gains or losses and rental properties. For business owners, CPAs can handle certified audits and reviews. Any accountant can compile records in a financial statement, but reviews and certified audits can only be prepared by CPAs.
Besides preparing taxes, a CPA is qualified to assist you in tax planning strategies so that you can reduce future income taxes. Service from a CPA is generally more personal and comprehensive, as the CPA is concerned with helping you manage your tax liabilities. "It's not just a one-time situation during the year," Clinton notes.
Indeed, Henryne Tobias, assistant director for minority affairs at Associated Medical Schools of New York, has seen a dramatic difference in her tax liabilities since seeking the assistance of a CPA. When Tobias first got married two years ago, she discovered the marriage tax the hard way. "I was not aware of this at all," she says. Taxed as a single person with a joint income, the couple owed a lot in taxes the second year of the marriage. "With a CPA it's more personalized. I can call throughout the year and tell the CPA what I am planning to do," Tobias says.
Furthermore, a CPA can represent you in a court of appeals in IRS matters if your claim is denied by the IRS. An enrolled agent can represent you only before the IRS.
Tax attorneys. Highest priced are tax attorneys. Although tax attorneys can prepare returns, they generally don't because they lose their client privilege if they do prepare returns. Large law firms hire internal CPAs, which allows the lawyers to represent their clients in court if necessary. Tax attorneys are typically hired for aggressive tax disputes. Or, if you are a business owner, you may consider employing one to ensure compliance with tax laws when companies are merging or consolidating, or if you are setting up an employee compensation plan.
Unpleasant surprises at tax time can be averted by planning ahead. A certified financial planner (CFP) can assist you in planning a strategy to reduce your taxes, says Ian Quan-Soon, president of New York-based IQ Financial Services. Although a financial planner doesn't prepare tax returns, he or she can determine if you are paying too much.