How to Find a Good Tax Preparer

April 26, 2017

As a CPA who used to actually prepare taxes for other people, many are often surprised to learn that I no longer even prepare my own income taxes. The first year my husband and I were married, I spent the better part of a spring Saturday inputting all of our stuff into online software and resolved after that to outsource that task to a real pro going forward. When I was single and had just a W-2, student loan interest and a deposit to my IRA, my taxes were simple and it took me less than an hour to get them filed. But our taxes are much more extensive these days.

My husband is an independent contractor so he’s considered self-employed. We make several trips to Goodwill each year to drop stuff off, which requires an entry for each and every trip, and I have income from my moonlight gig as a fitness instructor and writing the “Weekly Savings Tip” for Feed the Pig. Not to mention that my husband has a brokerage account where he likes to play the market a little bit (with money we can afford to lose), which some years means a dozen or more entries for capital gains and losses. If time is money, then the money we pay our accountant to prepare and file our taxes is money well spent. If you’re in the same boat or find yourself with a new tax complexity that isn’t as easily handled by the tax software available to “common folk,” here are some best practices for finding the best person to help you:

Decide if you want a tax preparer, an EA or a CPA.

What’s the difference? I bet you didn’t know that pretty much anyone can call themselves a tax preparer, although the IRS has started to regulate that by requiring people who accept payment for preparing taxes to have a PTIN (paid preparer tax identification number).

An EA (enrolled agent) is someone who has passed the IRS’s test for tax preparation and is allowed to represent taxpayers in front of the IRS. Most EAs are going to be pretty well-versed in the more common tax issues like what you can deduct, self-employment income and what credits you might qualify for.

A CPA (certified public accountant) is someone who has a degree, studied accounting, and passed the Uniform CPA exam, which is no joke. Just because someone is a CPA doesn’t mean they do taxes, but if a tax person is a CPA, you can bet that they have a decent depth of knowledge. If they are a CPA/PFS (like me!) then they have also passed an additional test demonstrating deep knowledge of personal finance issues like retirement planning, budgeting and investing.

If your situation is pretty simple, but you just don’t want to spend the time on preparation, then you may be satisfied with a tax preparer through one of the large chains like H&R Block or Jackson Hewitt. Just know that since these companies guarantee accuracy and your lowest taxable income, they’re likely to go a little overboard in requiring you to document things that ultimately may not matter, like casualty losses and medical expenses (which must exceed 10% of your adjusted gross income to count).

If you have a little more complexity like self-employment income, income in multiple states or rental properties, then you may want to look at either an EA or a CPA. The biggest difference here is probably going to be cost, although not always.

How to find an EA or CPA to help with your taxes.

EA: National Association of Enrolled Agents

CPA: Look to your state’s society of CPAs by searching “Illinois (or whatever state you live in) CPA society.” That’s the best way to find a database of those in your area since CPAs are registered through their state rather than nationally.

CPA/PFS: www.findacpa-pfs.com

When performing your search, make sure you limit results to specialties that apply to you. If the database has a category for “individuals,” always check that and then also look for other complexities you may have such as multi-state or small business. Your search is likely to turn up multiple results, so you’ll want to filter out anyone who works for a large firm because they’re less likely to actually work with “everyday” people and instead specialize in very wealthy individuals.

I tend to look for people who work in a small office or even on their own. They’re more likely to want to work with everyday people at an affordable rate. After that, it may come down to convenience. Whose office is easiest for you to get to in order to drop information off, sign documents or stop by mid-year for a tax planning session?

This brings me to another criteria. Do you want someone to just prepare and file your taxes or do you want someone to help you save money on taxes going forward? Our accountant is a straight-up tax preparer, at least for us. If you’re looking for more guidance on saving money going forward, then you’ll want to ask a potential preparer if they do tax planning and you may want to look for the CPA/PFS credential.

The sad fact is that there aren’t a lot of CPAs out there that actually want to do income taxes for regular families who just have jobs, kids, a house and a few charitable donations. The easiest way to find one that does is to just pick up the phone and start asking, “Do you accept individual tax clients and what is your minimum fee?” If the minimum is more than $500, I’d say move on.

Kelley Long is a resident financial planner with Financial Finesse, the leading provider of unbiased workplace financial wellness programs in the US. For more posts by Kelley or to sign up to have her weekly post delivered to your inbox each Wednesday, please visit the main blog page and sign up today.

3 Strategies To Help With Your Tax Fears

March 15, 2017

I’m going to go out on a limb and say that tax time is pretty much everyone’s least favorite time of year. Even for me, a CPA and former tax preparer – I dread the process of digging up all our information and organizing it in order to complete our taxes and I especially dread the verdict of how much we’ll owe. It’s no surprise that nearly 1/3^rd of all tax returns were filed in the last two weeks of the 2015 tax deadline. Whether it’s due to fear, procrastination or waiting on that last bit of information, tax time is stressful. My colleague Teig Stanley offers the top 3 fears that we help people address and a strategy to overcome each of them:

Fear #1: It’s Confusing/Overwhelming

Your strategy: Overcome this barrier by writing a short, step-by-step plan to file. Set a date and time well in advance of the deadline (April 18^th this year) when you will start your tax filing and decide if you are going to use a tax preparer or do your taxes yourself.

Then, organize your documents. Use a tax preparation checklist or ask your tax preparer for one and start making an inventory of the documents you’ve saved. If you’re like most, almost all of your documents are in paper form, so make these files for them:

Income
Charitable contributions
Taxes paid
Receipts
Miscellaneous

Fear #2: I Might Not Get a Refund

Your strategy: If you’re afraid you’ll owe, the sooner you know the better. Even if you file your taxes in February, that balance isn’t due until April 18^thso go ahead and file as early as possible and use the extra time to make a plan to pay what you owe. If it’s more than you can afford, you can contact the IRS to arrange a payment plan or borrow from another source. Just be sure to compare interest rates to get the lowest possible cost.

If you’ll be receiving a refund – great! Get those tax returns in quickly to receive the money sooner. Asking for direct deposit makes it even faster. If that refund is large, consider filing a new W-4 form with your payroll department to increase your exemptions and take more money home in your paycheck throughout the year.

Fear #3: What If I Get Audited

Your strategy: Statistically, less than 1% of tax returns for those reporting under $200,000 in income (and more than $0) are chosen for an audit by the IRS each year. If you are concerned about an audit, work with a professional tax preparer who will agree in writing to provide audit support if one is requested.

The bottom line is that while tax time is no fun for anyone, it’s not something you should be fearing. If you haven’t already, get down to it and get it done. If you’re going it alone in preparing your own taxes and need help, contact your tax software provider or search for free tax prep help through local community organizations and national non-profits. You may even qualify for free preparation if you have a moderate to low income.

The Investor’s Secret Guide to Understanding Your Account Tax Statement

April 11, 2016

It’s spring time again, that magic time of year when investors with brokerage accounts come face to face with the dreaded Year End Tax Reporting Statement. All over the country, tax filers are cursing at their computer screens. How do they dig through eleven pages of legalese to find out how much they actually paid for the 100 shares of stock they sold in 2015? Why is it that they received a capital gains tax distribution on a mutual fund which actually lost money? What in Heaven’s name is a “qualified dividend” and why is it also ordinary?

Most importantly – is there a hidden meaning in “This Page Intentionally Left Blank?” and what do they do with all the entries that say, “n/a?” It’s enough to make taxpayers throw in the towel, file an extension and head for the stash of stale Halloween candy to ease the anxiety. While I’m not an accountant and I can’t give you tax advice, I can shed some light (or at least light humor) on investment tax challenges.

What is Your Cost Basis?

Your cost basis is what you paid for an investment plus any commissions paid to acquire it. Why is this important? If you sold a security in a taxable investment account, you must report a capital gain or loss on Schedule D, summarizing all the transactions you list on Form 8949. You’ll need the sale price (minus commission if applicable) and the adjusted purchase price to figure out your capital gains and losses. The good news is that if you made a profit and you held the investment for more than a year, you’ll pay long term capital gains tax rates on the profits, which are lower than ordinary income tax rates.

Seems simple to calculate, right? Not always. This can get more than a little complicated if there has been a merger, acquisition, spin-off or stock split. Also, what if your brokerage firm doesn’t list your cost basis on your tax reporting statement? This could happen for a number of reasons:

You inherited the securities. What if your grandfather left you his 1000 shares of Big Oil Company, and you decided to sell 100 of them last year? The cost basis of those shares received a “step up” on the date of his death.

If you don’t have the actual record from the settlement of the estate, you could consider using the market low on that date as your basis. You can generally find that by entering the symbol on market data sites like Yahoo Finance or asking your brokerage firm. Make a printout of the data showing your price and keep it in your tax file in case of an audit.

You transferred them in from another brokerage firm. Technically, you are expected to keep a record of your purchase prices of securities. Did you keep your old statements from previous years? Possibly not, unless you’re the kind of person that also kept your childhood report cards.

While brokerage firms have been required to include purchase data on statements since 2011 – and many firms have been back filling data from previous years – this data isn’t necessarily going to show up on your new statement if you switched firms. As you can guess, your old financial advisor’s team isn’t going to prioritize your 11^th hour call seeking information about your long ago cost basis. This Forbes article has some helpful tips about how to reconstruct cost basis using tools like Netbasis.

You bought the securities at your current firm before they used their current statement software. Good news here. If it’s your current firm, they’ll be likely to prioritize answering your cost basis question. Call early though because they are inundated with these kinds of calls the last few weeks before the tax filing deadline. A firm will generally have old records on microfilm if they haven’t back filled data on customer files.

Please be considerate when you call. There’s an administrative person on the other end who’s been taking outrageous last minute requests for account information for a few weeks now. If you don’t get an answer, you can consider using the low market value for that date (even if the purchase price was less than a few dollars per share) – better to err on declaring slightly more gain than you needed to in case of an audit.

Why Do I Have to Pay Taxes on a Mutual Fund That Lost Money?

No, this is not a Kafka novel. This happens all the time. Investors who hold mutual funds in taxable brokerage accounts have taxes to pay on those investments, even if the fund performance was negative for the year, and even if they didn’t sell any shares. I know it seems cruel. Taxable distributions from mutual funds are likely if you own the fund in a non-retirement account and can take the form of capital gain or dividend income.

This is because the mutual funds must pass dividend income and net short and long term capital gains and losses that happen during the year through to fund shareholders proportionately. Fund managers buy and sell securities over the course of the year, either as part of active portfolio management or to meet fund redemptions. Yes, folks, it’s true…you can even get dividend and capital gains distributions when you own index funds.

There’s good news, though. Many dividends are taxed at a low rate. (See below). Even if they are not, the max you’ll pay is your marginal income tax rate.

Even better, you can net all capital gains and losses from security investments (“active” investments) against each other – short losses against short gains, long term losses against long term gains, and net short term against net long term. If you consistently have net capital gains in your taxable investment portfolio, you may want to consider switching to a more tax-efficient investment strategy. Check out these tips from Morningstar on capital gains tax season.

What is a Qualified Dividend?

A dividend is a distributed share of corporate earnings. According to NASDAQ, a qualified dividend “is a type of dividend that is taxed at the capital gains tax rate. Generally speaking, most regular dividends from U.S. companies with normal company structures (corporations) are qualified.” Not sure if your dividends are qualified? See this description from the IRS.

Why is This Page Intentionally Left Blank?

Despite appearances, it’s not for taking a meditative pause to regain your composure during tax time. This is one of the true mysteries of the universe. Is this disclaimer there to inform us that there is not a printing error? Could we not have figured this out on our own? Wikipedia even has an entry on this topic, which goes to show you that others also see this as an enigma.

You Might Need a Tax Preparer

By the way, if your tax filing seems so tricky that you can’t figure it out on your own, this is a sign that you need to see a tax professional. That’s what they’re there for, people. A tax preparer has chosen to help people with their taxes as their life’s work. Seriously – they love this kind of thing!

If you’re looking for ongoing tax guidance and advice, consider engaging a Certified Public Accountant (CPA). Less complex or one-time tax preparation can generally be handled by an Enrolled Agent (EA). Tax preparation fees are usually tax deductible.

How about you? Do you have a financial topic you’d like me to address on the Monday blog? Email me at [email protected] or Tweet me @cynthiameyer_FF.

5 Reasons Not to Put Off Your Taxes

February 04, 2016

By now, you should have received the documents you need to file your taxes. I know it’s easy to procrastinate though. After all, I’ve had my share of late night runs to the post office on April 15^th.(You actually have until April 18^th to file your taxes this year because the IRS will be shut down on April 15^th for “Emancipation Day.”) But there are some very good reasons not to put off filing your taxes: Continue reading “5 Reasons Not to Put Off Your Taxes”

When To Hire a Tax Preparer

February 11, 2015

It’s February, and that usually means that you are ready for winter to be over, you are thinking about what to get that special someone for Valentine’s Day, and you can’t decide whether to do your own taxes or to let someone do your taxes for you. For years, taxpayers have been baffled by the federal income tax system and for good reason. The number of pages in the Wolters Kluher CCH Standard Tax Reporter reached 73,954 in 2013! However, there’s probably only a handful of those pages that actually apply to the average taxpayer, while the rest of those pages are technical jargon, legalese, and other stuff that’s most irrelevant to you and me. Continue reading “When To Hire a Tax Preparer”