Because it’s tax season, I was just curious if it is more beneficial to be working with a CPA throughout the year and having a tax reduction specialist or choosing an option like TurboTax? I’m sure it varies depending on circumstance but I’m curious what those circumstances may be. Thanks in advance!
It depends on how complicated your financial situation is. I have found that TurboTax does a good job for average folks, but if I was running 3 companies and sold a variety of stock options I might want a professional to do it instead since it can quickly get pretty complicated. You could start with a tax program and then get a review from some place like H&R Bloch and see if there is a difference in your case.
I’ve done fine with TaxAct; my situation has some unusual aspects (writing income and expenses) but it handled that fine.
If there is a human being who is familiar with your finances and also familiar with tax law, that person is more likely to answer all the questions correctly. Someone less familiar with one or the other is more likely to miss a significant detail.
Tax Act et al are great for average people, but the farther you are from average, then the greater the chance that the software will miss your unique situation, or even more likely that you’ll miss the significance of the questions that it asked you.
All this seems self evident to me. Did I miss something?
oops, sorry. You wanted examples of what sort of issues would make the tax return complicated. Really, it could be anything. You might THINK that you know exactly who is or is not a dependent, but if you are wrong it could cost you really big.
One of my customers has a saying, “good accountants are free.” Because finding all the exemptions and avoiding penalties for fucking up are worth more than s/he charges.
Turbotax does a fine job of filling out your tax return. By the time you get to that point, there is relatively little you can to change the amount of tax you owe for the year. You can just report it correctly.
Working with a tax pro on an ongoing basis, you can make plans about what to do to minimize the taxes you might owe. Generally, this has to be done BEFORE you engage in a transaction, not after.
I’ll give you an example, let’s say you have a lot of short-term capital gains that you realized this year. A tax pro could advise you that it would be a good time to harvest some long-term capital losses. A long-term capital loss is most profitable in a year when you have mostly short-term gains. If you wait until it’s time to fill out your tax return, it’s too late to take advantage of that strategy.
A tax pro could advise you of a tax break that is about to expire so you can take advantage of it. If you get an inheritance, a tax pro could advise you to disclaim it so that you’re family will get to keep the maximum amount after taxes.
Your tax pro could advise you how to structure gifts and life insurance to avoid gift tax and estate taxes. All Turbotax can tell you is how much tax you owe.
Your tax pro could advise you that it is a good year to convert your traditional IRA to a Roth IRA because of your low tax bracket this year. But this has to be done before the end of the year, long before you start filling out your tax return.
If you are only a W2 employee go with turbo tax or fill out the tax forms yourself.
If your income sources are varied then a CPA may be useful.
I have a friend who took out a 2nd mortgage on his home. Used the money to purchase a convenience store. The money he made at the store to pay off the loan was taxable.
After he got a tax lawyer and a CPA he was told he set up his business wrong. 1st he should have set up a LLc. Then taken out the 2nd. Made a business loan to the LLC to purchase the store. Then the money he made at the store could be used to pay back the business loan. Now the money made at the store to pay the loan is a business expense.
I use to do my taxes myself, fill out the forms by hand. Then take all my papers to the tax service guy. As long as the tax guy got me more back than what he cost I kept going to the tax guy.
I did the same when TuroTax came out. No advantage in using turboTax but it was easier than filling out the forms by hand.
My taxes got more complicated after selling some land and buying a four plex. I used a CPA. I would have made some major mistakes in filling without the CPA.
So I say it Depends.
The real value of good tax advice is learning just how far you can drive into the gray areas before you get caught. Turbotax, et al, are pretty well designed to keep you very close to the straight and narrow; it reduces their liability at the expense of you paying more tax than is minimally necessary.
But in order for that advice to have value for you, you need to have a complex enough situation that there are decisions to be made. And as noted above you need the advice before you make the financial moves, not when you’re filling out the forms documenting the moves you already made.
We’re retired and have no W-2 income. What we report is a mixture of income from traditional IRA’s, Roth IRA’s, 401K’s, 1099s, capital gains, a government pension and Social Security. Some of it’s taxable, some isn’t, and I frankly don’t trust an off-the-shelf program to sort it all out.
We went to a CPA the first few years that my wife had writing income. It was very useful in understanding which expenses were deductible. It was reasonably expensive. After a while nothing much changed and we moved to TurboTax. I think we’d go back if there were a major change in our circumstances.
We donated a horse to charity, and it took some research but we were able to do it without using a CPA.
My son is a CPA, but I use Turbo Tax Deluxe. I have him review my taxes after I do them and he hasn’t found anything worth changing.
The wife and I have jobs; retirement incomes; some savings; and own our home. We live and and work in the same state. Not too difficult of a return.
The one year we did have a complicated return and my son wasn’t a CPA yet, we paid someone to do our taxes after I’d used Turbo Tax. They saved us almost exactly what their services cost over Turbo Tax.
A tax professional is invaluable when you have questions of planning.
For example, your parents own rental real estate and lots of money in an IRA. Should they sell the properties, gift them to you, or let you inherit them? Is a trust beneficial? Grantor-type or irrevocable? How about the IRA? Cash it out now, or let you inherit the IRA? Do the wrong thing - or in the wrong order - and you can cost yourself significant percentages of the asset’s value. Even a middle class person might be looking at a 10 or 15% differential.
TurboTax can’t do this. Sure, maybe you could enter the information after it happens, but you have to really know the rules to select the best option ahead of time. In fact, there probably isn’t a single best option, because there are significant unknowns regarding future tax law, investment performance, etc. So you also have to be able to weight the likelihood of different outcomes.
When I work with my regular clients, I often volunteer these suggestions ahead of time… when they weren’t even sure there was a question that needed to be asked. Just one good suggestion like that can pay for a lifetime of tax prep fees.
Thanks for all of your responses everyone. My financial situation currently is pretty “average” without many complications that would benefit from a CPA it sounds. It sounds like speaking with professionals would be beneficial in the long run though as I advance financially. I guess I’ll have to try both sides and weight the pros and cons as I go.
Although the OP might not be in this category, I know at least one response was from a retiree so I’ll add that the AARP Tax Counseling for the Elderly program might be a good alternative. Every year they do returns for free - usually setting up at a senior citizens center or library. Note this program is offered by the AARP Foundation - not AARP Inc.
Could you describe in a general way what made that return complicated? I have been doing my own taxes for 35 years, using TurboTax for at least 10. Now I am wondering if I am missing something.
We are married filing joint with two incomes, short- and long-term capital gains, rolled-over capital losses, 401(k) contributions. For two years I was a residential landlord. I have never thought my taxes were too complicated to do myself, although it takes some effort to get all the capital gains right. Once the IRS slapped me with some sort of desk-check audit report and billed me for something like thousands in additional taxes. I reviewed what they did and it was total shit. The auditor didn’t really know what he was doing. I wrote several pages to document why my return was correct, and they replied saying that my liability had been reduced to zero. And in doing so I noticed a mistake in my favor, so I filed a 1040X and got an additional refund 
This mistake was not due to misunderstanding tax law, it was just that I used the wrong number for a cost basis someplace.
If I were a business owner I would probably have a pro do my taxes. Or if I were Romney with a $10M income and a 379-page return.