The IRS and many software companies that sell tax return preparation software each year will tell you that anyone can prepare their own tax return. That is true for many taxpayers who have income from a job and basic deductions such as a home mortgage, property taxes, cash contributions and possibly medical expenses. However, there are many times when your situation becomes complicated and making the correct choices when preparing your tax return becomes crucial to paying the minimum allowable taxes. Here are situations that make a tax return complicated.
High Income – Even if all your income is from employment and reported on one or more W-2 forms, once you or your combined income with your spouse exceeds $200,000, you may face a variety of extra taxes such as the Alternative Minimum Tax, the Net Investment Income Tax, and the Additional Medicare Tax. Participating in an employer’s qualified or non-qualified stock options program will also increase your tax return complexity and many times can’t be reported using online or personal tax software. The professional has more robust tax preparation software and the knowledge and ability to perform calculations not included in the software to achieve the most accurate approach to the tax calculation.
Consultants and Small Business Owners – If your income is not reported on a W-2 (i.e., you are self-employed) preparing a tax return becomes more complicated. You need to keep precise revenue and expense records. Knowing when to depreciate expenses and keep track of the records is essential. The rules related to expensing automobile and home offices further complicates your tax return. A considerable amount of information is carried forward each year throughout the life of the business and the ownership of the business assets. Most personal tax return software can do this, but you will need to use the same brand of software throughout the ownership years or manually re-enter the information each time you switch software. The IRS reviews and questions these tax returns at a much higher rate than tax returns based on W-2 income.
Partnerships and S Corporations – If you are a partner of a partnership or shareholder in a S Corporation, will receive information related to your income, expenses, and distributions on a Form K-1. Many online and personal tax preparation products either cannot help you enter this information or do not provide the complete number of entries to properly handle these forms. Professionals have the software and expertise to correctly add this information to your tax return.
Rental Income Property – If you own one or more properties that you are renting, including vacation homes and short-stay rentals such as Airbnb, HomeAway, or VRBO, you should consider hiring a
professional. Each type of rental property rentals requires a different
reporting method. Rental properties require precise revenue and expense records. With expenses, you need to decide whether they can be expensed in the year you paid for them or whether they need to be depreciated over a specific number of years. Once an expense is depreciated, you need to track its basis and carry forward the information each tax year. At a minimum, you will need to depreciate the property (but not the land). All the depreciation will need to be recaptured in the year the property is sold—even if you are no longer renting the property. Records must be kept for the entire time you own the property.
Divorce or Separation – If you and your spouse decided to divorce or separate and live separately, a layer of complexity is added to your tax return. Deciding who gets deductions and exemptions related to the children, and the taxability and deductibility of alimony payments usually requires a professional tax preparer who can review the divorce decree and other legal documents to determine what is and is not allowed under the Federal and state tax codes. If the divorce is related to potential criminal acts of tax or financial fraud by one of spouses, it is critical to seek professional help to determine if you qualify for Innocent Spouse Tax Relief.
Investment Income – If you have taxable investments or are taking money out of your 401(k) plan or IRA, paying the minimum amount
of taxes may require the help of a tax professional. The more income you receive from investments, especially if your investment income is reported on Form K-1, the more likely you will need a professional to prepare your tax return. Retirees with multiple sources of income—Social Security benefits, taxable investment income, and income from IRA or 401(k) withdrawals—can work with a tax professional to minimize taxes and maximize long-term income from investments.
Estate Issues – if you receive an inheritance, give gifts greater than $14,000 to one person, receive income from a Trust, contribute assets to a Trust, or just about any other issue related to an estate, you’ll need to seek out professional assistance.
during the year, a professional can make sure you pay the correct taxes to each state and obtain the deductions for federal moving expenses. Home sales, especially if you previously rented the property, can be tricky. You may need help to make sure you get the maximum capital gain tax exemption and pay the minimum amount of tax.
Do one or more of these examples describe what is needed to prepare your tax return? You may want to read my blog article Should I Prepare My Own Tax Return. If I have convinced you to seek help, read my article How Do I Find a Tax Preparer That is Right for Me?