Taxes create a considerable amount of stress, regardless of whether your tax situation proves simple or complex. Oftentimes, simply having to set aside time for preparing taxes can prove a hassle. Sometimes, hiring a tax professional to handle your tax return preparation makes sense.
However, if you hold down a traditional desk job and receive a Form W-2 with no other complicating circumstances, preparing the return does not seem hard. Instead, the process seems, well, taxing. Preparing your own return requires carving out time to sit down, review your income and deductible expenses, answer a series of prompts in tax software, review for accuracy, and send it all off to the IRS. In sum, not necessarily a time-intensive endeavor, yet just something else to handle.
Now, imagine an entirely different scenario: managing a collection of 1099s and a W-2 received in the mail from multiple companies, investing accounts, passive income streams, or other income sources, and then keeping track of the laundry list of tax deductions related to your business or freelancing. Without a doubt, this can sound daunting.
Even if you have been around the block with this exercise before and feel up to the task, you might still wonder whether you need a tax professional’s help. Despite your level of comfort and familiarity, you might not know everything needed to leverage all applicable tax credits, deductions, or exclusions. Further, you wish to avoid making any mistakes if you decide to prepare your own taxes.
When you face the choice of using tax software or hiring a tax professional, it often comes down to how comfortable you feel preparing your own taxes. After all, if the tax software proves worth its salt, it will do a great job of guiding you through the tax return preparation process.
In theory, this should eliminate the need for seeking out the guidance of a tax professional. However, despite the many powerful tax software programs found on the market (e.g., TurboTax, H&R Block, TaxSlayer, to name a few) just because you start down this path does not mean you will not need extra assistance. In that instance, having access to professionals becomes very worthwhile.
Should you wish to learn more about the best tax software in 2021, have a review of the table below and identify which software best fits your needs. Further, some of these companies also offer quick access to your refund through refund advance products.
1. If You Earned Income from a Side Hustle, Freelancing Gig or Operating a Business
As many of you reading this may have found out last year during tax season, significant changes came to the tax code under the Tax Cuts and Jobs Act. In particular, those who chose to participate in freelancing jobs, side hustle opportunities, or operating their own business.
For those entrepreneurial enough to earn extra income (and have it result from a trade or business), they will almost surely qualify for a 20 percent Qualified Business Income (QBI) deduction. However, this QBI tax item represents a complicated new tax rule. To make sense of it fully (and maximize your tax savings), you might consider soliciting the services of a tax professional.
As a note, if you operate any of these activities as a sole proprietor, you might also qualify for numerous other benefits. By not having the insight or expertise to navigate this business tax landscape, you might miss out simply by doing your own taxes. And when you have incurred your business startup costs (those are deductible to certain limits!) and these activities scale enough, this could amount to significant tax liability- and potential missed deductions and credits.
And while hiring a professional might seem overdone for only choosing to pursue a minor freelancing opportunity or side hustle, it could still be a good idea for directional guidance. Many deductions exist for businesses and may go unclaimed if not accounted for properly on a tax return. As with most things, sometimes having person-to-person interaction can make a situation run much smoother. Because, while software can serve as a great tool for uncomplicated tax situations, a CPA can really help find tax deductions and credits for you by learning more about your unique circumstances.
2. If You Have a Significant Portfolio of Investments
Investments held in perpetuity often require little maintenance beyond accounting for any dividends or capital gains distributions. However, taxpayers with significant investment portfolios of both traditional investments and alternative investments can still benefit from seeing a tax expert.
The reason for this comes when not necessarily considering the purchase or sale of investments reported on a return, but with respect to the tax planning which occurs throughout the year.
Imagine planning your taxes in advance and harnessing immensely more maneuverability when it comes time to prepare your return. For those of you who have enough invested with stock trading apps could benefit by working with a CPA who operates proactively throughout the year. That way, you receive the most benefit come tax time.
Further, investing apps for minors can result in tax liabilities to you if your account made trades in a taxable custodial account. If your teenager is starting to invest, handling this might be a challenge and the help of a tax professional could make your life easier.
3. If You Own and Rent Property
Rental properties act as a great tool for building wealth because they can produce capital gains from appreciation and income from tenants. The numerous deductions, (e.g., MACRS depreciation, landlord insurance, marketing expenses, etc.) associated with the property can shield that rental income from Uncle Sam. By seeking the help of a tax professional, you would better manage the expenses related to maintaining this property.
And should the time come when you decide to sell this rental property, hiring a tax professional to assist with efficiently handling the tax implications of selling might prove profitable. If planned for appropriately, a competent tax professional can avoid the risk of misstating your gains and costing you a significant amount of money in unnecessary taxes. This leads us to the next situation where hiring a tax professional makes sense.
4. If You’ve Flipped A Fixer-Upper Property (for a Profit)
Closely related (and a natural conclusion) to the previous instance of when you should consider hiring a tax professional, if you purchased a piece of real estate and and now desire to flip it, you will want to make sure you get these details right. When assessing the tax implications of this transaction, it might appear straightforward on the surface. “We paid $x, invested $y and sold it for $z.”
In reality, the number of transactions tied up in this financial decision create a need for close attention to detail. Depending on the money spent, the funds used could either qualify for immediate expensing or as a capital cost accounted for using short-term or long-term capital gains. This distinction hinges on how long you have owned the property and when you invested the money. In truth, knowing how to classify these multiple transactions can feel overwhelming. Handing this difficulty over to a tax professional might prove beneficial to ensure you make the maximum return possible on this investment.
5. If You And/Or Your Spouse Have Student Loans
In few circumstances does it make sense to file separately as married taxpayers because this usually results in a greater tax liability. When you choose to file jointly as a married couple, you often enjoy more generous tax deductions, credits, and options. And you certainly receive more favorable tax brackets as compared to single filers.
However, even though it might not always serve as the best tax solution, some narrow instances exist where filing separately makes sense. In particular, one of the most oft-cited reasons deals with student loans.
For those taxpayers who financed their education with federal student loans and therefore have eligibility for participating in an income-based repayment plan like those used by the Public Service Loan Forgiveness program. These plans base your monthly payment amount on your annual income, and, under some circumstances, your unpaid student loan balance could qualify for forgiveness after a certain number of years.
As a result, filing separately could artificially lower your income in the eyes of loan forgiveness programs. Before proceeding down the path of filing separately, however, sit down with a CPA or tax professional to identify the tax impact.
Additionally, accounting for student loan interest often costs extra with most online tax software programs. Adding this to a list of discussion items with a CPA might prove beneficial, especially if you qualify for the student loan interest deduction, which may have decreased after you refinanced your student loans.
However, tax pros might be overkill for handling this tax deduction because the most popular online tax software programs offer packages which allow claiming the student loan interest deduction a breeze. Have a look at the following table and then click through to each software program’s review to see which package works to capture this need and the others cited on this list.
(1) Prices subject to change; prices listed represent full-retail cost.
(2) Discounted prices shown at time of review were $29.95, and $39.95, respectively.
6. If You Have Experienced A Life Change, Such As A Move Or Divorce
Life has many turns, whether that includes moving cross-country, a change in family status from tying the knot (or breaking it), or welcoming a new child to the family. Because of any of these events, you want to prepare accordingly from a tax perspective.
Undoubtedly, the number of events affecting your filing status and claims never end. As a result, navigating these changes might not always seem so straightforward. Choosing to outsource this decision-making to a professional could make any tax benefits work to your advantage. Further, this could also utilize other tax strategies to minimize your tax liability.
As discussed above, marrying comes with more tax benefits (as compared to filing as a single taxpayer). Regarding divorce, changes occurred under tax reform affecting the deductibility of alimony paid. New rules allow a person making qualified alimony payments to deduct them against taxable income while alimony payments received by the former spouse become taxable and therefore must figure into the recipient’s income.
On the other hand, the taxpayer providing child support cannot deduct it while the payments transfer tax-free to the recipient.
7. If You Had Tax Issues In The Past
Sometimes the best choice involves not making the same mistake twice. In years past, if you the IRS chose to audit your tax return for accuracy, you have a higher likelihood of receiving another scrutinizing eye from Uncle Sam.
If you have found yourself in such a situation, whether audited or the recipient of a notice, having a tax professional in your corner might prove useful. Many online tax software services have begun offering services related to audit defense for such instances.
Finally, if you have received such a notification from the IRS, speaking with a tax professional should help you to understand your situation and how best to proceed, including necessary tax forms and documents, statements of fact, and substantive evidence or any positions taken.
8. If You Adopted A Child
Understanding the importance of welcoming a new child into a stable environment, both the IRS and many states offer favorable tax items for adopting a child. Because this represents a major decision, you may wish to consider consulting a tax professional beforehand to ensure you have taken advantage of the adoption tax credit properly.
Take special note that in circumstances when a taxpayer claims a tax credit like the adoption tax credit or earned income tax credit which triggers a refund, the IRS wants to keep close tabs on this election. When a tax election results in a cash outlay from Uncle Sam, the scrutiny from the IRS will increase, thus posing a significantly higher audit risk, all things equal.
9. If You Make More Than $200,000 Per Year
Statistically speaking, the IRS receives a lot of money from high-income individuals, solidifying the age-old phrase: “More money, more problems.” As with most things in the world of high-incomes, you become a target: for marketers or Uncle Sam alike. You have deep pockets and they want a cut.
High income earners represent an opportunity to get more bang for the government’s buck with an audit because more money is at risk. Applying the 80/20 rule would necessitate the IRS spend a great deal of time meticulously reviewing these returns since 20% of the population would pay 80% of the taxes. While surely an approximation, the concept remains valid: follow the money because any mistakes at this level result in more missed opportunity on the part of Uncle Sam.
Further, high income earners understand the value of hiring a tax professional because they can claim many lucrative tax breaks. However, in claiming such positions, the IRS will demand justification of potentially aggressive tax decisions.
All things equal, you can expect as your income rises, so too does the scrutiny from the IRS to make sure they will not be short changed on their tax payments.
10. If You Have Sold Stock Via Stock Options Through Your Employer
In circumstances where you sold stock through stock options with your employer, it could very easily be a circumstance where the cost basis reported on your Form 1099 has been calculated inaccurately. As a result, you may also not have withheld a sufficient amount of money on the transaction and you face significant tax liability.
Further, because the cost basis might be inaccurate, you may need to make special adjustments to avoid double taxation.
11. If You Installed a Solar Energy System
Solar energy continues to grow in popularity. Many new systems went up this year and so too have the number of taxpayers claiming the solar energy investment tax credit, a lucrative credit meant to refund up to 30% of the solar system’s installed costs.
Because what counts as a qualified installed costs matters, seeking the help of a tax professional may result in a low tax liability (this credit is non-refundable, meaning it cannot trigger a tax refund).
12. If You Have Any Foreign Assets
Don’t like dealing with taxes in the United States? I cannot imagine adding complexity from dealing with taxes in a foreign country make matters any less stressful. However, if you hold foreign assets (e.g., bank accounts, retirement accounts, foreign-held investments, a condo abroad, etc.), you want to consult a tax professional to determine what you should report to the IRS.
In recent years, the government has developed a heightened interest in such assets as they examine taxpayer decisions to offshore their assets and evade taxation. And for those who get caught? You can expect steep penalties.
13. If You Received Life Insurance Proceeds as a Beneficiary
In most cases, life insurance proceeds are not taxable. However, certain circumstances apply where that might not be the case. Make sure the term life insurance purchased is worth it and then whether it qualifies for exemption from reporting it on your tax return.
- What is Imputed Income for Life Insurance
- What is the Cash Surrender Value of a Life Insurance Policy?
- What is an Insurance Declaration Page? All About the DEC Page
- What are Insurance Riders and Endorsements? What You Need to Know
14. If You Worked In Multiple States
Similar to moving across state lines, you might have worked a job, owned a business, or freelanced in multiple states throughout the year. The reasons for these varied work geographies can result from a move, your work relocating you either temporarily or permanently, or perhaps even from maintaining a regular travel schedule that keeps you working on the road. Regardless of rationale, working in multiple states for extended periods of time can still result in tax liability in those different states.
Commonly, professional athletes must file multiple state-level returns, because even though they may have played only a handful of games in a particular state, 3 days / 365 days per year * * 5% (assumed effective state tax rate) * $20,000,000 salary = $8,219 in state income tax paid.
While not likely a professional athlete, you may still have worked in different states and face tax liability in each. As a result, your circumstances can quickly result in a complicated return preparation. Depending on the level of effort, you might consider passing the hassle off to a tax professional.
15. If You Want To Save Time
Life offers many joys and often not enough time to enjoy them. Why let tax prep act as one of those deterrents? What little time you do have for pursuing interests should not go wasted doing something you do not enjoy. In all likelihood, you would rather spend time with friends and family or doing something you enjoy. In other words, not preparing a tax return.
As a result, hiring a tax professional may make for a better use of your time and money. The tax pro should handle your taxes adequately and minimize your tax liability within the confines of law. For your part, you likely only need to upload necessary tax documentation and the tax pro handles the rest.
16. If You Want Peace Of Mind
Peace of mind should act as a primary driver for preparing your tax return. If reviewing tax code interpretations, deciphering Section 1231 from 1245 and 1250 property gains, or understanding the new limits to the Section 179 deduction does not sound like fun, you might consider hiring a tax pro. Alternatively, you could dramatically simplify your life and remove all this complexity to avoid preparing a complicated return! Admittedly, that sounds a lot more like the tail wagging the dog.
Visiting a tax professional may also provide opportunity to extract any missed credits or deductions you neglected to claim in the past. As a point of fact, the IRS allows you to amend tax returns for the previous three years and claim missed refunds on account of mistakes. Should you face this situation, hiring the tax pro might actually prove profitable and provide peace of mind. Surely, a combination everyone strives for during this time of year.
Tax Software to the Rescue
If none of the above situations apply, do not resonate with you, or you still wish to go it alone, numerous online tax software programs are available. Consider any of the following options and read reviews for each one to see which package makes the most sense for your circumstances.
If you have a simple tax situation, you likely do not need to pay up for the bells and whistles of TurboTax or H&R Block, unless you may also like access to a tax professional. After all, you may not want to go to the tax professional dance, but you’d still like an invite.
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