Do You Need a Tax Preparer to Help with your 1040 Form?

February 27, 2011

Author: Dave Gardner

With tax season upon us, you have a decision to make. Should you file your tax return the old fashioned way with pen and paper tax forms? Do-it-yourselfers might prefer affordable online and software tax preparation applications. Delegators can choose a franchised tax prep service or a qualified tax preparer — preferably a CPA or Enrolled Agent.

You can’t argue with the cost of paper returns — essentially free except for postage. After preparing your own return, you will be armed with the tax knowledge that comes from reading through IRS publications. This gets the job done and can lead to tax-savvy moves throughout the year.

Truthfully, there’s little reason to do this. People who file paper returns are 40 times more likely to make mistakes or miss deductions. One alternative is the IRS FreeFile program that grants free access to tax preparation applications if you have an income of $58,000 or less.

Many professional tax preparers agree that software applications, such as TurboTax or H&R Block At Home, meet the needs of most taxpayers. If your sole source of income is a paycheck and most of your investments are tax-deferred, one of these packages should suffice. The franchised tax preparation offices can also help those with an uncomplicated tax picture. Just try to avoid the oft-criticized tax refund loans with interest rates that would make a bookie blush.

Consider using the services of a CPA or Enrolled Agent in these situations:

You own a business. A qualified tax preparer can consider common deductions taken by business owners. As your marginal tax rate, including FICA, can easily exceed 50 percent, every deduction found can pay tremendous rewards. What more, they can recommend retirement plans such as a SEP-IRA or 401(k) that can help you defer tax on tens or even hundreds of thousands of income a year.

You have a significant portfolio or properties. Those with taxable accounts, tax-deferred accounts, and tax-free accounts such as the Roth IRA can benefit greatly from qualified advice. If you have questions on the tax implications and options of Roth conversions, beneficial use of appreciated securities, depreciating rental properties, and net operating losses, you may need professional help.

You’re subject to the Alternative Minimum Tax. The AMT is a parallel tax structure that ensnares many upper income taxpayers. Many traditional deductions are disallowed and activities that are ordinarily untaxed become subject to the AMT. You can tell whether you were in the AMT last year by looking at line 45 on your 1040 from last year.

Your tax situation is not clear-cut. Let’s say proceeds from the sale of a business could be characterized as consulting income, paid as part of a non-compete agreement, or could represent a long-term capital gain. Perhaps you’re wondering about out-of-pocket employee expenses or whether your new business is legitimate in the eyes of the IRS. The more your questions diverge from black and white, the more you need an experienced tax pro.

You’re taking complex credits or deductions, or must file extensive forms. Did you take the first-time homebuyers credit in 2008 that now must be repaid over 15 years? Do you receive Form K-1 as a business partner? Do you need to file Form 8606 to track basis for your IRA?

Tax planning is important. Tax professionals present the most value with reasoned advice on proactively limiting your tax burden to the legal minimum. Preparing a return can be a relatively simple task, but understanding your tax situation and laying out an effective tax strategy requires a thoughtful and knowledgeable practitioner.

Dave Gardner, for the Daily Camera.

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About Dave Gardner

David Gardner is a certified financial planner with a practice in Boulder County and can be reached at dave@confluencefa.com and at twitter.com/Dave_CFP.

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