Nine Signs You Need Tax Preparation Help

When it makes sense to hire a professional

Written by Tom Yeung, CFA | CDFA Investment Advisor & Fund Manager, Jurnex Financial Advisors

How do you know you need tax preparation help? For filing taxes, many people start with low-cost tools and services such as TurboTax and H&R Block. But once you start accumulating personal wealth, things can get complicated quickly. That’s why it often makes sense for people to outsource tax preparation to professionals.

But how do you know you’re at that point? In this article, we will cover the nine signs you need professional tax preparation help.

As always, I suggest you reach out to a qualified tax pro before making a final decision. But to get you started, here are the nine signs:

1. You have significant financial transactions in the year

Whether you’re buying or selling stock, or exercising company stock options, any significant financial transaction has the distinct possibility of causing IRS audits. That’s because selling assets will generally trigger capital gains tax, a substantial source of taxable income for the IRS.

Be careful of “wash sales,” a process of selling and buying stock within a 30-day window. These can nullify tax savings.

2. You make more than $200,000 per year

The average American has a 1-in-160 chance of getting audited by the IRS. Those who earn more than $200,000, however, are more than TWICE as likely to get checked.

And what if you make over $1,000,000 per year? Your chances of getting audited QUADRUPLE.

Why is that the case?

Generally, the larger your income, the higher the chance of making a significant tax error. The IRS recognizes this fact and pays special attention to people with higher incomes.

3. You have to pay the Alternative Minimum Tax (AMT)

The Alternative Minimum Tax is an additional tax imposed by the US tax system on high earners.

In essence, the AMT acts as a “shadow tax.” People subject to the AMT must first calculate their regular taxes. After that, they must recalculate things for a SECOND time to determine additional charges.

Having to perform TWO tax returns means those facing the AMT seek tax preparation help.

If your income is above the following, you will generally have to calculate an AMT:

• • Unmarried individuals: $71,700
  • Married filing jointly: $111,700

4. You own a business or have self-employed income

The IRS also tends to audit business owners. That’s because it’s easy for business owners to write off specific business expenses incorrectly.

Owning your own business means balancing between using tax reduction techniques while following IRS rules. Certain areas allow you to reduce LEGALLY or eliminate taxes:

• • Depreciation: Taxpayers can use Section 179 and bonus depreciation to quickly expense items, which will reduce current taxable income
  • Expensing: Most direct business costs can be 100% written off. Meals can be 50% written off. Home offices can be expensed as well, up to certain limits.
  • Healthcare and Social Security: Certain healthcare costs can get written off, as well as half of social security and Medicare (FICA) taxes

Rules can get confusing. For example, the IRC requires business owners to pay themselves “fair compensation” (and thus pay income tax) but doesn’t necessarily define what “fair” means. This uncertainty can give some freedom in choosing how to allocate wages.

5. You have foreign income or bank accounts

Another sign you need tax preparation help is if you own foreign bank accounts. The IRS requires individuals to report ALL foreign financial holdings through Schedule B of Form 1040. Also, the IRS has the following filing requirements:

• • FBAR (Form 114): Bank accounts with $10,000 or more at ANY time during the year
  • Form 8939: Financial assets of $50,000 or more at the end of the year, or more than $75,000 at ANY time during the year
  • Form 3520: Report foreign gifts and bequests of $100,000 or higher.

Penalties for non-filing can be severe. Failure to file FBAR, for example, can result in criminal penalties, including a fine up to $250,000 and five years in prison.

6. You have Partnership, LLC or S-Corp income

“Pass-through” entities are one of the most complicated aspects of US tax law. That’s because these types of corporations will pass their income directly to shareholders. Rather than the corporation, it’s the individual who’s ultimately responsible for paying taxes generated at the corporate level.

Partnerships, S-Corps, and estates are generally required to provide K-1 Forms to all members involved. Tax preparers will then use these submissions to determine personal tax burdens. Often, the benefits and burdens from K-1 forms can get offset by personal income and expenses.

LLCs have the choice of getting treated as a “disregarded entity,” a corporation, or a partnership. Most LLCs retain a partnership status, passing on corporate tax responsibility to their shareholders.

7. You’re giving or receiving inheritances

In general, gifts and bequests are taxable to the donor, not the receiver. However, even recipients can land with tax consequences. That’s because the IRS will levy unpaid taxes by the gift giver’s (or their estate) against the executor and receivers of the gift.

Estates generally have to file Form 1041 if they generate more than $600 of income in a given year.

For those wishing to distribute income to their heirs, trusts offer an excellent way to control tax liabilities:

• • Simple trusts: An entity that distributes all current income, but no distribution of principal
  • Complex trusts: trusts that distribute its principal, or gives to charity
  • Grantor trusts: trusts where the donor RETAINS control of assets. Many taxpayers use this trust instead of (or in addition to) a will.

Non-grantor trusts: trusts where the donor does NOT retain control of assets. Includes irrevocable trusts, disability trusts, and charitable trusts

8. You’re buying or selling real estate

The US real estate tax laws can get complicated because of tax laws that benefit both homeowners and landlords.

When homeowners and investors buy and sell property, they should use certain tax benefits:

Homeowners can claim up to $250,000 tax exemption ($500,000 if married filing jointly) on a property you’ve lived in for 2 of the past-5 years. Be aware, however, that you can only take this exemption once every two years.

Real estate investors can claim a 1031 exchange. When you sell a real estate investment, if you use the proceeds to buy another property, you can avoid paying capital gains taxes as long as you maintain that second property. You can continue doing additional 1031 exchanges indefinitely.

A professional tax expert can help you navigate real estate transactions.

9. You’re planning on giving to charity

Every year, Americans give over $400 billion to charitable organizations.

The IRS allows people to write off 100% of their donation, up to 20-60% of their annual income. Unused tax benefits can get carried forward.

However, the IRS places strict reporting requirements on charitable giving due to the possibility of abuse. Every gift over $250 needs to have proper documentation, and the penalties for failing to keep adequate records could mean losing the charitable deduction.

Conclusion

A tax accountant can help you save both time and money when it comes to filing taxes. These nine signs that you need tax preparation help can act as a good starting point to understanding when you should hire professional help.

Where to find more resources

If this seems like a lot of information, don’t worry. The great news is that help is available. That’s because here at Jurnex, we work with individuals and families just like you to make the most out of investing.  I’ve helped invest client money for over a decade in the same old-fashioned way. And that’s to seek out great companies in great industries that can you can buy at a discount to their fair value.  Sounds too simple to be true? Give me a call today, and I’ll show you that it’s still possible after all these years.

About Jurnex

We are an independent registered investment advisor and asset manager.  We have the securities backing of Charles Schwab, yet we retain our operational independence from any third party. This means you can have the confidence your money is safe with one of America’s best brokerages and still receive knowledge and advice from an independent firm focused on YOU.

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