Hiring a Tax Professional Versus DIY’ing With TurboTax
- TurboTax is sufficient for straightforward tax returns.
- Learn the top seven reasons why my clients hire a tax professional.
- Understand the services that tax professionals provide, and how/when to hire one.
April 15th approaches, and you’re preparing your tax return with TurboTax. For next year, however, you may be wondering whether to hire a tax professional.
When TurboTax is Sufficient
For people who have straightforward tax situations, TurboTax and other DIY software work well. An example of a straightforward tax situation is if you only have one job at a company that pays you a regular paycheck, an annual bonus, interest income from your savings accounts, and divident/interest income from a brokerage (non-retirement) account.
When You Should Hire a Tax Professional
Based on my clients’ experiences, these are the top seven reasons to hire a tax professional:
- You’re worried about mistakes that could lead you to overpay taxes.
- You have a more complex situation (e.g., stock option exercise, company going IPO, ESPP sales, carryover items, AMT issues, investment sales in non-retirement accounts, rental property income).
- You’re busy and prefer to pay someone else to do it.
- You’re not up to date on filing tax returns from previous years.
- You’ve missed the tax filing deadline in the past, leading to penalties.
- You make after-tax contributions to your 401(k). You can learn the basics in my free guide.
- You’re expecting a major life event (e.g., buying or selling a house, marriage, divorce, adding a child, financially supporting an adult relative).
What Services Do Tax Professionals Provide?
Tax professionals provide two services:
- Backward-looking: tax return preparation
- Forward-looking: tax projections
The first service is widely available. Every spring, tax professionals are diligently gathering clients’ documents (W-2s, 1099s, etc), and preparing tax returns before the April 15th deadline. “Backward-looking” means there isn’t much the tax professional can do to reduce last year’s taxes. I offer tax return preparation services to clients who aren’t working with a tax professional.
The second service is far more valuable, but not as commonly offered. Let’s say it’s April 1st. You have nine months left in the year to plan. For example, you can learn the tax cost before you exercise stock options. This helps you make an informed decision about whether you should exercise.
I run tax projections for my clients to help answer questions like:
- What else can I do to save on taxes besides contribute to my 401(k)?
- Am I withholding enough taxes from my paycheck?
- I got a large RSU grant/job promotion/significant cash bonus. What does this mean for my taxes?
- How can I avoid a surprise tax bill next April?
- What will be the tax bill if I sell some or all of my company stock?
- What’s the tax impact of exercising my stock options this year?
- If I’m better off itemizing, did I miss deductions?
- How does the Tax Cuts & Jobs Act impact me?
- How are my RSUs, stock options, and/or ESPP taxed?
Can a Tax Professional Help With My Investments or Financial Planning Questions?
Probably not, unless they also have the CFP (Certified Financial Planner) or PFS (Personal Financial Specialist) designation.
Can a Financial Planner or Investment Adviser Help With Taxes?
Probably not, unless they also have the CPA (Certified Public Accountant) or EA (Enrolled Agent) license, they offer tax planning as a core service, or they partner with a CPA or EA (see the “Vetting Tax Professionals” section below).
One-Stop Shop: Taxes, Investments, and Comprehensive Financial Planning
The traditional tax professional will prepare your tax return. But they will not answer investment questions such as, “What should I do with the cash if I sell my company stock?”
The traditional investment advisor can help you figure out an investment strategy balancing risk and reward, but they can’t or won’t give tax advice.
The best-case scenario (which unfortunately is rare) is to find a professional advisor who is competent in taxes, investments, AND comprehensive financial planning. I believe this ideal person has the:
- Certified Financial Planner (CFP) designation
- CPA or EA license (see the next section), has deep experience with tax planning as a core service, and/or they partner with a CPA/EA to complement their investment and financial planning skills
This person can address questions from all angles:
- Should I sell some/all of my company stock? I’m worried about a giant tax bill, but I’m also worried about concentration risk.
- If I sell my company stock, what should I do with the resulting cash?
- Should I exercise my stock options this year?
- What should I do with future RSU and stock option grants as they vest?
- Am I on track to meet my goals?
How to Vet Tax Professionals
CPA or EA
Focus on these two designations:
- CPA: Certified Public Accountant. CPAs must pass four exams, amongst other rigorous requirements. You need a CPA who focuses on taxes. It may be odd to read this because most people think CPA = taxes. In reality, of the CPA’s four exams, only one out of the four tests covers taxes. The other three tests will be of limited use to you as a client: financial accounting, business law and economics, and financial statement auditing.
- EA: Enrolled Agent. This license is administered by the IRS. It consists of three rigorous exams. All three exams focus on taxes only.
Both CPAs and EAs can represent you on any matters including audits, payment/collection issues, and appeals.
A third category is tax attorneys: lawyers who specialize in tax law. In addition to the JD, they sometimes have a Masters of Law in Taxation. A tax attorney makes sense if you need help with the legal implications of your tax situation. A tax attorney probably won’t prepare tax returns, and they will be less focused on finding ways to save on taxes.
IRS and California Requirements for Tax Preparers
The IRS doesn’t require tax preparers to have either the CPA or EA. Instead, the IRS only requires tax preparers to have an “IRS Preparer Tax Identification Number” (PTIN). This is a short application that verifies you weren’t convicted of prior felonies, and that you’re up to date on your personal tax returns. That’s it. There are no education, experience, or exam requirements.
PTIN holders have limited “practice rights”. They can only represent clients whose returns they prepared and signed, and they can only represent those clients to a subset of IRS employees. They can’t represent clients regarding appeals or collection issues even if they did prepare the tax return.
If you’re a California resident, California law requires tax preparers who meet the following two criteria to have the CRTP designation, which means they register as a tax preparer with California Tax Education Council (CTEC):
- Prepares (or assists with) tax returns for a fee.
- They aren’t an attorney, CPA, or EA.
CRTP stands for “CTEC Registered Tax Preparer”.
How Much Will it Cost?
- Tax return prep: buy TurboTax for about $50, or pay $300-$800 to a CPA/EA.
- Tax projections (sometimes advertised as “tax consulting”): hire a CPA or EA for $350-$400/hour.
- If you want help with your total financial picture, find a one-stop shop (the “best-case scenario” described above). Ask the professional about how they handle taxes (do they run tax projections and/or prepare tax returns?), investments, and comprehensive financial planning.
When to Get Professional Help
For tax return preparation, don’t wait until right before the April 15th deadline. Although it isn’t impossible to find a CPA or EA to prepare your taxes, many tax professionals will stop accepting new clients as the deadline approaches.
In terms of tax planning (i.e. getting a tax projection), find a professional before you make an important decision.