More people than ever now prepare their own tax return: a whopping 51% of US taxpayers did so in 2021.
The trend is the result of improvements in tax prep software, which is adequate for many people. But there may come a time when it makes sense to graduate from DIY tax software to a CPA or Tax Pro. But how do you know when it's time for you to make that shift?
Read on to find out.
1. When you’re self-employed.
Being self-employed comes with many unique tax and financial considerations.
From the initial question of how to structure your business, to accurately reporting and classifying business income and expenses, a CPA could be critical to your success.
In the beginning, a CPA can help you understand the tax benefits of the various business structures. For example, many business owners set up an LLC, but some may decide to have their LLC taxed as an S-Corporation. That’s because S-Corps can avoid payroll taxes on some of their income, creating valuable tax savings for their owners. But, choosing an S-Corp isn’t right for every situation, so it can be valuable to have a CPA or Tax Pro explain the pros and cons.
In addition, reporting income and expenses and making tax payments for your business is more complex for the self-employed.
The W-2 tax filing is relatively simple, with places to report earnings, taxes paid, and deductions such as 401(k) or HSA contributions. But a self-employed person or freelancer must track and report all their income and expenses for the year, so organization and systems can be critical. In addition, self-employed business owners must pay income taxes throughout the year to avoid underpayment penalties. These are known as quarterly estimated taxes and are based on income from each quarter.
2. After a significant transition or life event.
Next, it may be time to graduate to a CPA or Tax Pro after a significant transition or life event.
These may include:
Each of these life events comes with unique tax considerations and add complexity to a tax situation.
For example, when a person gets married, they switch from single to married tax filing status. This means both they and their partner will report all of their income and deductions on the same tax return. In addition, with a new filing status comes different income tax brackets and deductions that may change their annual tax outcome.
Working with a CPA or Tax Pro can be valuable to understand your new tax situation and identify any tax planning strategies available.
3. When you own rental property.
With the rise of Airbnb and other short-term rental options, many investors are turning to rental property as a form of income.
This can be a lucrative investment, but comes with many unique tax considerations.
At a high level, all of your rental property income and expenses will be reported on Schedule E. This tax schedule tracks a variety of complex items such as depreciation, rental income and expenses, deductions, and your net profit. In addition, if you ever decide to sell your rental property or convert it to personal use, a CPA or Tax Pro can be essential in explaining and reporting the transition correctly.
4. If you’re an active stock or crypto trader.
While many investors choose to buy and hold for the long run, others opt for more frequent trading in an effort to generate outsized returns by taking on additional risk in their portfolios.
For more frequent traders, hiring a CPA or Tax Pro could be worthwhile as there are many unique tax aspects and issues to frequent trading.
One of the most common issues traders run into, especially with cryptocurrency, is known as ‘missing cost basis’. Your cost basis is the amount you originally paid for your investment. But, after transferring your investment from one exchange or brokerage to another, your cost basis may be lost in the process. Then, when you sell your investment, your new exchange may report that it does not have the cost-basis information.
This creates an issue because the IRS can tax the full amount of your sale as a gain, unless you can come up with an accurate cost basis amount. This is one of many situations where a CPA or Tax Pro could be worthwhile, as they can help you recover or estimate your cost basis as needed.
5. When you feel your tax situation has gotten too complex.
Lastly, if you get to the point where you feel your tax situation is too complex, it may be time to graduate to a professional.
For many, tax prep software is a breeze, allowing them to easily report their income, deductions, and taxes paid for the year. But, if you get to the point where you’re not confident you’re reporting things correctly, or feel that the software you’re using is unable to accurately report the nuances of your situation, consider hiring a CPA or Tax Pro.
Making the decision to graduate to a professional tax preparer comes with added cost, but can offer peace of mind and confidence that your tax return is accurate — and that’s well worth it.
If you’re interested in on-demand financial answers, analysis, and plans to reach your goals, Range is here to help.
With Range, you can connect all your finances into a single dashboard to track, monitor, and plan the best version of your life. And with CFP® professionals on staff to answer your questions, you can say goodbye to uncertainty and doubt and hello to peace of mind.