Turbo Tax and Do-It-Yourself VS. Professional Tax Preparer
Tax time brings a multitude of financial decisions, including whether to hire a tax professional or prepare your own taxes using software like TurboTax. While the low cost and advertised ease of do-it-yourself tax products may be tempting, they aren’t always what they claim to be. In fact, many tax filers find them frustrating and time consuming with very little actual cost savings. These drawbacks and increased stress often makes hiring a professional tax preparer a smart move.
The Dangers of Do It Yourself Taxes
When people consider using do-it-yourself tax filing software, they typically focus on the positives, like the low cost and ability to use them from their couch. However, these programs have quite a few negatives as well, which could wind up causing an audit, late penalties and even interest charges. Here are a few problem areas:
- They’re time consuming and stressful- Tax software promises to walk you through all the steps, but what happens when you don’t understand the steps? Online help systems and FAQs are often insufficient to help you understand what to enter. For example, health insurance premiums can be deducted in some instances but not all.
- You can enter any numbers into the return – The ability to enter any number into the software may seem like a good idea, but it can be dangerous. A higher charitable contribution amount or inflated IRA may get you a bigger return, but it can also get you into serious trouble down the line.
- You don’t know if you did it correctly – There are few tax topics that apply to everyone. Most only apply to some people in some cases. Many software programs don’t ask enough questions to find out if you are truly qualified for a deduction, for example mileage deduction for a vehicle.
- There’s no continuity- Even if you use the same tax program every year, it can make errors. Most programs say that they import information from the previous year, but would you know if they didn’t? Most people don’t and end up losing deductions or credits that they qualify for.
Big Box Drawbacks
Some people know that they don’t have the skills or patience to do their own taxes. However, to save on costs they go to a big box tax service like H &R Block or Liberty Tax Service. While the price may be right for these services, there are some things you should know. Primarily, they use untrained staff to prepare taxes. Most of their preparers have only taken a four to six-week course in taxes. They aren’t even required to have previous experience in accounting and rely on software programs to do most of the work. That means they aren’t any more knowledgeable than you are. In addition, many of these stores close on April 17th, which means they aren’t around if you are audited by the IRS.
Benefits of Professional Tax Preparers
Professional tax preparers have years of knowledge, advanced degrees and certifications, such as Master’s Degrees and CPA and EA licenses. Their experience and education is what will ensure that their clients get all of the deductions and credits that they deserve.
Here are a few more advantages that these tax professionals can put to work for you:
- They can often represent you if you are audited and help you handle collection matters.
- They provide tax planning to help you make tax saving decisions early.
- They spot opportunities to help you make smart tax decisions like converting ordinary income into capital gains.
- Their office is open year-round to answer your questions
At Dukhon Tax, we understand taxes down to a theoretical and statutory level, which is much better for our clients! Visit our website for a free, no obligation consultation! We even offer a special package for students!
Reporting Your Affordable Care Act ("ObamaCare") 2014 Taxes
Confused by the tax filing requirements under the Affordable Care Act (ACA)? You are not alone. Filers for 2014 must report healthcare coverage on form 1040 in the taxes section on page 2.
Read more
Strategies for Avoiding or Reducing the new 3.8% Net Investment Income Tax
Dukhon Tax shares strategies for Avoiding or Reducing the new 3.8% Net Investment Income Tax
As of the beginning of 2013, new Code section 1411 imposes an additional tax of 3.8% on unearned net investment income. The so-called "Net Investment Tax" or "NIT" kicks in after certain thresholds effectively pushing up the top marginal tax rate for individuals, trusts, and estates. The tax is actually a Medicare tax that is newly imposed upon investment income as of 2013 by the "fiscal cliff deal" or The American Taxpayer Relief Act of 2012. Some people may not remember that specific government delay amongst the many we've had this year but it was the reason many people could not file their returns until mid to late February in 2013. Also, the legislature extended many favorable deductions, credits, and provisions of the tax code but also introduced some increased rates and additional taxes (such as the "NIT").
"Net investment income includes, but is not limited to: interest, dividends, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities, and business that are passive activities to the tax payer. Net capital gains are also included, as well, including gains from the sale of real estate and gains from the sale of interests in partnerships and S corporations as to which the taxpayer is a passive owner." Short-term capital gains are taxed at ordinary income rates but can be offset by long-term capital losses. Income from S corporations or partnerships in which the taxpayer actively participates is not included as well (more on that in just a bit).
How is net investment income computed?
In short, the tax is equal to 3.8% of the lesser of a) your net investment income for such taxable year or b) the excess (if any) of your MAGI over the threshold amount. Got that? Let's simplify this a bit. First, MAGI is modified adjusted gross income and, for purposes of this section, it's equal to Adjust Gross Income (see the bottom of your 1040) increased by your foreign income that would otherwise be reduced by your foreign income tax credit. Basically, you have to include your foreign source income regardless of the foreign tax credit. For most people, MAGI is equivalent to AGI. Now, the thresholds are $250,000 for married filers, $200,000 for individual filers, and $125,000 for married filing separate filers. Once your MAGI goes above those thresholds you become "open" to the tax. You must then compare your net investment income against the amount of MAGI over the threshold and the lesser of those two, multiplied by 3.8%, is your net investment tax. Easy enough, right?
Pitfalls and how to avoid them
For most people, this isn't a major concern. However, for individuals that invest in stocks, in real estate, have interest, and passive income, this can add up pretty fast. Your investment income may not be much but if your MAGI is high (for higher wage earners for example) then you're possibly subject to paying an extra 3.8% on every dollar of your other net investment income. If you have a modest stock portfolio or bought into a few partnerships, then you could see a noticeable increase in your tax over the prior year. If you're tax adviser has not mentioned this to you, it may be wise to make a phone call and see if this is something with which you should be concerned. Of course, the staff at Dukhon Tax and Accounting would be more than glad to help. Give us a call or e-mail: 617 651 0531 or [email protected].
Deductions
The reason we keep saying "net" when we talk about your investment income is that you are allowed deductions before you have to make the above calculations. Deductions allocable to rents and royalties are deductible, passive income deductions, investment interest are a few of the major ones. For example, the interest on a loan you took to invest in a partnership in which you are passive, that's a great deduction that will get you to the "net" amount of your investment income. Non-deductible items include many of your other miscellaneous itemized deductions and deductions attributable to non-passive trade or business.
Planning
The big question is: how can we be creative within the confines of the tax code and avoid this thing? There are several strategies, too numerous to list here, but the idea is to balance your current MAGI against your future MAGI with income shifting or other tax deferral strategies. Tax-exempt vehicles like municipal interest might be a great idea (compare your taxable to non-taxable net gains after the tax and it may cover the lower interest rates on the Muni-bonds). Tax deferred annuities may be something to consider; maybe your income is higher now and you want to try to push some of those gains out a few years. Retirement options like 401k and IRA are always a great choice. In some cases, ROTH conversions (turning a regular IRA into a Roth) may make sense for retirees who are expecting their RMDs to push them into the realm of NIT at retirement (not to mention the otherwise increased ordinary income tax rates). Installment sales are a good hedge against capital gain increases (which are also subject to the tax) and could provide savings of up to 8.8% in the event that you are subject to the new higher 20% capital gain rate AND the 3.8% Net Investment Tax versus the 15% otherwise favorable rate.
In conclusion, there's a lot to consider here and your tax adviser should be talking and thinking about these things. Once again, we welcome you to contact Dukhon Tax and Accounting to find out how we can help you reduce your tax liability and navigate the increasingly complex system of taxation we have in our great US of A.
All the best,
The Staff at Dukhon Tax