When You Should Hire an Accountant to Prepare Your Taxes
As a financial planner, I often get the question from my clients, "Do I need to hire an accountant?" Especially given the constant changes and complications to the tax code, I wanted to address how an accountant can benefit you and when it might be time to consider hiring an accountant.
When exploring accounting services, the priority first and foremost is to make sure you are getting value for the money you are investing. The can come in two very different forms. First, it may be that the complexity of your situation dictates a Certified Public Accountant, also known as CPA, may be able to find enough tax planning opportunities to offset the fee they are charging you. Secondly, you may prefer to pay an accountant to handle your taxes so that you can focus your time on other, more productive areas – such as increasing your income or spending time with your family.
Hire an Accountant for Complex Tax Scenarios
Let's start by outlining what defines a "complex" tax scenario. Generally speaking, if you have significant stock options, real estate investment properties, trusts, a stake in a business, or other complex scenarios, you may want to consider a CPA. Given any one of these items, or especially a combination of them, a CPA may provide value to you based on the complexities and opportunities of the tax code in these scenarios.
Utilize a CPA for Taxation on Stock Options
If you do have significant stock options, utilizing a CPA in conjunction with your financial planner can lead to significant tax planning opportunities. However, your stock options are set up (ISOs, NQSOs, RSUs, ESPP, etc.), determining when to exercise your options, when to sell, and how it fits into the bigger picture all may have tax impacts. It may be especially critical if your stock options have led to the need to pay alternative minimum tax (AMT). Additionally, if financial decisions, such as the exercise of stock options, may trigger AMT, a CPA can assist in determining when to recognize the income.
Strategize Real Estate Amortization Techniques with a CPA
If you own real estate as investment properties, a CPA may be able to help you determine amortization techniques or exactly which improvements you can incorporate in your tax basis when it comes time to sell. For example, one of my clients had depreciated a rental property down significantly over the years. Because of this depreciation, they were concerned about selling their property and receiving a significant tax bill. We discussed in more detail, and I found out there had been many expenses over the years they could claim as "improvements" to increase their basis. Since I knew we had a tax scenario we could improve on significantly, I referred the family to a CPA, and they were able to reduce their tax bill on the sale by over half!
Are you making a critical retirement planning mistake?
To learn retirement distribution strategies and develop a thoughtful income strategy, click here to claim your FREE online course!
How a CPA Can Assist with Trusts
Trusts often pay their own taxes. A trust is considered its own entity and come with their own tax brackets, rates, and other impacts. A CPA can help significantly when you are filing taxes for trusts or other entities in addition to your more traditional income taxation.
When to Hire an Accountant as a Business Owner
If you own a business, a CPA can help you identify and use the structure (LLC, Sole Proprietorship, S Corp, etc.) you have established to minimize your taxation based on how you pay yourself, your employees, and the benefits you may wish to offer. A good financial planner will help with these areas from the longer-term view as well. However, a CPA can help look at the micro view year to year and be sure you are hitting all the bells and whistles to minimize taxation.
Hiring an Accountant to Free Up Your Time
We have discussed complexity. However, on the flip side, many folks may find hiring an accountant well worth the expense in order to simply free up more of your time. When I first started building my practice as a financial advisor, my finances were not super complicated. Still, I hired an accountant purely so I could focus my time in an area that I could find more value: growing my practice. To me, it was well worth spending some money on tax preparation services to save me a few hours to spend on my business rather than gathering tax documents and working through a software program. Hiring an accountant in this scenario may not be for everyone. However, if you value your time, you may find investing in an accountant allows you to focus on other areas and ensures nothing is missed.
I have a client at a large tech firm in the area. They are a hard worker with aspirational goals in their career. This particular clients is extremely smart and would have no problem handling their own taxes if they wanted to. Rather than spending the time on working through taxes year to year, they have decided it is well worth the investment to hire a tax preparer to free up this time each year and, instead, spend it on growing their career. This client knows that the extra effort they put in pays off dividends for years and years to come as future earnings. Another client of mine is retired, and to them, family is everything now that they have more free time. This couple has decided that investing some money into accounting services allows them to spend more time with family come tax time. They have decided this is well worth the tradeoff.
Are you prepared for taxes in retirement?
For more long term tax planning strategies, claim your FREE copy of Brandon’s book, Retire by Design!
There is no clear line in determining whether you "need" accounting services. Primarily because there are different levels of service that come in at various price points and, in turn, provide value at these different levels. From a pure mathematical perspective, a CPA is most commonly needed as you find complexity in your taxes, or more likely, some additional tax considerations/schedules needing to be filed outside of ordinary income and credits/deductions. That said, your time is valuable. You may not need full blown CPA services but may decide that paying for basic accounting services is beneficial to allow you to focus on your priorities.
Remember, the starting point and quarterback to your professional relationships is a financial planner to coordinate all aspects and help address the bigger picture. Generally speaking, the most obvious starting point for when you may want to start considering a CPA and their services relates to the schedules you file for taxes. If you simply file 1040, you may not have the complexity to justify a CPA directly. However, if you find yourself needing to file for your real estate, business, trust, or any combination of the above, a CPA certainly may be worth exploring in addition to your existing financial planner relationship.
Here at Mainsail, we have established relationships with CPAs and accountants that we work with closely in the Bellevue and Seattle area. If you have questions, we would be happy to chat with you and provide personalized recommendations for your situation, determine what type of services may be best for you, and make an introduction. Get in touch with us below!