Bridget Sullivan Mermel CFP® CPA and John Scherer CFP® talk about when hiring help doing your tax return helps save you money and avoid an IRS disaster.
This video should help you reduce the probability that you’re leaving money on the table by not taking every tax deduction available to you.
It can be difficult to figure out—are your finances complex enough so you need tax help? Should a tax preparer be able to help you save taxes so that you come out ahead? What about your time and confusion?
We talk about how hiring a tax professional like hiring a plumber. Have you gotten a 1099? Some self-employment and real estate side-hustles are like re-doing your house’s piping. Some W-2s are more like fixing a leaky faucet.
We cover: When you can reasonably do tax returns yourself. What is a basic situation? When it pays to get your taxes done for you, including using a Qualified Charitable Donation, or QCD, and exercising non-qualified options.
TRANSCRIPT
Bridget: Taxes. Can you do it yourself? Or should you hire someone?
I'm Bridget Sullivan Mermel, and this is Friends Talk Financial Planning.
John: Hi, I'm John Scherer. And this is a great question, Bridget. We get this all the time. “Geez, do I need to hire a CPA, or find somebody that can do my taxes? Can I do it myself?” 20 years ago, you didn't have all the software. Today, I can buy software. But then how do I know what I'm doing? And that's an interesting question. So I'm curious, what do you say to people? Or how do you advise folks who asked that question? Do I need to hire help to have my taxes done?
Bridget: Right! So here, I break it into groups. I get this question from friends and family all the time. And it's almost like I can't go out in public without getting a question right now. So I break it into groups.
First of all, there is your comfortableness with software and getting online and doing things yourself. So if you're pretty computer literate and you can find files on your computer, and you can upload things, and that type of thing, I think, and your situation is basic. That says, maybe do it yourself. Especially these days, because there's less people itemizing. And so when you put all your information in, your tax return, from my perspective, might end up looking pretty simple.
But there are situations where it makes sense. So I want to give you those guidelines about, like, “Okay, I'm a reasonable person. I should be able to do this myself.” But when is it worth it? So when does that tax prepare or pay for themselves and more? Not just in convenience and confusion, but let's talk about when they actually help.
So the first group that they help is people who are self-employed or get 1099-miscellaneous income. And the second big group is people who own rental real estate. So, John, what are your thoughts on that?
John: Yeah, it's interesting as you're describing that, Bridget. I was thinking about, like, the “do it yourself” thing, right? And I sort of related it to if I've got a plumbing issue. If my faucet’s leaky and I'm reasonably handy, I like doing this, I could call a plumber or, geez, I could probably put it in a faucet, and YouTube instructions.
And if there's a leak in the middle of my wall or something major going on, my toilets… I want to bring somebody in when I've got these big issues. And the big issues -- and I agree with you -- it's the self-employed folks and the people that own the rental real estate where it gets really complicated really quickly. And I think if you're going to do it yourself, you run the risk of not knowing what you don't know. That's where the problem, I think, comes in.
Bridget: Right. Absolutely. That's great way to put it.
John: And you can do it, but golly, who wants to? I don't want to. If I'm handy, I can fix my sink. But I'm not going to go and redo all the plumbing in the house sort of a thing.
Bridget: Or, you know, open up a wall.
John: Yeah, exactly. Right? It's big dollars, right? It's these big-ticket things.
Bridget: Well, and you might goof it up and cost yourself more money by trying to do it yourself. Like with a big plumbing project, right?
John: Penny-wise and pound-foolish.
Bridget: You might leave money on the table just because you were too cheap to hire somebody.
John: That's the thing. It's interesting when you say that. That's the thing that resonates with me is: when you've got those more complicated situations that you run the risk of wasting money on unnecessary taxes, right? That's the place.
Bridget: Yeah. And so if you pay for it this year and you still have the business or rental property next year, paying for somebody to do it is a tax deduction. You can take it as a tax deduction, so that should help ease the pain if you really hate paying somebody to help you with this.
John: Bridget, do you have any examples? I'm trying to think now off the top of my head, a place where, with a rental real estate, where folks can trip up. And this is why we need to have a pro or on the self-employment?
Bridget: Oh, sure, like common expenses. Like, what are common expenses? How do I depreciate these things? With self-employment, what about my home office? What about my mileage for my car? For rental real estate, it’s what do I do about the new kitchen that I put in the rental property? What do I do for the expenses because I had to evict somebody? All those things. Or they didn't pay me the rent, but they were supposed to pay me the rent. How do I report that on my taxes? All those kinds of questions, all that stuff comes up.
John: That's interesting. When you say that, as I was trying to put it together in my head, it's those things. It's the things. “Oh, Geez, I didn't realize that I could deduct that.” Or “I didn't think about that part of things.” Like, “That's really deductible.” No, I just have this little income. I pay taxes. Like, no, if you know what you need, somebody that can help you think through that, right?
Bridget: Yeah. And the other thing is that people want taxes to be black and white. And in simple situations, they are. But you get into grey areas, and people are not going to be writing articles on the internet that talk about how to exploit the gray areas, because they don't want the IRS to audit all their clients!
John: Right.
Bridget: And it's not that the gray areas are abusive or… they can be tried and true. It'll pass through the IRS.
John: It's just less clear.
Bridget: Yeah, exactly. So those types of things, like even if you're a CPA and looking on the internet, you're not going to necessarily find that stuff if that's not your area of practice, if that's not what you're doing.
John: The other thing that you made me think of, too, Bridget, is that things change, right? How many tax law changes… at least two major tax law changes in the last three years? And so what was proper five years ago might not apply. Maybe you're deducting things you shouldn't be. Or maybe there's new ways to do it, right? And staying up to speed on all the changes.
Bridget: Yeah.
John: That's the other benefit, right?
Bridget: Someone recently asked me about, should I incorporate? Should I be an LLC? And when I had my tax practice, I was up to date on that information, and it stayed the same for five years or so. Five to ten, or eight years after I started the financial planning practice. But I'm not current on it anymore, because there's enough things that have changed. So I told this person to hire somebody else. I'm not the person to ask for about this question. I'm thinking about maybe changing my business entity, or I think about it, and I’ve got to hire somebody.
John: Yeah. One other thing that I thought about is: we've got those self-employed folks and the people with rental real estate. Those are really clear. Like, okay, this is a place where doing it yourself is dangerous.
Bridget: Right.
John: The other thing that I thought of is for people who are retired and are taking minimum distributions from their IRAs, and for those people, if they choose to do any of the qualified charitable contributions, meaning giving money to charity from their IRA, your investment firm doesn't report that on the 1099. You get the statement that says, “You took out this much money.” It doesn't say how much you gave to charity.
And that's a place where or we've seen people trip up, or even the tax preparers, and sometimes… where having somebody that's involved in your situation and knows what you've been doing can save… We had somebody that was a $7,000 difference. No, the tax difference was $7,000, what they had given away vs. what got reported on their tax return.
Bridget: Right.
John: So that's another place that applies to a sliver of people. But if you're giving money to charity from your IRAs, that's a place where doing it yourself is probably too risky.
Bridget: Right. And often on the other spectrum of the agent spectrum is non-qualified options. So if you get options from your employer and you've exercised them, boy, the documentation is bad on that. And so hiring somebody that actually understands how to interpret it, that can save you thousands and thousands of dollars. So that's another, a little more esoteric situation where I think it makes sense to hire somebody.
John: That's maybe a great place to circle back on things. We always like to talk about what action steps and what takeaways to have. And so the big things I got from our conversation here today are: one is that you can do taxes yourself. You can and do these things. But if you have some more complications, especially if you run a small business or if you have rental real estate, those are the places where getting professional help is really going to pay off for you.
Bridget: Right. Exactly. Hire the plumber. Don't leave money on the table.
John: Right! Are you fixing your sink, or are you re-piping your house? That’s your thought process.
Bridget: Exactly. So as we wrap it up, again my name is Bridget Sullivan Mermel, and this is John Scherer. We both have fee-only financial planning practices. And we're both members of ACP, or the Alliance of Comprehensive Planners. It’s a group of planners, a not-for-profit group and we spread the ideas, similar ideas to what we're talking about, all throughout the country.
And, subscribe!
John: Yeah, that's right. Make sure you hit that “subscribe” button so that other people have a chance to see this information.
Bridget: It’ll really help us out.
John: Thanks so much, Bridget. Until next time.
Bridget: Thanks, John.
At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.
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