How Do You Do Your Taxes?
It’s getting closer to that time of year again.
After celebrating the holidays and ringing in the New Year, tax season comes rolling in fast.
For most Americans, tax preparation starts by bringing a box of receipts to a tax preparer or accountant. Then the CPA prepares the return based upon the box of receipts.
Others prepare their own income tax returns using the same “shoebox” process of adding up their income and deductions a month before the IRS deadline and paying the tax.
Without professional help, many people are not sure they even know the right questions to ask to reduce their own taxes.
John has a prosperous insurance business in Minneapolis. He has been using the same accountant for five years. Each year, he brought his receipts to his accountant who then would calculate the tax. He thought he was paying too much in taxes, but he assumed his accountant was doing a good job.
One day, John went running with Brett on a five-mile loop around a local Minnesota lake. It was just before sunrise. The crisp, clear air was refreshing but very cold as temperatures were hovering around six degrees above zero. In the distance, we could see the quiet skyline of Minneapolis about five miles away.
During the run, it became obvious that John was not considering all potential deductions. Key information was never collected that could have reduced his taxes. In addition, John waited until March every year to give his accountant the tax information he thought his accountant needed. By then, it was too late to consider John’s best deductions, and it was too late to do things to reduce his taxes.
I suggested using TurboTax® and John expressed amazement at all the deductions he missed by not giving the accountant the information prior to year-end. Now John makes decisions to change his tax liability before it is ever reported to his accountant or the IRS. John is more in control of his taxes than ever before.
The tax reduction strategies I will discuss in this series do not come from some gimmick, loophole, or “gray” tax area. Instead, it comes from doing a better job of gathering tax-related information, finding a great accountant, identifying your best deductions before the tax year ends, and preparing proactively for an audit.
The Benefits of Having an Accountant
Have you ever heard about a person who represents himself in court? More often than not they end up making a fool of themselves and making their situation much worse.
The same can be said for doing your own taxes.
A major problem with doing your own taxes is the only one who could catch an error is the IRS.
This is why having an accountant is the best way to represent yourself when it comes to facing Uncle Sam, just like having a great lawyer is far better than representing yourself in court. But how do you know if you have a great accountant?
A skilled accountant not only takes your shoebox of receipts to calculate your income taxes, she works to make sure clients provide the right information BEFORE the year is over. Then, an accountant does her own “what if” analysis.
A good accountant will:
- Proactively work to minimize the client’s taxes through comprehensive income tax planning.
- Go to the client with ideas to reduce both this year’s tax returns as well as steps to reduce next year’s taxes.
Compare this to an overworked accountant who:
- Does the bare minimum.
- Takes your information and enters it into his tax program.
- Does not ask for more information beyond what you provide.
- After populating the data, gives you a completed tax return to sign with no suggestions or discussions.
- Provides no ideas to reduce taxes for next year.
If this sounds familiar, you need to find someone else to do your tax work.
How Do You Find a Good Accountant?
The best way is to ask mentors and other trusted advisors for a recommendation. Another option is to tap your rich source of professionals who are adept at what they do.
Another suggestion is pulling a tax attorney in to help with more complex matters like selling a business or looking at starting your own private foundation. By getting the right people on your tax team, the other tactics (which will be discussed in Part II of How to Reduce Your Taxes) will be much easier to implement.
Have you had any run-ins with bad tax preparers? Tell us about it. Send me an email to firstname.lastname@example.org and tell me about your experience!
Material discussed is meant to provide general information and it is not to be construed as specific investment, tax, or legal advice. Individual needs vary & require consideration of your unique objectives & financial situation. Please consult with your accountant or tax advisor for specific guidance.