Avoid Penalties with the Help of a Tax Professional
A complex tax return includes anything beyond filing a W-2 consisting of a paycheck and interest on your bank account. Any other financial transactions or major life events will generate more tax documents to file, and this will complicate your return. For those with high net worth, the process of calculating tax deductions requires an experienced eye to correctly evaluate multiple incomes, assets, and investments. Thus, it’s crucial to regularly consult a tax professional, as they will guide you in navigating these convoluted situations and avoiding audits, back taxes, and delinquent fees that accrue when you file incorrectly.
To avoid hefty penalties, here are 9 situations in which it is best to let a qualified tax professional complete your return…
1) Marriage or Divorce
If you were recently married, you must now file a joint return, and depending on specific circumstances such as changes in income and children, this can either increase or decrease your tax liability. If you were recently divorced, you will need to decouple your income and separate assets and dependents on your return.
2) Trusts/ Estates
Due to the various types of trusts and possible estate plans, many are taxed at different rates. You must file either a Form 1040 or 1041 depending on whether it is a grantor trust, which will affect how you report income and expenses. Overall, having a professional assist in navigating how your trust or estate plan is taxed can prevent you from paying unnecessary taxes later.
3) Reporting your capital gains and losses
When you sell a capital asset, such as your home, collectibles (Ex: vintage cars), furnishings, stocks, or bonds, you must pay capital gains taxes. These are taxed differently than income such as wages, interests, rents, and royalties. You will generally pay a higher tax rate on assets you held for a shorter period. Additionally, if you sell the capital asset at a loss that exceeds the limits you can claim, then you could pay taxes in later years as well (Source).
4) Assisted Living Costs
When transitioning from independent living to assisted living, many misreport or miss out on deductions they could otherwise take advantage of. These include medical care, meals, lodging, and commonly missed fees such as entrance fees to assisted living and monthly services fees to facilities. Under certain circumstances, these expenses could be used to lower your taxable income.
5) Education
Oftentimes, those with 529 College Savings Plan accounts and discharged student loans fail to report them correctly. These mistakes can result in your accounts and loans being treated as taxable income, which can generate IRS letters.
6) Foreign accounts or investments.
If you own property or are receiving income outside of the U.S., additional foreign reporting is required. If unreported or misfiled, this can cause hefty penalties and fines from both the IRS and your state.
7) Real Estate/ Rentals
Many fail to report extra expenses for real estate and rentals on their tax returns, such as cell phones used during business hours, mileage of driving back and forth from a rental home, and small upkeep costs. Failing to analyze these costs with a professional means that you might not be maximizing your expenses on your return.
8) Corporations, exempt organizations, and partnerships
Whether you are a full or part-owner of a business, you’ll need to file a K-1 with a professional who can advise you on how to report business income. The K-1 allows you to report amounts that are passed through to the person(s) who have a stake in the business. This requires you to complete a separate tax return that includes your individual income, losses, deductions, credits, and more (Source).
9) Selling your business
Selling your business comes with a significant tax bill because you are taxed on the profit you will make from selling it. The amount of this bill will depend on whether the money generated from the sale is taxed as ordinary income or capital gains.
What does a qualified tax professional offer?
No one wants to miss out on deductions, pay more than they need to, or try to amend a mistake on their tax return that could otherwise be avoided. Even if you use tax software, online systems may miss something that should be reported. In contrast, a qualified tax professional offers specialized knowledge and assists in navigating complex tax laws using cost-effective methods. They work to minimize tax, maximize returns, and safeguard your wealth.
Making decisions about your money isn’t always straightforward. At Storen Financial, our team is dedicated to helping you maximize your earnings and minimize your taxable consequences. Tax projections are a great way to avoid unexpected taxes (Click here to read our “3 reasons a tax projection is a wise financial move” blog). If you would like to have a tax projection completed, please contact us (click here for contact information).
Want to learn more?
Here are a few more resources to help answer your questions…
Find Information on Complex Tax Topics – IRS
When you Should Hire a CPA or Tax Pro – The New York Times: Wirecutter
8 Common Life Events That Affect Your Taxes – Intuit Turbotax
Blog by Kim Storen, EA – Tax Services Manager
Learn more about Kim and the rest of the Storen Financial team here.