Think Twice Before Preparing Your Own Tax Return
This piece was inspired by a meeting I had with a Trustee and her husband last week. The Trustee was named to manage both of her parents’ trusts after their deaths. Her father died decades ago, and her mother died just last month. Turns out that the Trustee’s husband likes to organize finances and prepare tax returns, including for her parents and their trusts. This proved to be a disaster because he was unaware (and didn’t think to ask) about how the trusts were set up. We will figure it all out eventually, but not without extra time, money and the help of an experienced CPA. These issues could have easily been avoided.
Taxes can be simple or complicated, depending on your specific circumstances. If you are single and retired, or young and just starting out, then doing your own taxes can make sense. However, things can become complicated quickly, and that’s where a professional tax preparer can save you time, money and stress. Here are some factors to consider:
- If you are involved with a “taxable entity”, then see a tax professional. Taxable entities are enterprises that usually have their own tax identification numbers. LLCs, business partnerships and irrevocable trusts are taxable entities. (Revocable Living Trusts are not taxable entities because they use your Social Security Number as their tax id and thus are invisible tax-wise).
- If you receive a Schedule K-1, then see a tax professional. A Schedule K-1 is a federal tax document that is used to report income, deductions, losses and dividends from taxable entities like LLCs and certain trusts. You could get a Schedule K-1 if you benefit from someone else’s trust (i.e. you are a beneficiary) or you have your own business. Any Schedule K-1 you receive becomes a part of your personal income tax return and without properly understanding them, you can cause yourself problems. One mistake I sometimes see is the filing of a personal tax return by a beneficiary before a Schedule K-1 is received by that beneficiary. That often requires going back and amending your return, ugh!
- If you or a loved one have lots of medical expenses, then see a tax professional. Not only are those costs potentially deductible, but they also can dictate how best to prioritize which assets to withdraw from. (Hint – it’s often better to withdraw from a tax deferred account like an IRA in years when you have large medical expenses for the write-off). A good tax professional will walk you through the options and can save you a lot of taxes.
Sure, tax professionals can be expensive but so can mistakes made without proper guidance. The Trustee I mentioned at the beginning of this piece is about to find that out. I don’t want that to happen to you. In general, a good tax professional is more than worth the price.
Fun Fact: My wife has quite a backyard garden that includes bird feeders and inevitably, squirrels. It’s fun to see how resourceful a squirrel can be when they like what’s in the well-protected bird feeder. Not only are they resourceful, but they are also tricky. They sometimes engage in “deceptive caching” wherein they dig a hole and vigorously cover it up again without depositing a nut. Scientists think it is to throw off potential food thieves
