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Should You Work With a Tax Advisor?


Most Americans have very simple tax needs. Their employer handles biweekly withholding, then every April they file for a refund or payment based on their appropriate standard deduction. However, depending on how you manage your investment portfolio, things can get a little more complex than that. If you have significant investments or other forms of income, a tax advisor might be necessary. Just as importantly, if you’re unsure about your taxes, an expert can help you avoid mistakes. Consider working with a financial advisor as you build a tax plan for yourself.

What Are the Different Types of Tax Advisors?

There are several types of tax advisors you can utilize the services of. Each one offers a distinctive type of expertise or manner of relationship. Your particular needs and specific budget will help determine which type of tax advisor is appropriate for you. Here’s a breakdown of each:

Professional Certified Public Accountants (CPAs)

This is the most expensive, but also most useful, option. A professional accountant is someone who works full-time, all year as an accountant. Like anyone in finance their busiest season runs from January through April. However, they aren’t one-off agents like retail accountants. As a result they have the kind of expertise that seasonal tax preparers tend to lack, although CPAs do sometimes rely on tax software to make their jobs easier.

The advantage to a professional CPA is that they know the tax code, ideally inside and out. They can explain things and answer questions in a way that neither software nor retail accountants can. A full time accountant can help you spot issues that you might otherwise have missed. They’ll know what to ask you for, and can take the time to review your files with you and ask for more information if you didn’t think to provide something. A computer can’t offer feedback, and a retail accountant can’t spend real time with you.

But, while you can get what you pay for, you pay for what you get. A professional CPA is the most expensive option.

Enrolled Agents (EAs)

An enrolled agent is a tax professional with authorization from the federal government to represent taxpayers before the Internal Revenue Service (IRS) at all levels. Enrolled agents have unlimited practice rights. This means they can advise and represent individuals, corporations, trusts or any other entity required to file taxes.

An EA can prepare your tax return for you as well as advise you on any tax-related concerns. Furthermore, if you need to deal with the IRS in any capacity – for instance, in an audit – an EA can represent you, providing you with an expertise you wouldn’t otherwise have.

Tax Consultants

Tax Advisor

A tax consultant can help you minimize your tax liability, capitalize on tax deductions and manage your tax situation. With more expertise than standard tax preparers, tax consultants can help with tax planning, inheritance issues, charitable giving and other complex tax needs. Often, these advisors have training in tax law or accounting. Fees vary, depending on the scope of work and the skill and experience of the tax consultant.

Tax consultants usually work for financial consulting firms, public accounting firms or government agencies. On the other hand, some may operate completely independently. In many cases, tax consultant services are available online, though you can also access their services through an office. Clients range from individuals and families to organizations and corporations.

Online Tax Software

Online tax software is a collection of computer forms that you fill out to prepare your taxes. They come pre-programmed with tax codes, exemptions and the other calculations necessary to correctly calculate what you do (or even better don’t) owe. At the end, the software creates a prepared series of tax forms that you can either print out or e-file. The most popular are TurboTax and H&R Block, although there are many different software packages on the market.

Software packages are very inexpensive relative to hiring any form of in person advisor, and the tax code is built around unambiguous answers of the kind that computers can handle. However, the system is only as good as its programming. The software can’t predict your specific needs. If it doesn’t think to ask a question, doesn’t anticipate a specific situation, or if you don’t understand something, you won’t have many options.

An automated system is good for taxpayers with simple taxes who want to make sure that they don’t miss any possible exemptions or credits. If you have more complicated finances, you might get what you pay for.

Retail Tax Preparers

Retail tax preparers are the tax professionals that you will hire at a franchise like H&R Block. These preparers typically work seasonally. They help taxpayers during the busy months of the year, then head off and do something else for the rest of their time.

Generally speaking, a retail tax preparer relies on automated systems to do most of their work. These systems are similar (when not identical) to the ones that a taxpayer can use on their own. The preparer takes your forms and plugs in the numbers.

While a retail tax preparer will usually have more expertise than you do, they’re nowhere near as skilled as a full-time accountant. They also rarely have the time to ask questions and explore your specific needs, since they work on customer volume during the busiest time of the year.

These preparers might work in some cases, but the bottom line is this: If you’re spending the money on an advisor, a real professional may be a preferable option; and if you want to save money, online tax software could be the better route to take.

Should You Use a Tax Advisor?

So, if those are your options, what should you do? First, tax software is generally quite useful. It can help you spot potential deductions and credits that you otherwise might have missed. For someone with relatively simple taxes, it’s often a good idea to spend the money. Some cases where tax software may be the right option include:

  • If you only have W-2 income;
  • If you do not itemize your taxes;
  • If you have no investments beyond ordinary stocks and bonds;
  • If you have only one state of residence.

In other words, if you anticipate filing few (if any) forms beyond a standard 1040, tax software may be a good option.

By contrast, the more forms your taxes require, the more likely it is that you will benefit from hiring a tax advisor. Generally speaking the IRS requires a new form for each different aspect of your taxes. Different sources of income, for example, require a new form, as do investments, deductions and other tax events. You might want to consider a tax advisor if you meet one of the following circumstances:

  • You are self-employed or own a small business;
  • You have significant investment income, such as rental properties or dividends;
  • You have complex investments, such as foreign assets, currencies or derivatives;
  • You have made significant transactions over the past year, such as real estate or numerous sales of stocks and bonds;
  • You have earned income in multiple jurisdictions;
  • You itemize your taxes.

Two Good Rules of Thumb

Tax Advisor

One rule of thumb, is that the more tax events you have, the more likely it is that hiring a tax advisor can help you save money. Any time that you make or lose money, the IRS refers to this as a “tax event.” Essentially, this is an event that changes how much you’ll owe on your end of year taxes. If you rent your apartment on Airbnb, you have triggered a tax event by making money. If you sell stocks for a loss, you’ve triggered a tax event by losing money.

The more tax events you have in a given year, the more likely it is that your taxes will touch on different parts of the tax code. This means that you have more ways to save money through deductions and exclusions. It also means that you have more ways to owe money, and a tax advisor can help make sure you don’t miss them.

Another rule of thumb is that the more jurisdictions you touched on, the more likely it is that a tax advisor can help you avoid mistakes. Every time your money crosses a border, you involve new tax laws. This includes different states in the United States and across international borders around the world. Every new set of laws creates new ways that you can make mistakes and a new opportunity to miss something.

Bottom Line

If you have relatively simple taxes, such as only filing a Form 1040 or earning your money just through W-2 employment, you probably don’t need to spend the money on a tax advisor. If you have complicated taxes, such as many sources of income, significant investments or multiple jurisdictions, a tax advisor is probably a good idea.

Tips on Taxes

  • Complicated finances can lead you to work with a tax advisor or a financial advisor. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Use our no-cost income tax calculator to get a quick estimate of what your federal income taxes will look like.

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