Sometimes it pays to get help filing taxes
By Sandra Block
Even if you're a pretty good handyman — or handywoman — sometimes you need to accept your limitations and call a plumber. Ideally, you should reach this conclusion before your toilet overflows.
Similarly, even if you're comfortable with tax software, there are times when you should consider hiring an experienced tax preparer.
Treasury Secretary Timothy Geithner endured a public pummeling after lawmakers learned he had underpaid more than $34,000 in taxes while he was working for the International Monetary Fund. Geithner used TurboTax to prepare his taxes in 2000 through 2002 and again in 2005, according to the Senate Finance Committee.
Geithner blamed his problems on "careless mistakes," not the tax software. Still, Geithner's experience provides some lessons for do-it-yourself taxpayers. Consider getting help if:
Employers typically withhold Social Security and Medicare taxes, which amount to 15.3 percent of earnings (2.9 percent for Medicare, 12.4 percent for Social Security), and pay half of your share. When you're self-employed, you're responsible for the entire 15.3 percent. To avoid penalties, you may be required to pay estimated self-employment and income taxes every quarter.
You're allowed to reduce your self-employment income by 7.65 percent before applying the tax rate, and you can deduct 50 percent of your self-employment taxes. Still, you could end up owing the IRS a lot of money, Schwarz said.
You can lower your tax bill by deducting business-related expenses, but there are a lot of misconceptions about what is and isn't deductible, said Francis Degen, an enrolled agent in Setauket, N.Y. Some taxpayers mistakenly believe that "anything tangentially associated with their business is a write-off," he said. "That's a place where professional help is useful."
To calculate your gains or losses, you'll need to figure out your basis, which is the price paid for a stock or mutual fund, plus reinvested capital gains and dividends. That can be a real challenge, Degen said. For example, many taxpayers who buy shares through dividend reinvestment plans forget to include reinvested dividends when calculating their basis, he said, resulting in a higher tax bill. In addition, taxpayers who sell stocks they've owned for many years often have a hard time tracking down the purchase price. An experienced tax professional can help find that information, or at least come up with a good faith estimate the IRS will accept, Degen said.
Hiring a tax professional doesn't guarantee you an error-free return. In 2006, staffers for the Government Accountability Office, the watchdog arm of Congress, had tax returns prepared at 19 outlets of several tax-preparation chains. They found mistakes in all of them.
Degen recommends looking for a tax preparer who is an enrolled agent, a certified public accountant or a tax attorney. These preparers must meet continuing education requirements. CPAs, enrolled agents and attorneys are also qualified to represent you if you're audited. The National Association of Tax Professionals offers an online brochure, "Finding the Right Tax Preparer," at www.taxprofessionals.com.
