Say you've been using an online tax program for several years to do your taxes. Your needs were simple, so the program was all the help you needed. Suddenly, you find yourself self-employed or with a change in your life that requires the services of an accountant. Whether you own a small business, are self-employed or just have questions about your situation, an accountant can be an essential partner in your quest to minimize taxes and maximize deductions.
When shopping for an accountant, or even if you've used the same one for years, you need to be sure you're asking the right questions. Here are 10, in no particular order, that you may not have thought to ask, but that may be important to your finances. Many of these questions don't have a right or wrong answer, so find an accountant who doesn't mind the questions and provides the answers that make you most comfortable.
Look for an accountant who understands and has worked with people in situations similar to yours. There are ins and outs to every business, from understanding how and whether to hire contractors or employees in the construction industry to managing the legal requirements of escrow accounts in the real estate biz. An accountant who has experience in your industry can make you aware of potential pitfalls, pain points and deductions.
Similarly, if you're just starting out, you may not have a whole lot of money. That means an accountant who works with millionaires probably won't even answer your calls. Fortunately, you probably don't want that accountant anyway. You want the one who helped get those folks to the top, not the one who gets paid a lot of money to keep them there. Talk to friends and business colleagues in situations similar to yours and find an accountant who understands where you are now and where you want to go.
Congress and the IRS always seem to have new rules, regulations and laws written in obscure legalese that the average person or small business owner can't possibly understand. Fortunately, that's what your accountant is for: to translate the mind-boggling government-speak into plain English and figure out how it applies to your tax position.
Generally, when new tax laws are passed, they don't go into effect for a year or more. So, ask your accountant what might be coming up that could affect your taxes. There may be things -- like the simplified home office deduction passed in 2013 -- that will make your life easier but that require you to keep track of and document year-round.
Yes, say the experts, there are mistakes people make over and over when working with an accountant. Talk to yours about what those mistakes are and how you can avoid them. Some of the most common include not being completely honest and up-front about business or personal finances and goals. Your accountant can offer more than mere tax return services if you share information about your business, your life, your dreams and your financial problems.
Hand-in-hand with this is the mistake of not taking your accountant's advice. Not that you should blindly follow whatever is said, but consider the advice and explore the subject further with your accountant if you have questions or disagree with it. You're consulting a person you consider an expert. Discounting that advice for no good reason goes against the very reason you hired an accountant in the first place.
Look for an accountant who will develop a relationship with you and work to understand your business. This will ensure that if you have questions throughout the year about your taxes, finances or bookkeeping practices, your accountant can help you with the answers and keep you updated on changes in the tax code that may affect your business. That way, you're not left scrambling to find the answers as tax day approaches.
Some of the things you may want to consult with your accountant about throughout the year are the tax implications of hiring a contractor vs. an employee or moving from a home office to leased space. Keeping the lines of communication open will help both your comfort level and your finances.
There's no right or wrong answer to this question. Everyone has to decide what is right for themselves. You just want to find an accountant whose tax approach is similar to your own. For example, some accountants encourage clients to write off every deduction possible, while others may think deductions have big, glowing lights around them, drawing IRS auditors like moths to a flame.
Think about where you fall on this spectrum. Are you a gambler, figuring your chances of an audit are low? Does the idea of taking certain deductions make your stomach sink? Accountants come in all shapes, sizes and philosophies. Find one who best matches your approach, but who can help gently nudge you in the right direction if a good savings opportunity presents itself.
This is another question with no right answer. Certified public accountants (CPAs) are the tax people many are most familiar with. They are licensed by the states and often have knowledge and education beyond tax preparation, including financial planning or bookkeeping.
Enrolled agents (EA) are federally certified in taxation and can represent taxpayers in front of the IRS. Many are former IRS agents and know the inner workings of that labyrinth. EAs must either pass an exam covering all areas of the tax code or have worked as an IRS agent in a position that regularly interpreted the tax code for five years or more.
Again, there is no right or wrong answer here. Choose a CPA or EA depending on your business or personal financial needs.
If you have a complicated family situation -- divorce, special needs family members, parents you care for -- then this is an important question to ask. It's also why having a tax adviser you feel comfortable with and who understands your family and situation is essential.
Your adviser should be able to explain the exemptions and deductions that fit your family, such as those for dependents (both children and other family members), medical expenses (including travel to and from doctors or hospitals, insurance premiums, drugs and treatments for you or any other family member whose medical expenses you pay) and educational deductions and credits to help pay college tuition -- for yourself or others. Find an accountant who will talk with you about those that apply to your taxes.
This is an especially important question if you have a large estate and are looking for ways to minimize its value. The answer, however, is no. Only gifts to qualifying charities are deductible. That doesn't mean that giving gifts to family is not a good idea. While they are not deductible for you, gifts to family members or others may not be taxable for the recipient, provided they meet the following general rules:
- They are gifts that do not exceed the annual exclusion, which is $14,000 for 2014, or $28,000 per married couple. This means, for example, that you can give $14,000 -- or $28,000 if you're married filing jointly -- to each child, and those gifts will not be taxed as income.
- They are tuition or medical expenses that you pay on someone's behalf.
- They are gifts to your spouse.
If you have a large estate, annual gifts up to the exclusion limit can be a way to lessen the value over time and help out family members while you're still alive to enjoy it.
This question is a good example of a new law or regulation that can actually make doing your taxes easier. In 2013, the IRS simplified the home office deduction. Prior to this, figuring your home office deduction required a mountain of paperwork and a lot of headaches. Your accountant should be able to fill you in on the simplified home office deduction and help you figure out if it is the best way for you to take this deduction.
Basically, for the simplified version, you still have to meet two requirements. First, you must use a portion of your house regularly and exclusively for business. For example, you can't set up a desk in the guest room and call it your office -- especially if you've got company sleeping in the bed next to you. Second, it must be your principal place of business.
If you meet these requirements, here's how to claim the deduction the easy way:
- Use a standard deduction of $5 per square foot of space used for business, up to a max of 300 square feet (91 meters).
- Claim allowable itemized deductions, such as mortgage interest, utilities or real estate taxes on Schedule A.
- Don't worry about the home depreciation deduction, it isn't allowed with the simplified option.
If your accountant believes you can get a larger deduction doing it the old fashioned way, you may want to consider that. The IRS still allows it [source: IRSSimplified].
If you run a business out of your home, you can use the simplified home office deduction mentioned in the previous tip and also claim a portion of your home operating expenses, such as your mortgage payment, utilities and Internet and phone bill. You may also be able to claim equipment you use for business, including your computer, printer, phone, fax (does anybody still use those?) and office supplies.
Auto expenses may also be deductible if you use your vehicle for business. You cannot claim both the mileage deduction and operating expenses, such as maintenance, gas and insurance. So, talk with your accountant about the rules and how they apply in your situation.
HowStuffWorks examines the fate of the personal exemption in light of the tax reform laws of 2017 and it affects 2018 income tax refunds.
Author's Note: 10 Tax Questions You Probably Didn't Ask
As I was writing this, I found myself reading more of the IRS website than I ever imagined possible. Much to my surprise, it's well-written. The information is clear, concise and generally makes sense. So if you have questions beyond the scope of this list, peruse the IRS site. After all, it's your tax dollars at work.
- Internal Revenue Service (IRS). "Frequently Asked Questions on Gift Taxes." Oct. 24, 2014. (Oct. 26, 2014) http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Frequently-Asked-Questions-on-Gift-Taxes
- Internal Revenue Service (IRS). "Simplified Option for Home Office Deduction." Aug. 19, 2014. (Oct. 14, 2014) http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Simplified-Option-for-Home-Office-Deduction
- National Association of Enrolled Agents. "What is an Enrolled Agent?" 2014. (Oct. 24, 2014) http://www.naea.org/taxpayers/what-enrolled-agent
- Porter, Jane. "10 Questions to Ask Before Hiring a Tax Accountant." Entrepreneur. Jan. 14, 2013. (Oct. 24, 3014) http://www.entrepreneur.com/article/225378
- Shandrow, Kim Lachance. "10 Questions to Ask When Working with an Accountant." Entrepreneur. April 8, 2014. (Oct. 24, 2014)http://www.entrepreneur.com/article/232841
- Shin, Laura. "6 End-of-year Questions to Ask Your Tax Advisor." Forbes. Dec. 10, 2013. (Oct. 26, 2014) http://www.forbes.com/sites/laurashin/2013/12/10/6-end-of-year-questions-to-ask-your-tax-advisor/
- Staples. "Top Ten Questions You Need to Ask Your Accountant about Tax Time." 2014. (Oct. 25, 2014) http://www.staples.com/sbd/cre/tech-services/explore-tips-and-advice/easytech-u/tax-articles/top-ten-questions-you-need-to-ask-your-accountant-about-tax-time.html
- TurboTax. "Tax Exemptions and Deductions for Families." 2014. (Oct. 26, 2014) https://turbotax.intuit.com/tax-tools/tax-tips/Family/Tax-Exemptions-and-Deductions-for-Families/INF12053.html