The following is a guest post by tax professional Kim Fourman, otherwise known as Mrs. Luke1428. She is a CPA at Loggins, Kern & McCombs in Jonesboro, Georgia. The following is not tax or legal advice. If you have questions about your own situation, please consult a professional to discuss your particular situation.
If you understand the questions and can answer them properly, then Turbo Tax works great.
It really does. It would make no sense for someone with a couple of W2s and some mortgage interest to pay a CPA to prepare their taxes. But, there are times when you need to consult a tax professional.
Consult a Tax Professional When…
1. You had a major, unusual event during the year, like a foreclosure or bankruptcy. Did you know the general IRS rule is that debt which has been forgiven is actually counted as taxable income? Unbelievable, isn’t it! So if you couldn’t pay your credit card bills, and some of the debt was forgiven in an agreement, that amount (that was forgiven) could be counted as taxable income. Now, there are a multitude of exceptions, and then exceptions to the exceptions. This is where a professional can help make sure you aren’t hit with an unexpected tax bill.
2. You have your own business. Many people do their own taxes just fine, but once you get into the realm of small business taxation, it’s worth it to consult a professional, at least at the start. If the business is owned by just you, then the income and expenses are recorded on Schedule C of your 1040. If you understand the form, and there’s not too much complexity, then you are probably fine to do it yourself.
But, there are some issues that a professional can help you answer like… how much in estimates should I pay through the year? Do I have business assets that should be capitalized and depreciated? If my business operates as a loss, am I in danger of the IRS disallowing the loss because of hobby loss rules?
Let me just add here – not filing your taxes can be a criminal offense, as in go to jail time. You have got to file your tax returns, even if you can’t pay the taxes.
Now, the IRS does not just pop up at your door with handcuffs if you are late in filing your taxes. There are all sorts of notices that you will get from them, and you will be well aware that the hammer is about to fall. If you have not filed your taxes in a while and you start getting those notices, (or even better – before you start getting those notices) get your butt some help. Now!
4. You are involved as a plaintiff in a lawsuit. Many people do not realize that the settlement proceeds can be taxable depending on how a lawsuit is structured. In most cases, if the money from a lawsuit “makes you whole” from a physical injury, then it is not taxable. This would include money received to compensate for medical expenses or for lost wages due to a physical injury.
Alternatively, punative damages (money received by the plaintiff because the court is trying to punish the actions of the defendant) usually are taxable. Believe it or not, the lawyer for the plaintiff may not even consider the tax implications of the settlement. In this case, it would be worth it to consult a CPA to see if there is a way to structure the settlement so that you are not losing 30-40% of the settlement to taxes.
Questions: What other times did you use a tax professional and you were glad you did? Or, the flip side – you thought you needed a professional, but you were OK on your own?
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