Every year around tax time, I inevitably see lots of articles about maximizing deductions and figuring out ways to get more money back. There are lots of gray areas when it comes to taxes and that opens up lots of possibilities for aggressive filers. But even within the CPA community, there is a lot of debate over certain aspects of the tax code and your friend’s CPA might suggest something completely different than your CPA.
That’s one of the reasons why I like doing my taxes myself, so that I know exactly what’s going on and I can explain everything in it. The tax code might be long and boring but it’s not all that complex. As long as you can read and do some very basic math, you can do your taxes yourself.
The CPA title is actually very broad and many public accountants, private equity guys, etc hold their CPA license. Although they’re technically CPA’s, I think even they would admit they wouldn’t feel comfortable doing somebody else’s personal tax return.
What Tools Do You Need?
In order to be successful at doing your own taxes, you’ll need an interest in taxes and a decent amount of time. CPA’s have to do a lot of research and training in order to become proficient but they’ll apply that knowledge to hundreds of returns. You’re probably only doing one return so it’s up to you to do all that research for yourself. Still, I think the math and research behind taxes is a lot simpler than most people would think.
The only problem you’ll run into when doing research for taxes is that it can be hard to verify certain types of information. Finding out about deductions and credits is the basic stuff – you’ll be able to figure all of that out just by reading a basic tax book or by going through the IRS publications. But you might find some trouble when you start looking into the gray areas. One of the main issues I’m dealing with on my taxes right now is calculating the land value(for depreciation) to use for my rental property. There is no set formula provided by the IRS but there are ‘unwritten rules’ among CPA’s and real estate investors.
Information like this won’t be found in a simple Google search. You’ll have to go onto Bigger Pockets or the Bogleheads forum and ask your question there. In fact, that’s actually how I solved this problem. I posted a question about depreciation on the Bigger Pockets forum and a few people recommended a book called, NOLO’s Guide to Landlord Deductions. The depreciation section was about 100 pages long but it gave me 5 different ways to calculate my depreciation that will end up saving me about $600 on my taxes this year alone.
(Btw, I’m working on an article about maximizing depreciation but just know that it is an amazing thing!)
What Does it Take to Be a CPA?
I’m going to be blunt: I don’t think it takes much to be a CPA. Like in any profession, I’m sure there are some really good ones out there but I think it’s a myth that only a CPA can do a great job. That doesn’t mean the average person is smarter than a CPA but if you can read and you have an interest in taxes you can do just as well as the average CPA.
The reason why I feel so strongly is that this year I actually met with two different CPA’s in person. Both were very highly rated by online reviews and I ended up explaining depreciation recapture tax to the first one and arguing with the second one about the passive loss exclusion. The only reason why I knew more than both these CPA’s was because I had just read NOLO’s Landlord’s Guide. It wasn’t because I’m a genius, I just spent the time reading up on landlord deductions and clearly these guys weren’t specialists in real estate taxation.
Is Your CPA a Specialist?
Taxes are extremely complex and I don’t think there’s a CPA on the planet who is a specialist in every field of taxation(although some claim they are). For example, if you run a manufacturing business, you should go to a CPA who specializes in manufacturing. In my case, I should have been looking for a CPA who specializes in real estate transactions since that’s where most of my complex tax issues arise.
Think of it like this: if you are having a heart problem would you go to a podiatrist? Or would you seek out a cardiologist – someone who specializes in the heart. Taxes might not be as complex as the human body but at just over 74,000 pages they’re pretty damn close.
Nobody Cares About Your Money More Than You Do
This saying really applies to everyone whether you pay someone to do your taxes or especially if you do them yourself. I can guarantee that no CPA will spend more time thinking about, researching and doing your taxes than they would for their own return. No matter how much they like you or how much you pay them, you’re always going to be just another client. It’s in my best interest to do as much research as possible and do a damn good job too since it directly affects my taxes. At the end of the day, no CPA will care about your money more than you do.
I think a lot of people expect that they can just drop off their taxes and be done with it all. But as I’ve discovered there are lots of complexities to the tax code and it behooves you to take an active and willing role in your taxes. I’m not against hiring a CPA, I think most people would benefit from hiring one. But I am against people who think their CPA’s are all-knowing.
I see it over and over in the investment industry so I might be a little biased but most financial advisors are salesmen yet people assume that they’re acting in their best interest. I’d rather think the worst and be pleasantly surprised than assume the best and be dissapppointed. If you’re a landlord it won’t kill you to read a book on landlord deductions. Similarly, if you’re a small business owner, pick up a book about small business deductions.
I got the feeling from both of these CPA’s that they were going to just take my information and hand it to a secretary to enter into their tax software. I don’t need to pay $500 for that and neither do you. I give out free copies of TurboTax every year so my advice is to do it yourself or hire a specialist and take an active role in your taxes.
Readers, what do you think about hiring a CPA? Is it worth $300-$500 to hire an average CPA or should you spend more and get someone who specializes? Do you do your taxes on your own or do you pay someone to do it?
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It takes a lot more to be a CPA than you imagine and I know because I have a license. I had to have 150 credit hours of education and take a gruelling 16 hour test that has an insanely high fail rate. That said, a CPA is not just a tax accountant. Some choose to specialize in tax while others choose audit. Tax CPAs make their big money on clients with businesses and a small return with a rental property isn’t their bread and butter. Many partners do have their staff, other CPAs and professional accountants (not secretaries) prepare returns but they do review them for accuracy. While you might be right about the two tax CPAs you consulted, it is not representative of all CPAs and I recommend you do a bit more research before making such broad statements. Simple returns can easily be prepared by the public, but CPAs do add value to the clients they serve in most cases.
Hey Lance, thanks for your feedback. I definitely think there’s some value in hiring a CPA – I hope I made that clear. But I think if you’re going to go to just a general CPA who handles average returns you can do just as good of a job yourself. If you’re going to hire a CPA, I think it’s the best idea to hire one who’s a specialist in whatever industry you’re in – ie if you’re a blogger you should hire a CPA who specializes in small business. I think there’s a misperception among CPA’s and every day people that if you take your tax return to a CPA they’ll be an expert in everything. But like my MD example, you want to go to someone who specializes in the problems you’re having.
“…I don’t think it takes much to be a CPA.” Most likely because you’ve never attempted to become one? 🙂 The pass/fail rate on the CPA exam is 50%…meaning only 50% of those who take it pass it. That puts it on par with the bar exam as far as difficulty.
With that being said, I’d agree with your assessment that most individuals can do their own taxes. Their simply isn’t enough complexity to warrant hiring someone. My wife (a CPA herself) even advocates for that. Her firm does strictly business taxes (and the personal returns of those who run those businesses) where the need is much greater. $300-$500 or more is worth it for a business…probably not an individual.
Oh…and she has run into a few of the lousy CPAs you are talking about. Guess there is high and low quality in every industry.
Yea I probably think I’m a lot smarter than I actually am haha(a little biased I guess). I’ve heard the pass/fail rate is 50% for this test and the bar exam but honestly not sure if those numbers make sense to me. So 50% of people that go to law school and acquire 100-200k in debt don’t get a job b/c they can’t pass the bar?? Something’s fishy there.
I think it’s a misconception that taxes are complicated – the standard return is very simple and easy to understand. Software like TT will help/prevent you from making any mistakes too. But when your taxes get more complicated(ie rental property, small business, etc) I don’t think it makes sense to go to your average run of the mill CPA. These guys won’t have the specialty knowledge you need, they’ll know about as much as you if you read a book. In that case, you’ll either have to do a lot of research yourself or hire someone that’s a true specialist($$$).
I’m not trying to be arrogant here, but most CPAs that prepare taxes usually have very complicated business returns, trusts, partnerships, corporations, non-profits, etc.
You don’t need a “specialist” for a 1040 with a Schedule E…That’s barely on the radar for most CPAs with a decent tax practice in terms of difficulty.
By the way, I hope you’ve read up on the upcoming repair regulation changes in 2015. You’re depreciation “expertise” is now obsolete.
Also, the CPA certification is not a tax certification. (I know because I am one). It is a state license that allows CPA’s to conduct public practice and issue opinions on financial statements. Basically, its primarily for audit purposes (financial statement, not tax audits) that lenders, investors and other shareholders rely on to know if they can rely on the financial statements when making lending or investing decisions.
If you talked with a CPA who is in public tax practice that does business returns, I highly doubt you had to “teach them” about depreciation recapture tax. Tax may not seem complicated to you because you have a run of the mill tax return, and I’d agree do that yourself, but really its more of one of those things where you “don’t know what you don’t know” for most tax payers.
I disagree 100% but thank you for the comment. It’s kind of a silly argument since we’re both so biased but you’re right depreciation recapture is super basic. I’m sure most CPA’s know about this but they may not know about something like this: https://yourpfpro.com/depreciation-new-best-friend/
Your first sentence kind of proves my point too, those are all super specialized fields. You don’t need a cpa for the average return and I can assure you a good CPA can do miracles with a rental property while an avg one will get you only the basics. There’s a reason why the nolo landlord tax deduction guide is almost 1,000 pages…
So, what exactly did you “disagree 100%” with? “Most CPA’s in tax practice do have more complicated returns (trusts, s-corps, c-corps, partnerships, etc)” – Not sure what you disagree with there…I’m in practice, I can vouch for that one.
“You don’t need a specialist for a 1040 with a schedule E (rental property)” – again, don’t know what you disagree with there?
Upcoming repair regs change the entire way we will need to expense or capitalize purchases, improvements, repairs, etc. – That’s a fact and most tax payers with business or rentals will be filing a 3115 change of accounting method this year to comply. Not sure how you would disagree with that?
The CPA certification is not a tax certification, but rather an audit certification – Again, not sure what you could disagree with this on. That is pretty much the entire purpose of CPA licensing – to protect the public on financial statement opinions and reliance.
Also, not sure what you are trying to say with your link….what you posted on there isn’t some newly discovered thing…I’m glad you know the definition of depreciation? Look into Section 179 bonus depreciation, expense vs capitalize, etc. A lot more to it than that. You really need an understanding of accounting rules and GAAP to know if you’ve got it right. I see you’re an engineer by training so you should understand that software is only as good as the input. Garbage in, Garbage out.
Again, not trying to talk down to you, but just because you’ve got a simple return, you can’t say a CPA is not worth the money. Taxes truly are one of those things where you may think you did it 100% right, but that’s only because you may not know the whole picture. You’re downplaying a whole profession and study because you are taking a sample size of 1 tax return, a book you read (which is not authoritative research to stand on if you’re audited, BTW) and projecting that over 270 million + taxpayers.
I believe if you get into more complicated business structures (c-corps, s-corps, partnerships) where you’ve got issues with tracking stock basis, distributions, equity, equipment depreciation, etc, things start getting very muddy and change frequently. That’s when you will realize how much a CPA who takes 40+ hours of continuing education a year and stays abreast in the tax law is worth.
That’s a good point about the bar exam and fokls having already having a vested interest in passing. Despite that, the consensus from those who have passed both is that the CPA exam is the more difficult and rigorous exam.
As with most things, it helps to have a base understanding of something so when you do seek help – you know what to look for. I’d never repair my car myself, but I know enough about mechanics that if somebody tried to fleece me I’d know about it.
Same thing goes with tax. By understanding the basics you’ll know how to increase your deductions throughout the year and at the end, you hire a CPA so you don’t need to spent a massive amount of time doing the filling.
Hey Will, that’s a great point. You really need a basic understanding of something anytime you seek help: automobile, taxes, finances, etc.
I think most of the work of doing your own taxes is staying organized, having all the right documents, etc. For me, I might as well just enter the numbers myself since it’s not much more work 🙂