It is a little disheartening, but not surprising, when someone asked me if a tax attorney or tax preparer is worth it. In truth, however, this is a loaded question. If you are asking me if the local store front office of the mega-tax preparer service is worth it, I would say probably no. If you are asking me if an experienced tax attorney is worth it, the answer is yes. And not just a little yes; a resounding yes.
Let me explain by way of illustration. If I decide that I want burnt ends (a Kansas City favorite) for dinner, I can either make them myself or go out. If I decide to make them myself, I would do what everyone faced with this situation would do. I would go to Google and type in “Burnt End Recipes.” I’m sure this would yield me many useful results. After perusing the many links, I would probably find one that sounded good and easy. I would then print it out and head to the store for ingredients. After getting the ingredients, I would come home, fire up the smoker, follow the recipe, and soon after, I would have my burnt ends. Now if I went to any of the fine BBQ restaurants in Kansas City, I could probably get better burnt ends, a variety of side dishes, and not be faced with the messy cleanup. Would they be significantly better? I would hope not! Could I not figure out the side dishes I like and just make those? Yes. Is the extra cost worth avoiding the cleanup? Maybe; my wife would say, “Yes!” So why don’t I cook every meal at home? Because, I like the variety the restaurant offers. I like the fact that the menu contains items I’ve never heard of but want to try. Most importantly, I’m only as good as the recipe. The restaurant, on the other hand, has the ability to explore and create new and unique items for me. I could try and do this, but I’m almost certain nothing I make would be edible. And yes, my wife likes the piece of mind of no cleanup.
The same goes for your tax return and your tax preparer/tax attorney. You can go out and purchase some great products that will help you complete your tax return. TurboTax and TaxCut to name a few. These programs even offer support packages to make sure you get everything right (though you might have to pay a little extra for these services). If you use one of these tax programs to complete your return, you would most likely get pretty close to what your paid tax preparer achieves. And this is why I say the typical tax preparer is probably not worth it. These low-cost tax programs can do the same thing for a quarter of the price. But with a true tax attorney, you aren’t just paying for the tax preparation. You are paying for the tax attorney’s expertise regarding planning opportunities, for the tax attorney’s knowledge of what is and is not possible, for the piece of mind that you are getting it done right, and for the piece of mind that if the IRS comes calling, your tax attorney will be by your side to help you through it. In short, after the return is complete, a qualified, experienced tax attorney should explain opportunities to reduce your tax bill and be available to answer your, or the IRS’s, questions. This is what you are paying for.
An example that I like to use involves medical expenses. Most employers offer what is called a flexible spending account. It is an account that allows employees to save money pre-tax to pay medical expenses. A lot of employees are scared to put money into these accounts because any money that isn’t used by year’s end is lost. But by failing to put money into these accounts, these individuals may be unnecessarily increasing their tax bill.
Medical expenses are are itemized deduction subject to deductibility limits. Thus, in order to deduct medical expenses, it must be advantageous for the taxpayer to itemize his deductions and the amount of medical expenses must be significant. For instance, let’s assume that we have a married couple with two children. The couple elects to contribute nothing to their flexible spending account and have no above-the-line tax deductions. If the couple’s gross income is $50,000, they may only deduct medical expenses in excess of $3,750 ($50,000 x 7.5%). If the family incurred $4,000 in medical expenses, only $250 is potentially deductible and the remainder is lost forever. This is only half the story. For 2009, the standard deduction for married couples filing jointly is $11,400. In other words, married couples filing a joint return must have more than $11,400 in itemized deductions (e.g., home mortgage interest, state income tax, medical expenses, etc.) before it is appropriate for them to itemize. (There are a few situations where this might not be true, but these are not relevant to this discussion.) Because the couple did not contribute to the flexible spending account, they forgo a $3,750 deduction, and potentially the remaining $250 if they did not itemize.
If, on the other hand, the couple had contributed $3,000 to the flexible spending account, the couple would have deducted this amount pre-tax. Thus, their taxable gross income would have only been $47,000. Assuming the family had the same $4,000 in medical expenses, the couple would have paid the first $3,000 from the flexible spending account leaving $1,000 in potentially deductible expenses. Because of the deductibility limits, the entire $1,000 would not be deductible as it does not exceed 7.5% of the couples adjusted gross income. But this $1,000 in non-deductible expenses is significantly less than the $3,750 that was not deductible in the previous scenario. Additionally, the couple does not have to itemize to take advantage of all of this. All in all, by contributing the $3,000 to the flexible spending account, the couple saved around $350 in taxes.
A qualified and experienced tax attorney could and should walk them through a more proper tax strategy, including the proper amount to contribute to a flexible spending account. This is what you should expect from your tax planning attorney, and this is where the value is created. Obviously, this is just one simple example of the many tax planning opportunities that exist.
Now I’m off to get my burnt ends!
– The State Line Lawyer
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Great post, KSMOL! I’ve subscribed and am looking forward to your future posts.
That was a very good analogy. I think it depends on the individual/s tax needs whether or not they would benefit from a tax preparer or going the DIY route. This post does explain what you are paying for with a tax professional though.