Six Reasons to Consider Consulting a Tax Advisor

When I did my first tax return, it was relatively easy. Today, with numerous deductions, allowances, and tax credits that seem to change every year, a tax return is much more complex. Not applying the tax code properly may have negative financial consequences, either a lower refund or an incorrectly claimed higher refund. Although I believe many people should be able to do their own tax returns correctly, I think there are six situations when it may be worth consulting a tax advisor, because of the complexity of interpreting the tax laws.

Here are my six reasons:

1. Claiming dependents other than biological or adopted children who lived with taxpayer more than 6 months. To claim another blood relative (e.g brother/sister, parent, grandparent, uncle/aunt, etc.) or non-relative (girl/boyfriend, partner or roommate), the IRS has defined several specific criteria that must be met to qualify as dependent. In addition, claiming a biological or adopted child that resided with the taxpayer less than six months requires approval through form 8332.



2. Taxpayer, spouse or dependent is attending school part or full time. In 2009 and 2010, there are threeeducation tax credits and one deduction which depend on whether the student is in a degree program, attending more than half time, or attending for work reasons. Form 8863 is needed to claim tax credits for education expenses. Form 8917 is needed to claim a tuition and fees deduction.



3. Purchased a first home. Of course, there is the first time home buyer's tax credit for 2008 through mid 2010. However, even without the tax credit, home ownership often enables being eligible for itemizing deductions, including charitable contributions, for the first time. In order to be claimed, the IRS requires documentation in the form of receipts, 1098 statements, or other payment records.



4. Starting a small business. Starting a small business is already challenging. A tax advisor can help ensure the tax related aspects are done correctly, e.g. expenses, depreciation and documentation. In addition, understanding the tax implications of a small business can help the owner make better business decisions, e.g. how much to charge clients.



5. Income under $43,279 and claim one or more dependent children under age 19. Earned Income Credit (EIC) provides refundable tax credits to taxpayers below certain incomes thresholds, and can provide up to $5028 of financial assistance for 2009 tax returns. According to Wikipedia, between 3.5 to 7 million households that may be eligible for EIC do not claim the credit, foregoing an average of $1766 in tax refunds.
   
   The maximum incomes eligible for EIC are $43,279, $40,295, $35,463, and $13,440 for 3 or more, 2, 1 and 0 qualifying children, respectively.



6. Thinking about a retirement plan early withdrawal. Pension, 401(k), or IRA early withdrawals may be subject to income tax and a 10% penalty. A tax advisor can help identify possibilities to minimize the penalty, using form 5329.

Here's my list of possible tax experts to consult:

Accountant. This level of expertise is most helpful for people starting a small business, who may need ongoing tax advice. Since accountants charge on an hourly basis, this option can be the most expensive. Some accountants provide a free initial consultation, e.g. one hour, to attract new clients.

Tax preparer. This time of year, there are many tax preparation companies offering their services. Find someone who is able to provide advice, in addition to doing taxes. Then schedule a 2-3 hour appointment to complete a tax return and get advice on one's tax situation.

Tax preparation companies vary in expertise, knowledge and availability throughout the year. This option can be less expensive than an accountant, but there is high variability in expertise and knowledge among tax preparers. To me , it is important to find one that has knowledgeable tax preparers, based on experience and training, and that are available after April 15.

IRS help line, 1-800-829-1040. The IRS provides assistance to taxpayers with questions at this number. The good news is that the cost is free. The bad news is the accuracy rate is 66% based on a 2005 quality survey. When using this service, writing down the name and the ID number of the person who provides an answer may be one way to prove the IRS was consulted, in case the guidance is not correct.

I believe the tax laws are only going to get more complex as the Obama administration and the Democratic Congress continue to make changes. The difference between a correct interpretation and an incorrect interpretation of the above six scenarios can be hundreds to thousands of dollars in a tax refund. For such cases, it is worth considering consulting a tax expert for advice.

Disclosure: During tax season, I have a part-time job as a tax preparer. Therefore, my views may be biased :-)

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This is not financial or tax advice. Please consult a professional advisor.

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