The internet has made it incredibly easy to do your taxes, with a long list of low-cost programs that allow you to prepare your returns and even file online.
While these online tax programs work very well for most of us, there are some circumstances complicated enough that you may need a little extra help.
While hiring a tax professional may seem expensive, not getting expert advice when you need it could cost you much more -- so be sure to look for these key signs you need a tax advisor with training to lend you some expertise.
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1. You've started a business
When you're running your own company, filing taxes becomes a lot more complicated. You'll need to figure out whether you can do things like get a deduction for depreciation of business assets, and whether you have to fulfill requirements such as withholding taxes for employees or sending out W2s or 1099s.
For business owners, you also need to make smart choices about which retirement investment accounts give you the best tax breaks and whether you'd be better off structuring your business as a sole proprietorship, an LLC, or a corporation.
All of this can be really complicated -- and special rules for business owners that allow some pass-through entities to take a 20% deduction starting in 2018 have only served to complicate things further.
Because there's so much involved in filing taxes and online tax software really isn't set up to help small business owners optimize their tax situation, hiring an accountant is almost always worth the investment.
2. You're earning lots of nonwage income
Are you earning all of your income from the gig economy? Do you have lots of money coming in from rental real estate or from your craft-selling hobby?
Taxes get more complicated when your money doesn't come from an employer because you need to comply with obligations to pay the IRS throughout the year as income comes in. You'll also need to determine if there are any deductions you can now claim thanks to the fact you're earning nonwage income.
A tax professional will help you to get a handle on your situation and will work with you to ensure you don't end up owing penalties for not making tax payments throughout the year.
3. You'll probably owe AMT
Alternative minimum tax (AMT) was put into place to ensure everyone paid some tax by limiting the ability of wealthy companies and individuals to take advantage of tax breaks.
Unfortunately, AMT wasn't indexed to inflation, so it started to hit even middle-class families. Tax reform eliminated AMT for corporations and raised the exempt amount for individuals, so far fewer people will be subject to the alternative minimum tax.
AMT didn't disappear for individuals, however, and those with higher incomes and larger families could still end up getting hit with AMT -- and owing thousands more on their tax bills. If you're one of them, talk with a tax professional about options to minimize the hit you take.
4. You sold property
If you sell residential or commercial property, your tax situation changes. You may lose deductions associated with the property and may owe capital gains on the sale, depending upon the circumstances.
A tax expert can help you understand what your options are for limiting taxes triggered. For example, if the property was an investment property and you're looking to invest in another one, a tax expert can help you to determine if you could qualify for a 1031 exchange to defer capital gains.
5. You have a ton of investment activity
Investment income is treated differently than regular income on your taxes. You need to ensure you comply with requirements for reporting investment income, and make certain you're taking advantage of any opportunity to reduce taxable income through claiming investment losses.
Online tax programs aren't always set up to help those who are active traders or who get substantial sums of money through investments -- especially if you hold investments for the short term or you're investing in things like real estate or cryptocurrencies.
A tax professional can help you ensure you're reporting investment income properly and taking advantage of legal ways to reduce taxes on investments.
6. You're newly divorced
If your marriage has ended, you have a host of new tax issues to consider.
You'll need to decide on your new filing status, such as whether you can file as head of household or need to file single. You'll need to understand what tax credits and deductions you can still claim, and address issues such as who claims your children as dependents or takes deductions for them like tuition deductions if you're paying for college. You also need to know the tax rules for alimony.
All of these issues are complicated; you should get the right advice to make sure you handle your first post-divorce tax return properly.
Should you hire a tax professional?
These are a few situations in which hiring a tax professional just makes sense. Bottom line: If you have a lot of income, are confused about taxes, or have an unusual tax situation, getting professional advice is usually worth the investment.
If your taxes are simple, your income comes from an employer, and your chances of an audit are low because you don't earn a fortune, then you're probably fine to file online.
But, if you have any doubts, it's usually far cheaper to pay a tax professional for help than it would to deal with a tax audit and paying fines to the IRS.
