Using a CPA: Is it worth it?


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OFB + CPA

Once upon a time, I wrote a post about filing taxes. I’ve actually written a lot of posts about taxes, which Joanna reminds me is the reason I don’t have friends. In the comments of the aforementioned post, a reader remarked that he/she never felt confident about whether or not they did their taxes right and asked when it might be worth considering having a professional handle them. I responded thusly (a word that probably keeps friends at bay):

“You bring up a good point about never knowing if you’ve done them right. I think what I’ll do next year is fill out my own return and then take it to a CPA, pay his rate to have him review it, and see if I’m doing it right. If so, there’s my green light to keep doing it on the cheap with software.”

Suffice it to say I never actually followed through with my proposal and I’ve kept trusting my instincts (read: stubbornness) and doing them myself with TurboTax. Then a few weeks ago, I got an email from one Eric Dow, a CPA based out of Utah who runs Dow Tax & Accounting. His name alone exudes a certain financial wizardry, so I read on. Having seen the comment referenced above in a post, he proposed I take him up on the challenge. While I was still interested in the idea, I decided to counter with a slight modification — I wanted him to look into his crystal ball and advise us on tax strategies for 2015 and beyond. He accepted.

The process started with us sending him our recently filed 2014 tax return. That was surprisingly unnerving and liberating — we’ve never given anyone access to our raw financials. Included with the return, I also listed out things we could reasonably predict about 2015 (salary, child coming, etc.) as well as specific questions regarding financial decisions we were considering this year. I had hunches on a few of the questions, but I figured this was my big chance to either confirm we were on the right track or help us correct course.

How will having a second child affect our 2015 taxes?

I knew we were in for another $4,000 deduction, but I wasn’t totally sure if there was anything else I was forgetting. Eric pointed out the Child Tax Credit of $1,000 per child, but mentioned it phases out above a certain income. So depending on our 2015 take home, we may or may not benefit with kiddo #2.

Thoughts on where to put extra savings (e.g. 529)?

Since New York offers a generous state tax deduction of up to $10,000 for 529s, I was planning on taking advantage of that this year. Eric gave the green light on this, but cautioned against putting too much into this account, as any extra that can’t be used toward education will be taxed and penalized. Fortunately for us, the more kids we have (planning on 14… kidding), the less likely we’ll ever over contribute. But the point remains.

Depending on our side business income, he also pointed us in the direction of other retirement options such as a SEP IRA, SIMPLE IRA, and 401k. It would be awesome to open up these options in 2015.

Given our situation, would you recommend Roth or Traditional IRA?

We’ve long been on Team Roth, but with an increased state tax rate, plus an extra tax for NYC residents, I wanted to know if jumping to Team Traditional would make a significant difference this year. Eric doesn’t see us jumping into a lower tax bracket this year, with or without the deduction, so he listed out all the things to consider when weighing out a Roth or Traditional IRA: amount to contribute (if max, Roth is better), withdrawal needs (Roth is better), expected future income (if lower in retirement, Traditional is better), expected future tax rate (if you think Congress will raise taxes in the future, Roth is better), income limit (if income is >$193,000, Traditional is your only option), etc.

All things considered, should we max out our HSA?

My gut said yes, and Eric and my gut are getting the same vibes. Eric (like many other readers and your truly) is a BIG fan of HSAs for all the reasons we mentioned a few weeks ago here: tax free in, tax free earnings, tax free out, no time limit on medical expense reimbursement, and if you don’t end up using it for medical, it’s essentially a Traditional IRA. He also pointed out that if it’s run through payroll, you’ll also avoid paying payroll taxes on that income. Eric’s rule of thumb on investing with an HSA is to keep the amount of one’s insurance deductible in cash and then invest the rest. Sound advice.

How can we make the most (meaning pay the least taxes) of our freelance income?

We didn’t pay a ton in self-employment taxes in 2014, but fingers crossed, we should be on the hook for more in 2015. And while we want the increased income, we don’t want the increased taxes. Eric proposed some really helpful and clever tips to avoid giving Uncle Sam more than we need to. One suggestion was to hire Sally and pay her a modeling fee for the photos we take of her chubby cheeks and post to our site. At first it seemed weird, but then I realized it really is no different than buying stock photography or paying another parent to use a photo of their child on our site. Eric’s word of caution here is to make sure the fee is reasonable (meaning paying market value for said service) and to keep all income under $6,300 to avoid paying income taxes.

Eric also suggested paying close attention to any business related travel and maximizing mileage and meal per diem deductions. Business mileage in one’s own car can be deducted at a pretty high rate of 57.5 cents per mile. As far as business meals, instead of using the actual expenses (which for us would amount to $20 or less most days), Eric recommended using the allowed $71 per person per day deduction. The key here is that all of these costs have to be business related.

Bonus tip: Front load itemized deductions in 2015

I thought this was a really smart, savvy idea. In 2014, we declined the standard deduction in favor of our itemized deductions. Since we have total control over our itemized deductions (especially since we don’t have mortgage interest, which can’t be moved), Eric recommended front loading our 2015 charitable donations (tithing, thrift donations, etc.) and state income taxes in 2015 so that we didn’t pay for any of those things in 2016. That would mean we’d take the itemized deductions in 2015 and the standard deduction in 2016. Here’s an example scenario:

  • Tax rate: 25%
  • Charitable donations: $10,000 / State income tax: $10,000
  • Option 1: Just itemized. Pay and deduct $20,000 in 2015 and $20,000 in 2016. Tax benefit over two years is $10,000.
  • Option 2: Front load itemized and then standard deduction. Pay and deduct $40,000 ($20k in donations + $20k in state taxes) in 2015 and $12,600 (standard deduction) in 2016. Tax benefit over two years is $13,150.

The trick to this is having enough disposable savings to prepay donations and state taxes in a single year. But should we be able to pull that off, a $3,150 difference is no insignificant chunk of change.

 Final Thoughts

The whole process was actually super fun. It was really cool to turn over our information to Eric and see what his recommendations and suggestions were. Given our personal finance nerdness, we were already familiar with and planning on implementing about 80% of Eric’s strategies prior to his analysis. But for the average bear that doesn’t eat, sleep, and blog personal finance, that number would probably be closer to 25%. That being said, Eric’s services would have been well worth the four or five suggestions that we would have never considered. His idea about front loading itemized deductions alone could net us an extra $3,000 next year.

While we are still proponents of doing our own taxes for personal accountability, we are now completely sold on the idea of using a CPA for additional tax savings and planning in the future. Keep in mind that not all tax preparers are created equal, but we found a smart, sensible one in Eric. We’ve always said that if an accountant or tax preparer could prove their worth in tax savings that exceeded the cost of their services, we’d be sold. Ladies and gentlemen… we’re sold.

Any other once tax-DIY’ers that have switched to using a CPA? Has your CPA found any treasure troves of tax savings that you would have never uncovered?

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13 Comments

  • Reply TT March 13, 2015 at 7:46 am

    I’ve been very fortunate to have a family member who is an excellent CPA and has done my returns for free since I started filing them. Some people would just turn over statements and be done with it, but for me I have loved being able to ask a million questions and really try to understand all the deductions without having to enter the CPA profession. It has been a great learning process, and I love having someone even more in tune with taxes and finances to bounce ideas off of. For now my tax work is free, but someday it won’t be. Whenever that day comes, I will DEFINITELY be hiring a professional, and I generally recommend others do too.

    Paying Sally for modeling is an awesome move I wouldn’t have thought of. That income that she earns can be put in a Roth IRA and begin growing pronto!

    Also, regarding Roth IRAs: “… income limit (if income is >$193,000, Traditional is your only option)…” Though it might seem so on the surface, this is not true. See: http://www.bogleheads.org/wiki/Backdoor_Roth_IRA

    • Reply Eric Dow March 13, 2015 at 11:40 am

      Yes, you can always convert a traditional to a Roth and pay the tax on the conversion, regardless of when you contributed to the traditional or your income level. You’ll obviously be paying tax in a high tax bracket if that is your only option though.

    • Reply Johnny March 21, 2015 at 9:34 pm

      I would have taken you to be a self-tax-filer if you didn’t have CPA connections. A big part of why I do them myself right now is so that I can try to understand what’s going on. I imagine there will come a time soon when I’ll have learned all there is to learn from TurboTax 101 and it will behoove me to go with a pro. But for now, the lost tax savings in learning the ropes is still worth it.

  • Reply Taylor Lee @ Engineer Cents March 13, 2015 at 8:10 am

    I don’t use a CPA but that’s because I have a super simple tax situation (no kids, no house). I can definitely see if I had a strong side business going and kids taking the time too see if I’m optimizing that part of my finances.

  • Reply Rob March 13, 2015 at 10:20 am

    Hi dude!

    For many years I too was the DIY tax prep guy in our family, doing both our tax returns as well as those of my wife’s parents. That was then but for the past number of years now we’ve been fortunate to have an accounting professional in the family (our daughter) who annually prepares our income taxes for free (and saves us a whole boatload amount of $). That all said, you now realize the value of using outside professional help in guiding you in doing your income taxes, right? Well think of the guidance that you would also get if you used a good unbiased fee-for-service-provided financial professional to give you (for a flat fee) advice in how to invest your savings on an ongoing basis, as well as recommend solid 3rd party financial resources where you could do that. Again, we have that resource in the family that we use (for free) – our daughter’s husband, who heads up his own financial services business. We all use health professionals (doctor, dentist, etc). So too does it make sense once in awhile to use the services of a financial professional to help in taking care of one’s financial health. Just my opinion.

    • Reply Johnny March 21, 2015 at 9:38 pm

      I’m actually very warmed up to the idea of using a fee-only financial planner. I don’t think we’re in a situation that warrants one just yet. And like I said in my comment above, I think the education we’re gaining by learning the ropes on our own right now is worth whatever money we might be missing out on by going with a pro. But I agree, it seems like a smart direction to look next.

  • Reply Christina March 13, 2015 at 10:25 am

    As someone studying to be a CPA, I say definitely go for the CPA! Keep me in business!!

    All joking aside, CPAs are invaluable for exactly what you had yours do – planning. By the time tax time comes around for most people, what’s done is done, and you’ll owe at the rate you’ll owe. But, with a great CPA who really knows your situation, you can find planning opportunities to help minimize the amount of your hard-earned dollars the IRS gets their hands on.

    Tax software, no matter what brand you use (even the stuff the pros use), won’t help you with those planning things – it isn’t meant to! It’s meant to just complete returns and make sure things “make sense”. I think it’s always worth it to get a consultation in an area you might not be familiar with (whether it be tax planning, retirement planning, investing) to find savings or planning opportunities.

    • Reply Johnny March 21, 2015 at 9:41 pm

      It was a really fun, eye opening experience. On some points, it made me feel great that we had already thought to do and were planning on doing X, Y, or Z, and in other areas (especially business taxes), it made me realize we don’t know nearly as much as we think we do. Glad to know you’ll be joining the CPA ranks soon!

  • Reply Diki March 13, 2015 at 12:48 pm

    I would definitely hire a professional CPA because I get accurate tax returns and not only can a good CPA handle your taxes, they’ll answer all of your tax and financial questions regarding budgeting, understanding your investments, managing debt, etc.

  • Reply Joseph Hogue March 13, 2015 at 3:56 pm

    It’s really worth getting the advice (and the services) of a CPA. They are better able to answer and explain whatever questions you have with your finances so you have a better understanding and perspective of your financial situation.

  • Reply MomofTwoPreciousGirls March 14, 2015 at 10:01 am

    With a mix of regular tax scenarios and my husband’s business expenses (not self employed but a lot going on) I just don’t have the patience for it!

    Another benefit for Sally and baby number 2’s modeling careers could be minor Roth iras!

    • Reply Johnny March 21, 2015 at 9:43 pm

      Totally! In fact, we threw the idea by Eric about funding a Roth IRA instead of a 529 for Sally, so we’re weighing those options. We’re not ones to throw a post topic away, so I’m sure we’ll write about it at some point.

  • Reply Mark AW March 23, 2015 at 3:14 pm

    I like the front loading idea. Can you also pre-pay property taxes if you own a house? Are there other things you can pre-pay?

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