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.
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?