For a lot of military households, tax preparation is simple, straightforward, and free. Every year, just collect the paperwork and head down to the VITA (Volunteer Income Tax Assistance) office, and the staff can help you do your taxes. Or, if you’d rather do it on your own, you can either use a software provider such as TurboTax, or go to the IRS FreeFile website. The IRS also has a link to find free state filing options, based upon certain eligibility criteria.
However, you often get what you pay for. Over the course of your military career, you might find yourself in situations where the free offerings no longer make sense. Below are three types of situations in which you may want to hire your own tax professional.
Tax Professional Reason Number 1: Your situation has become more complicated.
Over the course of a military career, you can expect many things to progress. Rank, household size, and income are three things that generally grow over the course of a 20+ year career. With that progression comes a certain complexity.
That complexity comes at us a little at a time. Getting married, buying a home, having a kid—those are all examples of the slow and steady way that our life becomes more complicated. Before you know it, you’re dealing with a lot of stress…we’ve all been there. A tough deployment, an extended TDY, or unexpected PCS—sometimes, you feel like you’re barely holding it all together.
Then, at tax season, you’re expecting to plug away all this stuff into TurboTax and get it 100% right? Usually, we’re looking at taxes as another ‘to-do’ or ‘honey-do’ list item that we’ve got to check off before we move on to the next thing. When it comes to calculating our tax liability (and subsequent refund/taxes owed amount), is this the right way to proceed?
If you knew the difference between properly calculated tax return (with all the deductions & credits you’re entitled to) and what you usually do, you’d probably take the time to ensure they’re calculated correctly. However, if you’re so busy that you don’t know what you don’t know (in the infamous words of Donald Rumsfeld), you might be overlooking a lot of opportunities without realizing it.
Conversely, if you’re improperly calculating taxes that you OWE the IRS, don’t worry. They can help you make sure that you pay the proper amount and remit what you owe (plus interest). But if your situation has gotten complicated, you might want to have your taxes professionally done so you don’t leave money on the table.
Tax Professional Reason Number 2: You have significant events on the horizon.
Sometimes, you’re going to do something that’s financially significant. Whether it’s selling some of your investments, liquidating retirement savings, or retiring from the military…these are all events that have tax implications. Some of these events can be done in a tax-efficient manner or a tax-inefficient manner. Before doing anything, it might be worthwhile to discuss your options with a tax professional or a fee-only financial planner so that you end up with as much after-tax money as possible.
On the flip side, sometimes you’re going to make a decision, pay the taxes, and move on. In that case, you want to make sure you accurately calculate your tax liability so you can budget for it, pay it, and not have to worry about the IRS knocking on your door.
For example, most people want to buy a home. In the military, many people who buy a home either sell it or rent it out due to PCS. Once that house becomes a rental, you’ll have to calculate Section 1250 depreciation, which is deductible against rental income, but recaptured when you sell it. When you sell your rental, calculating your tax liability by yourself is a tedious, confusing task. When selling that rental, should always hire a tax professional to ensure that you have the correct tax liability calculation.
Other major circumstances in which you may want to consider hiring a professional include:
- Working with trust assets (such as an inheritance)
- When you’re managing other people’s property & money (such as dealing with elder care)
- Working with people who have special needs
- Having a business (even if it’s a sole proprietorship)
- Selling or liquidating assets (such as retirement accounts, 529 plans or after-tax investments)
Tax Professional Reason Number 3: You want a second set of eyes to help you understand your financial picture.
Perhaps you’re doing just well on your own. You might feel that your situation doesn’t warrant assistance, and that you’ve got a handle on your entitlements. If that’s the case, keep on truckin’!
However, you might have that little bit of doubt in the back of your head…Am I doing this right? But how do I know? Even if you’re pretty sure about taxes, it might not hurt to have a second opinion. If you do, one of two things will happen:
- You’ll be right. If that’s the case, then you’ve bought yourself some peace of mind. Even then, you might pick up a piece of tax advice based upon your situation.
- You’ll be wrong. If you’re wrong, here’s your chance to either save some money, or to save some peace of mind with the IRS. You can also go back (up to 3 years) to see if filing an amended return is in order. Odds are, you won’t be completely off. However, tax calculations are complicated enough so that even one adjustment or one new piece of information will change an entire tax return. Having a professional set of eyes looking at your finances could mean a huge difference.
Most people are able to do their own taxes and carry on with their lives. However, the more complexity your life has, the more complicated your tax situation becomes. Eventually, you may reach the point where hiring a tax professional can be worth more than the cost of their services.
What do you think? At what point do you feel like you need professional help with your taxes? Feel free to post your comments below or join the Military in Transition Facebook Group!