What Kind of Tax Preparer Do You Need?
If tax law and regulations are not your favorite subject, or you worry about the cost of making a mistake using tax software, you might want to consider having a tax specialist prepare your return. There are several different categories,however, and you should know the strengths and limitations of each.
Enrolled Agent – A tax expert who has passed all four parts of the IRS Special Enrollment Agent showing broad competency in tax law and regulations. Required to take 24 hours of CPE per year. Unlimited right to represent taxpayers before the IRS. Subject to Circular 230 (Dept of Treasury regulations that professional tax preparers must follow to protect clients, ensure that preparers are competent and up to date on tax law, and prevent fraud)..
Certified Public Accountant – Has passed a uniform national accounting exam and additional requirements. Holds an accounting certification from a State Board and is required to complete CPE, the amount depending on Board requirements. Unlimited right to represent taxpayers before the IRS. Subject to Circular 230.
Attorneys – Hold a law degree. Legal CPE requirements vary according to state bar associations. Unlimited right to represent taxpayers before the IRS. Attorneys in Texas can earn a certification in tax law from the Texas Board of Legal Specializations. Subject to Circular 230.
Unenrolled Preparers – Persons who have not yet obtained one of the above qualifications. Limited right to represent a taxpayer (generally only relating to returns prepared by the preparer). Not subject to Circular 230.
Paid preparers are required to sign returns and enter their Preparer Tax Identification Number (PTIN) at the bottom of page 2 of Form 1040. If a return presented for your signature does not have the preparer’s signature or a PTIN, do not sign until both have been added. The IRS will investigate the lack of either and may give your return closer scrutiny as well.
This column was originally published in the January 1, 2012, edition of the Dripping Springs Outlook and is republished with its permission.
How to Choose a Tax Preparer
The tax return preparation season is almost upon us and millions of Americans are faced with a familiar decision: should I employ a tax preparer or do it myself? More precisely, “or should I do it myself using tax preparation software?”, since it is a daunting prospect to wade into tax preparation without the assistance of software.
Using tax preparation software is essential to preparing an accurate return. That’s because the software ensures that entries on one form are carried properly to other parts and other forms. Good software will prevent or warn you about incorrect entries and point out the need to fill in additional forms. There are numerous programs available.
But software is only half the story—the other half is whether you are prepared to enter accurate data into the program. My essential companion during tax season is J.K. Lasser’s Your Income Tax. It provides a great deal of explanation on a very broad variety of topics, with a strong index. If you are going to do your own return, you probably should use that book or the equivalent to find deductions that could dramatically lower your taxes. If you don’t like reading fine print or don’t have much time to bone up on taxes, you should consider using a tax preparer, since the fee might be much less than the cost of missing a major deduction.
There are some areas where professional help is particularly valuable. Small business income (Schedule C), rental or royalty income (Schedule E), IRA withdrawals, capital gains or losses (Schedule D), depreciation and situations dealt with at length in the J.K. Lasser’s Guide are all indicators that you could benefit from professional tax preparation.
True professionals complete Continuing Professional Education (CPE) courses and attend seminars during the off-season, subscribe to publications about tax developments, are subject to ethics requirements and have access to the Internal Revenue Code via internet. They can also represent you before the IRS if you have a tax problem. So if you need tax help, consult a professional, such as an attorney,CPA or Enrolled Agent.
This column was originally published in the January 1, 2011, edition of the Dripping Springs Outlook and is republished with its permission.
Tax Benefits for Education
If you have kids that you hope will go to college, or are planning to go back to school yourself, you might be able to take advantage of various tax benefits. Let’s look at the main ones:
— Scholarships and fellowship tax exclusion: If you are a candidate for a degree at an eligible educational institution and use scholarship or fellowship funds to pay educational expenses, you can exclude those funds from your income.
— American Opportunity Credit: You could qualify to receive up to $ 2500 against your tax bill or even have a portion refunded to you for each eligible student for whom you pay educational expenses and who is pursuing an undergraduate degree or other recognized educational credential.
— Lifetime Learning Credit: Up to $ 2000 against your tax bill is available per return if you pay educational expenses for post-secondary education or courses to improve job skills. No need to pursue a degree or other educational credential.
— Section 529 Plans: You make contributions to the plan with no immediate tax benefit, but earnings on your contributions withdrawn to pay educational expenses are tax-free. If you do not use the withdrawn earnings for education, however, they are taxable and a 10 percent penalty applies.
— Student Loan Interest Deduction: You can deduct up to $ 2500 in interest paid on student loans from your income if the loan was used to pay educational expenses for you, your spouse or your dependent and that person was a half-time or more student, among other requirements.
— Tuition and Fees Deduction: If you do not qualify for an American Opportunity for Lifetime Learning Credit due to income restrictions, you might still be able to claim up to $4000 for tuition and fees.
— Coverdell Educational Savings Account (ESA): Up to $ 2000 per beneficiary per year can be contributed to Coverdell ESA’s. While the contributions do not provide an immediate tax benefit, the earnings can be withdrawn tax free if used for qualified educational expenses of the beneficiary.
There are many restrictions and special rules for claiming these benefits. Consult IRS Publication 970 or your tax advisor for details.
This column will be published in the February 1, 2012, edition of the Dripping Springs Outlook.