One thing I love about running a blog is the great comments. ESI Money already has several readers who have left numerous insightful and helpful comments. Their thoughts posted on this site are a blessing to me.
One such comment was left on my post titled Why I Use a CPA to Do My Taxes. It offered both great advice as well as the personal experience of an expert, two things I LOVE.
Since it was so good, I wanted to share the quote with all of you.
Here it is with portions bolded that I want to emphasize:
ESI, very timely post, and good reading. Just completed taxes for myself-and-wife, for parents, and for a sibling with a Special Needs Trust. For us, we have pursued a strategy of ‘tax avoidance’ and realize a small income from interest and dividends. The relatively low AGI reduces our chances for IRS interaction, as it is not worth their time when they can easily review somebody who has an AGI 5, 10, 20 times greater and therefore get something from them (even if it is a ‘nuisance’ claim; I’ve paid $1,000 just to make the IRS go away). We are ‘pushing out’ income that will eventually have to be realized (picture a ‘whale-tail’ pattern in an area chart), but for the next few years this is a desirable path.
For parents, my father was a CPA and CFO for a publicly traded company, so his tax knowledge is at the professional level in the top 0.1%. However, he uses a CPA and I completely agree. I take a crack at it each year, and the CPA always comes up with a lower tax liability, for the same reasons you mention above in your great post. This year parents realized a large six-figure long-term Capital Gains from sale of stock options; this kicked in AMT, and there are a few other ‘red flags’ which may catch the attention of the IRS. However, taxes prepared and FILED through a CPA theoretically have a lower chance of audit, simply because the IRS knows the data has been prepared and certified by a person and business that has their license and reputation on the line and will go to the wall to defend the work.
For my sibling, the form is filed on a ‘1041’, which doesn’t come available in normal commercial software that I use. There are a number of backup documents and forms required, and the potential consequences of an IRS finding that the Special Needs Trust is no longer qualified becomes greater every year, as a revised filing would then have to be done for each year prior. So CPA preparation is well worth $200 to save the time, and mid-five-figure penalty for an adverse ruling. Thanks again, continued success to you!
Let’s go over the thoughts bolded above:
“my father was a CPA and CFO for a publicly traded company, so his tax knowledge is at the professional level in the top 0.1%. However, he uses a CPA.”
Ok, this guy is as experienced as it gets and he uses a CPA. He does so with very good knowledge of the tax system and choses this path. Makes a pretty good argument for many of us to do the same, wouldn’t you say?
“I take a crack at it each year, and the CPA always comes up with a lower tax liability.”
Exactly my point in the post. Also matches my personal experience. A CPA will find things that even highly knowledgeable people will miss.
“taxes prepared and FILED through a CPA theoretically have a lower chance of audit”
I didn’t know this, but add it to the list of reasons people may want a CPA to do their taxes.
“So CPA preparation is well worth $200 to save the time, and mid-five-figure penalty for an adverse ruling.”
This is what I’ve found too. The cost of a CPA is worth it for both the time it saves me (my federal return was 120 pages or so this year) as well the “adverse ruling” issue the commenter mentions.
Overall, a great, great comment that I just had to share with you all.
Thanks to JayCeezy for leaving it!
Thanks for the post, ESI, glad you found some value in the comment. Some further information. Special Needs Trust was set up 20 years ago, and contributions stopped shortly thereafter. The reason for that is the parents’ new Will and Trust was established, with a ‘Spillover’ provision. This would allow a ‘step-up’ in value upon my parents’ passing, and taxes would be avoided on Capital Gains for everything within the $5.45 million-per-individual ($10.9 million per couple) Estate Tax exemption.
The Special Needs Trust has been drawn down over past years, covering expenses for my sibling that are not normal food/shelter/clothing. Because the taxable amount was a relatively small income of Capital Gains and Dividends and Interest, actual remittance to the Federal and State agencies was never more than a few thousand dollars per year. 2015 was the last year before completing the drawdown. An adverse IRS ruling, worst case, would have taken the cumulative realized gains, counted them all in one year against my parents’ income (taxed at top rate), and added a fine on top! It never turned into a benefit or worthwhile tax avoidance vehicle, though it might have if the contributions had continued. We are all glad to be done with it.
On another note, my sibling is technically responsible for herself and there are no legal guardians. This works well for our family, as parents and other siblings are all on the same page regarding continued care for her. This allows her to be eligible for a small SSDI stipend, and some government resources to help navigate issues like housing, work (she had a job for 25 years), and transportation. Thoughtful planning by parents has provided some options that are quite useful, just this year alone.
Recent medical issues (a pacemaker, series of strokes, paralysis, etc.) have necessitated 24/7 skilled-nursing care. Cost for a comprehensive skilled-nursing facility ranges from $6-10K/month. We have decided on a facility that will cost $8K/month, which is almost $100K/year, paid for by parents. This is doable only because of the long-term planning by my parents, who have also self-insured for their own long-term care. Unexpected, but not unprepared.
Most of us are interested in PF dream of early retirement, and the freedom from trading our time-for-money so our time is our own to do with as we wish. While some of the readers at the beginning of their FI/RE journey might not have reason to think about it now, there might be a big bill coming due towards the end-of-life. None of us wants to burden others, and I am so grateful to have forward thinking parents who planned early and saved diligently for this eventuality. Someone much wiser than me said “when one is young, the focus is on money; as one grows old, the focus shifts to health.” Very true. Thanks again for sharing your journey with us, ESI!
Very interesting post, ESI!
My father was also a CPA (now retired) and I continue to use a CPA for my tax preparation each year. The thought has certainly crossed my mind to do it myself, but I like having someone to bounce ideas off of (tax avoidance questions) throughout the year. It’s also tedious if you’ve got a lot of little one-offs like me. 馃檪