It’s getting close to mid-April, and so many minds are tuned in to what’s happening in DC. While I wish it was the National Cherry Blossom Festival (which ends on April 14th) that has DC in the forefront of our minds, sadly it’s the next day… April 15th that has most people thinking about our capitol these days. That’s right. Tax Day Approacheth.
Tax preparation is a bit of a controversy in itself among the personal finance community. There are bloggers like Greg at Club Thrifty who insists that if you don’t exercise your tightwad muscles and do your taxes yourself, you’re a wuss. And on the other side of the spectrum is The Banker at Bankers Anonymous, who sees the risk of doing your taxes yourself as too high for a typical working adult with an average salary compared to the savings benefits.
We’re Somewhere In The Middle.
When Mr. PoP and I were single and didn’t have anything to speak of in terms of investment income, we did our own taxes using tax software – my own personal favorite at the time was TaxAct. It was fairly straightforward, and I tried to continue using it when we got married. But the thing is, it really doesn’t catch everything. Here’s our tax prep history as a couple.
2009 – We Biffed With The Software
The first year we were married (2009), Mr. PoP sold some stock that he had purchased through an employee stock purchase program at a previous employer. The purchase was done before we got married, so I didn’t have all the paperwork, but I was able to see the basis for the stock in the brokerage account and TaxAct kindly led me through entering the sale of the stock into our taxes so we could pay capital gains (long term since we had held it more than 12 months). It wasn’t a trivial exercise. (No small part of which was that we had to do a lot of the paperwork to find the basis months AFTER the sale and his brokerage account with that firm was already closed.)
But I did it! And right! Or so I thought…
Fast forward to that summer and we get a letter from the IRS. Turns out I (though to the IRS it’s we since Mr. PoP signed it as his return, too!) didn’t do it correctly. There was a clause in the employee stock purchase program whereby any stock sold within a certain number of years was considered compensation and would be taxed at regular income tax rates. Long story short, we ended up owing the IRS something to the tune of a couple hundred bucks because of the difference between our marginal income tax rate and the long term capital gains rate. We didn’t even try to fight the decision, just paid the bill (I think there was a small penalty and the difference in tax rates). I don’t even want to look up in mint how much it actually was because I don’t want to get mad at myself all over again.
2010 – We Did Okay With The Software But Probably Overpaid
2010 was a fairly straightforward year for us tax-wise, right up until the last week. In the last week of 2010, we purchased our investment duplex and started working on it.
When it came time to do our taxes for 2010, I used the software, and pretty much omitted the existence of the duplex in our holdings in 2010. We didn’t have any passive income to take expenses that we had incurred against the duplex so far, so it didn’t seem like it would be worth it.
To date, the IRS has no complaints – but in hindsight, I’m pretty sure we overpaid this year, so why would they?
A musical intermission for your listening pleasure…
2011 – We Called In A Pro
The duplex was extremely complex for tax purposes in 2011. Not only were we generating income from it, but we had spent thousands of dollars renovating it and all of those renovations had to be classified as “repairs” or “maintenance” or “capital investments”, which triggered depreciation schedules, etc. Then there was the issue of interest expenses. We were paying interest to Mr. PoP’s parents for money that technically speaking isn’t a mortgage, but we used it for the express purpose of investing in real estate. Then we also took out a HELOC at the end of the year that the duplex is collateral for, but we spent the money investing in a residential lot (which doesn’t throw off any income), so we didn’t know if we could take that expense against the rental income.
I genuinely tried to do our own taxes in 2011. I probably spent close to 40 hours trying to figure out all these various issues. And I kept finding conflicting answers. So we hired a Guy, who we’ll call G.
In 2011, we owed the IRS about $700, and G $500 for his services. Before going to G, my best efforts showed us owing $1200 to the IRS, so using G was net neutral to the budget and gave me a lot more confidence in our return.
2012 – We used G Again
The same issues as 2011 and more this year (2012) as Mr. PoP additionally had some non-cash compensation that we were being taxed on the cash value of. We also installed that AC system over at the duplex and I know I would have made a mistake if I went to depreciate it. Turns out AC systems get depreciated over 27.5 years. Ridiculous, right? Considering they only last about 10 or 15 years!
G worked with us when it came to that little issue of my identity being stolen, and he keeps trying to figure out ways to save us more money to see if we can stack expenses to make itemizing a possibility every other year, but so far his efforts there are fruitless. But figuring that out definitely takes effort.
In 2012, my best guess was that we were going to owe the tax guy about $2,000. G calculated that we were owed a refund of $500. We paid him $500. So I consider ourselves to have come out about $2,000 ahead for the year over what I thought we owed.
G Is Worth Every Penny
G charges us much less than he normally would. G doesn’t do many returns on the scale of our complexity. He mostly works with the very wealthy. The PoP taxes are done largely as a favor for a very wealthy friend of ours. As a result, we get G’s expertise – and seriously, it’s expertise – for much less than his hourly rate. It sounds like a lot, but we pay a flat fee of $500 for G to do our taxes.
For this, G sits down with me for about an hour or so and goes through every last bit of paperwork. He takes time to teach me what he’s looking for when he does so. Outside of that tax-time meeting, G answers all of my questions via email. From stupid ones like whether or not my hair donation was a charitable deduction, to the one that I’m getting ready to email him about how we can better use Mr. PoP’s HSA to make some strategic tax moves and set money aside for future health care expenses. And when I ask him questions, we don’t get “yes” or “no” answers.
G always takes the time to explain the answer, which for me increases our confidence. After all, our names are the ones the IRS cares about when it comes to that tax return.
Every year our taxes get a little more complicated and G is able to teach me something new. I’m by no means an expert. But give it another few years of learning from G and (if our investments get a little less complicated), I might have the confidence to start doing them myself again. Maybe.
The thing is, tax law changes all of the time. G knows that. G keeps up with that. I’m not going to fool myself by trying to think that I would keep up with changes in tax law minutia the way G does.
How do you deal with tax preparation in your family? Do you DIY it? Outsource it? Some mix between the two?