As your financial situation grows more complex, I highly recommend working with a skilled professional to file your taxes. That said, the onus is still on you to own the numbers. Learn how a quick review of my tax return saved me $1,500 this year!
Introduction
I talk a lot around here about how outsource and automate personal finance. I tend to prioritize efficiency and simplicity above all. Passive index funds. Dollar cost averaging. Credit card autopayments. These are just a few of the many posts that have touched on this general theme.
With saving and investing, the magic of passive funds, auto-transfers, and 401K deductions directly from your paycheck allow most of this outsourcing to occur with limited human intervention.
Taxes are a different beast altogether. When it comes to developing a tax strategy and filing your annual tax return, I suggest working with a good old-fashioned professional. Extra time and effort devoted to tax planning and optimization can put a surprising amount of extra money in your pocket.
Why It Pays to Outsource Your Tax Return
Granted, hiring a top-notch accountant will cost you a few more bucks than using a free service like TurboTax. But a great accountant is worth their weight in gold.
As you build more wealth and your tax situation grows increasingly complex, a skilled tax professional can potentially save you thousands, if not tens of thousands.
The tax laws are designed to reward those who do their homework. And keep in mind, tax rules are dynamic. There’s always a new loophole to exploit. Or a new piece of tax legislation on the horizon that could destroy even the best-laid tax plans.
Maybe you feel differently, but I don’t have the time, energy, or desire to read every piece of fine print in the tax code. And I certainly don’t have the stamina to do it each time the laws are updated.
That’s why I retain the services of an A+ accountant. The top experts in the field (the type you should be hunting down ) serve as strategists or consultants more than as data processors. They’ll ensure you’re running your finances in a proactive rather than reactive manner. The interpretation of advanced tax law is oftentimes shockingly ambiguous. You want an expert who can navigate these gray areas adroitly and with confidence.
An Inconvenient Truth
Here’s the rub though. You’re not off the hook.
Once you hire a tax specialist, it’s tempting to simply ship off all of your documents, approve the tax return without hesitation, and move on with life.
Remember, however, that no one cares more about your own money than you. And we’re all human. Even the sharpest accounting minds in the world make mistakes.
After my accountant prepares a draft tax return each year, I have built the habit of reviewing it in detail. I encourage you to take ownership of the process despite the decision to outsource the preparation of the document itself.
I think of my accountant as a crucial supporting member of my personal finance team. But ultimately, I’m the CFO of my life.
I sign the checks. I approve the key decisions.
My 2020 Tax Return
Let me preface this anecdote by emphasizing that my accountant is a phenomenal professional and person.
He’s been in the field for over four decades. He loves to dive deep and structure creative solutions. He provides tremendous insight about when to approach a particular situation with aggression or conservatism. Also, he’s a much better golfer than I’ll ever be.
In years past, my detailed review of his tax return drafts proved unnecessary. My life had been relatively straightforward from a tax perspective. I simply approved the draft returns and moved forward.
In 2020, however, my tax life grew more complex. I switched employers, lived in two states with radically different income tax structures, capitalized on a charitable contribution loophole, and made a $6,000 Backdoor Roth IRA contribution.
Sheesh! Thankfully, I built a trustworthy accounting relationship during the easy years. I would’ve been overwhelmed handling this nuance by myself.
Given these added variables, I committed to reviewing my 2020 tax return with added vigor. I knew there would be ample opportunities to make mistakes.
I’m glad I did.
Everything passed the initial sniff test, until I reviewed the treatment of my Backdoor Roth IRA contribution. I knew that performing a Backdoor contribution required filing an additional document called a Form 8606.
This form essentially proves to the IRS that there is no tax consequence associated with your Backdoor Roth IRA contribution. The funds are contributed “after-tax.” In other words, they have already been taxed as personal income.
I didn’t see this form included on my filing, however. My accountant had instead treated the Backdoor Roth IRA contribution as a taxable distribution from my Traditional IRA.
At my 24% marginal tax bracket, this meant the $6,000 contribution would trigger almost an additional $1,500 of taxes. But remember, the funds used for this contribution had already been taxed as ordinary income!
The net effect? I would have paid taxes twice on the same $6,000.
Don’t get me wrong…I love this country dearly. But not enough to throw the federal government a ~$1,500 bonus payment just for the hell of it.
My Tax Return Outcome
This story has a happy ending. I called up my accountant and resolved the issue in short order. No big deal.
But imagine if I hadn’t taken the time to thoroughly review my statements. Admittedly, $1,500 isn’t a life changing sum, but the consequences of these minor mistakes increase exponentially as you add more zeros to your bank account.
Let this serve as a friendly reminder as you build your team of experts to support your wealth-building journey. No matter how bright and experienced your accountant, lawyer, financial advisor, realtor, lender, etc…
You are the CFO of your life. No one on your financial team cares more about your money than you. Act like it.
Great post and great message!
Great post!