What Is a Tax Advisor and How Do You Choose One?
A tax advisor, also known as an enrolled tax agent or certified public accountant, is an accounting professional who specializes in the complex U.S. tax code, and who uses that knowledge to help taxpayers minimize their tax burden to Uncle Sam
Enrolled agents: Specially trained enrolled tax agents must pass a rigorous test and meet annual industry regulatory requirements to meet and sustain their professional credentials. Enrolled agents are licensed by the federal government, and are fully approved to represent clients before the I.R.S. They also provide general consumer and business tax services like preparing income taxes and offering specialized tax planning advice.
Certified public accounts (CPA): A certified public accountant shares many of the same attributes as an enrolled agent, but with a key distinction. While enrolled agents are licensed by the federal government, a CPA is licensed by the state where they set up shop, and must complete 150 hours of undergraduate and/or graduate school study and clear a CPA test given by the American Institute of CPA’s.
Professionally credentialed tax advisors can work in a variety of business models. Some run their own offices, some work for large corporations and tax-preparation chains, and some branch out to become certified financial planners. Most tax advisors who work with the general public charge by completed tax return, or on a service-by-service basis (like after handling an estate case or helping a customer start a small business.)
How to Find a Tax Advisor
No matter which type of tax advisor you choose, finding one isn’t difficult. You can either opt for word-of-mouth (asking co-workers, neighbors, family and friends for recommendations) or through industry trade groups.
Need someone to prepare your tax return?
There are various types of tax return preparers, including certified public accountants, enrolled agents, attorneys, and many others who don’t have a professional credential. You expect your preparer to be skilled in tax preparation and to accurately file your income tax return. You trust him or her with your most personal information. They know about your marriage, your income, your children and your social security numbers – the details of your financial life.
What kind of tax preparer do I need?
Anyone can be a paid tax return preparer as long as they have an IRS Preparer Tax Identification Number (PTIN). However, tax return preparers have differing levels of skills, education and expertise
How can I check a tax preparer’s credentials?
Our Directory of Federal Tax Return Preparers with Credentials and Select Qualifications can help you find preparers in your area who currently hold professional credentials recognized by the IRS, or who hold an Annual Filing Season Program Record of Completion. You can also check the professional organizations many tax preparers belong to.
What if I have a complaint about a tax preparer?
Tax return preparer fraud is among the list of common tax scams. The IRS provides tips on avoiding unscrupulous tax preparers and is committed to investigating paid tax return preparers who act improperly.
Tax Planning for Beginners
Your tax refund is based on how much tax you pay in excess of the tax you owe. Basic tax planning strategies aimed at reducing the amount of your taxable income may increase the gap and thus your refund. In some cases, these strategies benefit you in other ways, offsetting future costs for health care or providing for retirement. Though some aspects of tax law can be complicated, even a beginner can focus on taxable income reduction
Planning your deduction method
When completing your tax return, you have a choice between standard or itemized tax deduction methods to determine taxable income. The standard deduction is a dollar amount set by the government that you can claim without accounting for the expenses that typically make up a taxpayer’s allowed deductions. Itemized deductions are actual expenditure you make for deductible expenses. Your actual deductible expenditures in a tax year may amount to more than the standard deduction amount. If that’s the case, you’ll likely pay less tax or get a larger refund using the itemized deduction method. However, the itemized method requires support in the form of receipts and other documents to demonstrate these amounts were actually spent. Consider a filing system to save receipts. Even if you choose to claim the standard deduction, having receipts on file will help you make an informed choice at tax time.
Retirement savings strategies
“Savings plans such as qualified individual retirement arrangements save you tax in the current year, investment earnings grow tax-free year to year, and provide income for retirement, when you may be taxed in a lower bracket,” says James Windsor, certified public accountant from Ann Arbor, Mich. Many taxpayers turn to retirement plans for both the tax reductions now and income later. With a tax rate of 25 percent, for example, contributing $15,000 to a retirement plan may save you $3,750 on your current tax return. Investment earnings on money in your account are not taxed until withdrawal. Maximizing your annual contributions to retirement accounts may be an effective cornerstone for your basic tax planning strategy.
Other tax-sheltered savings
While the size of allowable contributions to retirement plans is attractive to many taxpayers, there are other savings plans that also defer tax and, in some cases, help you avoid tax altogether.
Using tax credits
Another way to reduce the tax you owe is to use tax credits that apply to your situation. Refundable tax credits not only reduce your tax but can be used to create a surplus, resulting in a refund
mistakes to avoid when choosing a financial or tax adviser
If you have the knowledge to do your own financial planning, tax preparation and/or investing, you can choose whether or not to do it yourself. Part of that decision is determining the highest and best use of your time. Doing the job of a financial or tax adviser, at least doing it well, requires a significant commitment of time and energy, both of which are limited and precious. Most people would rather spend that time on family, travel, hobbies, or volunteer work. If you’re in that camp, and need to find a financial or tax adviser, here are some common mistakes people make—and how to avoid them.
Not making a decision
Indecision—i.e., choosing not to make a decision—is like selecting “none of the above” on a test question, and can often be an impediment to financial success. This is as true when choosing an adviser as it is to sound investing. Many people let too much money sit in cash, or fail to rebalance their investment portfolios periodically, because they are waiting for the “right” time to make a change. Indeed, an inability to act (due to procrastination or indecision) is one reason many people choose to hire a professional financial adviser, who can eliminate the emotional element and use a disciplined approach to make decisions and take action as needed.
A professional financial adviser or planner will actually help guide you through the decision-making process, assisting you in determining the approach and allocation that best suits your needs, circumstances and goals. Once you agree together on risk and strategy constraints, you can choose whether or not to delegate day-to-day purchase and sale decisions to that adviser (or firm) by giving them “discretionary” authority. Either way, they should help you quantify your needs, decide on a plan of action…and set it in motion.
Not asking for referrals
If you are serious about hiring a financial professional, ask for recommendations from people you respect, such as work colleagues, friends, and professionals in related industries (e.g., an estate-planning attorney or insurance agent). If the idea of asking for a referral makes you uncomfortable, here are some questions to help you get the information you need
Assuming what a title or credential means
While no one can call themselves a “CPA” without considerable education and testing, literally anyone licensed to sell financial products (insurance, mutual funds, etc.) can call themselves a “financial adviser” or “wealth manager.” Similarly, certain credentials can be obtained by simply spending a few hours or a weekend taking a course, whereas others, including “CPA” (Certified Public Accountant) and “CFP” (Certified Financial Planner practitioner), require many months or even years of study, rigorous testing, and ongoing continuing education.
What Is a Tax Advisor? Attributes to Look For
Since Betterment isn’t a tax advisor, we often suggest that customers see a tax advisor regarding certain issues or decisions. Who exactly is a tax advisor and how should you think about picking one?
Anyone with an IRS Prepare Tax Identification number can be legally paid to file tax returns on behalf of others. But merely having this number doesn’t tell you much about the tax preparer; tax preparers have different experience, skills, and expertise.
Tax season is now upon us. Now that you’ve probably received all of your tax forms, you may be facing a choice for how to proceed with filing: do it yourself with tax software or hire a professional tax advisor?
Although it certainly will be more expensive than using tax software, hiring a tax advisor makes sense for certain individuals, depending on their financial circumstances
Here are two important factors to consider when deciding if a tax advisor is right for you:
Time: Even with tax software guiding you, filing your taxes yourself can be time consuming. You’ll need to make sure that you’ve entered or imported the data from your tax forms correctly, which often takes at least several hours. We’ve written before about valuing your time here.
Complexity: The more complicated your financial situation, the more a tax advisor may be able to help you. Have partnership income, or income from an S corporation? Been subject to alternative minimum tax in past years? Received or exercised stock options this year? Tax software can handle these issues, but it will take time, and the risk of mistakes (and even an audit) increases.