As someone who has been involved in the tax return preparation process for 30 years, I’ve heard many myths about tax preparation. I shared a few of these myths last week and this week I’m ready to share a few more.
Myth #1: A Refund is Great News You’ve probably heard some tax preparation firms brag about how many of their customers receive refunds, or the average size of their customers’ refunds.
Isn’t this great news? Well, I’m not sure. A refund can seem like great news, especially if it isn’t expected, but it usually indicates a lack of tax planning. With proper planning, that refund can be received a whole lot earlier. While most people don’t want to owe tax when they file their return, they also don’t like to part with their money any earlier than they have to and that is exactly what a refund reflects.
Myth #2: Filing an Extension is Bad Many taxpayers are hesitant to file extensions for their business or personal tax returns for fear that there are hidden disadvantages to doing so. This is not true! Extending your tax return can be a great tool in your tax strategy!
In fact, the IRS anticipates taxpayers to request extensions of time. The IRS even grants the extension automatically when the proper form is timely filed.
Extensions are helpful to avoid having to file amended returns. Sometimes the forms you receive, like a Form 1099 or W-2, get amended. If you receive an amended form and you’ve already filed your return, then you must amend your tax return.
Extensions are also a great tool for tax returns that either receive a Schedule K-1 or distribute Schedule K-1s. A Schedule K-1 reports the income from a “flow-through entity,” such as a partnership or S Corporation, to the owners. It is not unusual for Schedule K-1s to end up being revised. The revision may be the result of the preparer rushing to meet a deadline or a change to the books and records because they were not thoroughly reviewed before completing the return.
Extensions are an extremely helpful tool to add flexibility and efficiency to a tax strategy!
Caution! An extension does not mean you are off the hook when it comes to gathering your tax information timely. It is still important to gather all of your tax information timely so the extension can be prepared with the best information available.
An extension does not extend the due date of any taxes due with the return. Any tax liability due with the return is due on the original due date.
Myth #3: Tax Return Preparation is a Cash Outflow Tax return preparation fees can vary dramatically! This makes it extremely important to look at the big picture rather than just the cash outflow.
Let me give you an example.
Suppose you have a choice of paying $500 for your tax return to be prepared or $2,000. All things being equal, anyone would choose to pay the lesser amount.
But, what if all things are not equal? What if the $500 gets you an adequate, accurate return but the $2,000 would get you a return where you pay $5,000 less in tax? Which is the better deal? In one, you are out $500. In the other, you are ahead a net of $3,000.
Your Tax Return Preparation Before you have your next tax return prepared, review your own tax situation and the advice you are receiving from your tax preparer/CPA. Are you getting the return on investment you want? Are you getting the planning ideas you need? Are your taxes going down or do they continue to increase?
Taxes and tax return preparation are a major part of your wealth creation!