Since tax season is but a few months away, the topic of accountants ought to be discussed. How useful are they, and is there some merit to having them do your taxes even if you can very well do it yourself?
In full disclosure, I was late in the game in figuring out anything about money other than spending it. My parents had a tax accountant who helped them out (read: ripped them off) for years, and this same accountant even did my taxes the first two years I filed them in internship and residency. Both years, I was fined by Uncle Sam because my accountant left out a critical form for my state and city. Since the accountant didn’t live in either of the places I worked, he probably never had to file out of state taxes. I think he charged us an extra $70 plus some state tax filings charges for probably an hour of work–I’d do the same too if I were an accountant and my clients asked me to add on another filing.
Fortunately (or unfortunately) by the third year I had to file taxes, my parents accountant was undergoing chemotherapy and no longer was able to work. I ended up filing my taxes using TurboTax, and have done so ever since then.
We all fall under one of three categories of tax filers:
- DIY, either software assisted, or manually
- Full service accountant hire
- “I know how to file taxes, but I’d rather hire someone else”
DIY Tax Filers
With the advent of computer-based tax software, it’s gotten significantly easier to file taxes. The competition for online tax software is so great that we see television advertisements promoting these services. This has been good for the average consumer; if you have a simple W2 salary with minimal investments you can easily file online without paying a dime.
Most financial bloggers fall into this category. They are clearly numbers oriented, nerdy, or had some social shortcomings (okay, I exaggerate). Some of these guys (mostly are guys) are quite skillful with spreadsheets and numbers. Reading mundane tax laws and being able to beat the system is a challenge that they are all willing to take, and they do it well. I learn so much from these guys.
Medical residents ought to file their own taxes too. This is the time in your career where you will have the simplest tax forms, and probably the least amount of investment accounts to keep track of. This was the time I learned about student loan deductions, and realized that there was a dismal phase-out pretty much once I became an attending. How was that even fair? Just because you start making some money means that you can’t benefit from taking out loans for your education? I was pretty angry afterward when I once went an entire year of residency without repaying any student loans only to realize that I essentially lost my chance to deduct student loan interest. It hurts when you actually fall into the 25% federal marginal tax bracket living in a HCOL area with crazy city and state taxes. I probably could have “saved” $800+ of taxes had I repaid some student loan interest.
Full service accountant on retainer
Most doctors likely fall into this category. Maybe they never learned how taxes are filed. Maybe their accountants kept them in the dark. Most of us are likely too busy to be bothered. When my work schedule started picking up, I ended up forgetting to pay credit card bills. Most of us would rather play with our kids, shop, or even vegetate on the couch than to go through learning something new. Some of us have complex business structures in our practices in addition to our own taxes, so it’d be easier to have your tax account do your personal taxes along with the business’s taxes. Some of us also have irreparably broad investment interests in multiple states, all of which require individual state taxes. In these cases, it might actually be cheaper to go through an accountant if you have a longstanding relationship with them.
“I know how to file taxes, but I’d rather hire someone else.”
Fair enough. You’re a 1099 contractor or even a W2 employee with minimal outside investment or financial holdings, but you’re still too busy. Maybe after ten years of filing your own taxes and kicking butt in your medical practice, you are financially loaded. Who cares if you pay your account $2550 to file your taxes?
I think that the majority of physicians and busy professionals will fall into this category. There is only so much time in the day, and many of us didn’t realize that there are medical specialties that allow shift-based work rather than dedicating our lives to the career (ahoy vascular and neurosurgeons!) Eventually I expect to fall into this category, whether due to astounding success in my career or simply the need to carve out more time for the family.