305 comments

Should You Do Your Own Taxes? (and Why I Don’t)

mustachian_eagleI’ve always been a do-it-yourself guy, and will remain so as long as I’m alive. The reason is not money savings but the fundamental recipe for human happiness: you must remain challenged and keep learning throughout your lifetime. People who miss this recipe end up chasing ever more desperately after passive entertainments and pleasures. But they never find the happiness, because it was in the other direction.

So of course, I’ve always done my own taxes. Starting at age fifteen, I remember filling out my cute little T-1 tax form back in Canada – working through the single piece of newsprint with a pencil and eraser and a hand calculator. Throughout those teenage years, I enjoyed taking deductions for education and moving expenses and rent and relishing every dollar that I got to keep.

Later I got a fancy adult job and had to deal with higher income, deductions for the retirement account, and capital gains and losses from my early attempts at stock investing. I moved to another country and had to allocate that year’s income between the two different tax systems, and nip the little attempts each country made to grab extra taxes from the accounts of the other one. I bought a house in the US and marveled at the tax deductible nature of mortgage interest and property taxes. Started a business and noticed the huge, complex range of tax options that suddenly opened up. Quit the day job and noticed how taxes suddenly cease to matter, because the US government becomes very forgiving to you if you’re bringing in under $50,000 per year, even if you’re actually a millionaire.

At this point in the story, we hit 2011 – the year that low-key Pete the retired Engineer/Carpenter/Dad started to type some shit into the computer, unwittingly transforming himself into Mr. Money Mustache, Notable Finance and Lifestyle Guru. Things were looking up as our boy was getting older, expensive early business mistakes had been resolved, and both Mr. and Mrs. MM started to make more money in our post-retirement hobbies. Suddenly, we had taxable income again.

I kept doing my own taxes as if it were 2010, but the increasingly favorable life conditions meant my tax bill was growing exponentially. This didn’t concern me too much, because it also meant my after-tax income (which was 100% unnecessary anyway – our living expenses are already more than covered by investments) was growing at a similar pace. You have way more money than you could possibly spend, and you’re paying a lot of tax. Only an angry ideologue would consider this a bad situation. I decided not to be one of those guys, and instead keep the energy focused only within my circle of control.

However, things kept getting better every year, and several Mustachians (many of whom are accountants) started needling me to improve upon my inefficient tax situation. I knew it could be done, but I was already very happy with life and making full use of my waking hours with a huge backlog of interesting things to learn and do. Did I really want to shut down some of these things in order to reorganize my taxes, in order to add even more unnecessary money to my accounts? I made a mental note to improve the situation, but only if the right opportunity ever came up.

Enter Tax Man

Keith passionately hijacks a session on taxes at Camp Mustache, Seattle, May 2015

Keith passionately hijacks a session on taxes at Camp Mustache, Seattle, May 2015

Eventually that opportunity arrived. At a weekend gathering of Mustachians, I met an accountant that was genuinely passionate about the field, in the same way I am passionate about building stuff. Keith Schroeder likes optimizing taxes so much that he does it even when he doesn’t need the money. He runs the same Wisconsin accounting firm he’s had forever, biking down the country roads to his office and dispensing Mustachian life lessons to his employees whenever the chance arises. To me, this is a trust-inspiring place from which to start a business relationship, because you are less likely to get into a fight over who gets which dollar bills*.

So I handed over my financial laundry pile to Keith to see what he would come up with. The results were highly worthwhile, and here are just a few of them:

Changing my LLC from a Partnership to an S-Corporation

When you start a small business, you bring in some money from your customers,  you spend a (hopefully) small amount of it on computers, restaurants, airplanes and taxis, your mobile phone and internet service, and so on. What’s left over is the profit, which normally flows straight down to your personal income tax return. Because you’re self employed, you have to pay a full 15.3% for Social Security and Medicare fees right off the top of this income, then go on to pay federal and state taxes on that same income. A pretty big bite. Unless you do this:

Figure 1: Saving $6 grand by switching to an S-corp

Figure 1: Saving $6 grand by switching to an S-corp. (Note: I assumed a 25% combined federal/state tax rate throughout this article just to keep things simple).

When you reorganize to an S-corporation, your company makes the profit and you are just an employee (and owner) of the company. The company can pay you a “reasonable” salary, and then hand you the rest of the income as a “dividend”, which is exempt from this 15.3% tax.

The bottom line is that re-organizing to an S-Corp can save your company about $6,000 for each $100,000 of gross profit.

When Income Inequality is a Good Thing

Mrs. MM and I are joint owners of our LLC. Until recently, were simply splitting the income from this entity equally. This meant that if we made enough money, we would both be required to pay Social Security up to the limit ($118,500 of income per person). However, our activities for the company brought in drastically different amounts of money. Since my side includes this blog which is over 75% of the company’s income, it was justifiable to make my “salary” higher so that some of it fell into the “Over $118k” portion that escapes above the limit of Social Security contributions. Her salary is lower but fully taxable. Here’s an example of how this works with a hypothetical 2-person company making $200,000:

allocation

Figure 2: Different pay split saves $7626 per year

These are just two examples of tricks that the accountant brought in, and there are many more including having the business lease an office within your house, making the most of the powerful SEP IRA options open to business owners (you can contribute up to $53,000 per person per year!) and more. Keith even founded a Wisconsin branch of my LLC to allow the blog to at last become an Amazon affiliate. The savings or income from any one of these tweaks should be more than enough to cover his accounting fees for the year, which is exactly how hiring an accountant is supposed to work.

The Downsides of Complexity and Cost

The improvements above are saving me some serious money, but they come at the cost of some added complexity. When you change your simple business to an S-corp with employees, suddenly you have to “do payroll”, meaning you write a monthly set of checks to each employee and to the state and federal government. There’s also the nonsense of “unemployment insurance” and even “worker’s compensation insurance”. My accountant thankfully helped me opt out of the second thing (why would I expect to get paid if I injure myself while working for myself?), but the first is mandatory (so I can continue to get paid if I lose my job working for myself!)

My new accountant is handling all of the paperwork, but there are still emails and phone calls to answer occasionally, forms to sign, and obviously the cost of paying his firm to do all this work – roughly $2000 in the first year including the reorganization work, $1200 in ongoing years.  A good investment given my current situation, but maybe not in 2010 when income was lower and business was simpler.

So, should you do your own taxes or not?

The average person has a single job, lives in a single house or apartment, and does not own a side business. In this situation, taxes are extremely simple and it is hard to get it wrong – especially if you use automated tax software like TurboTax, TaxAct, or Keith’s preference 1040.com. Canadians might check out SimpleTax or StudioTax. If you are mathematically inclined and enjoy the process, I think filing your own tax return is a beneficial and empowering do-it-yourself activity.

The average Mustachian is more likely to have rental properties or side businesses, and at this level the decision is more of a toss-up: doing your own work brings great benefits, and you can do the job to perfection if you make a point of it. But if you’re not at least somewhat passionate about the work, it is easy to miss some details and cost yourself some money.  I feel there’s no shame in hiring out your taxes in this case, since you’re building a new business relationship and the service will effectively cost you less than zero.

People like me are even better candidates for tax outsourcing: despite my earlier interest in DIY tax hacking and a love of spreadsheets and calculators, more recent complacency meant I was still missing out on a lot of the finer points. Doing my own business taxes instead of hiring an accountant was costing me over $10,000 per year and not giving me a proportional boost in life skills or satisfaction. As your income and business complexity rises, your tax abilities need to grow in parallel. If they don’t, outsource it and put the saved time and energy into going out for more walks instead.

Is Mr. Money Mustache Out to Lunch?

I’ve been hesitant to admit to you that I ended up outsourcing my taxes. Given the stories (and excuses) above, what do you think? Is tax accounting outsourcing practical? Or Wussypants, like the outsourcing of your gardening and lawn care work?

I’m enjoying working with this new helper in my life, and the higher net income is worthwhile as well. But I don’t want this reliance on another person to shut down my old tax brain entirely, leaving me reliant on professional help to make even the smallest decisions. But so far, so good: thanks to the last six months of working with this accounting firm, I’m feeling more tax-savvy than ever.  I wish you similar good fortune this tax season.

 

Footnotes:

* note that the  same effects come up in couple relationships – things are much better if you’re not fighting over money.

When I first wrote this article, I mentioned that Keith Schroeder was willing to take on even more clients at his firm called Tax Prep and Accounting Services. After about 12,000 inquiries, he took on as many new clients as he could (over 200), and had to close the flood afterwards. Next year we will gather several willing accountants to share the work.

Since just running an accounting firm and doing tax work for hundreds of people is not enough, Keith also writes a blog called The Wealthy Accountant.

I receive no payment from any of the recommendations in this article, I just think they are useful. However I did provide Keith’s affiliate link for 1040.com tax software since it costs us nothing and will benefit his firm.

  • JP February 10, 2016, 8:01 am

    Jesus, that opening paragraph is pure gold. I end up painting a wall at night or cleaning because it makes me happier than sitting in front of the tube. Thanks Triple M.

    Reply
    • Meg February 10, 2016, 8:21 am

      I agree. I don’t like to do the same things, but I do keep busy in the evenings. I usually work on some sort of creative project, usually hand embroidery for an hour or two, and then read in bed until I’m tired. We have a small human in our family, so all this after her bedtime. Before bedtime we’re usually playing legos, board games, or reading.

      Reply
    • Jim Wang February 11, 2016, 4:28 am

      And it’s more active… I like taking breaks during the day (working from home) and I could have a stranger come clean my house or I can take 15 minutes and pick up a bit. 15 minutes of mindless physical activity so I can think about other things… that’s pure gold for me.

      Reply
    • brad February 12, 2016, 4:19 pm

      I enjoy my hobbies quite a bit personally. Watching movies or anime or playing video games does not send me scurrying for more physically demanding activities. To each his own though.

      Reply
      • Kevin February 23, 2016, 9:14 am

        I have to agree brad, I find a lot of value in reading articles on websites, watching thought-provoking television shows and movies, playing challenging video games (like DotA 2). I don’t see the harm in it as long as it feels like you get something positive out of it.

        Reply
  • Justin February 10, 2016, 8:08 am

    As an accountant myself I miss things on my tax return. I know I do. It’s nearly impossible not to unless you file peoples taxes for a living. The mustachian lifestyle is to maximize happiness. Usually that involves a DIY approach but in this case I think hiring a professional is prudent. It would be similar to hiring a lawyer to represent you in a lawsuit. It would be almost silly to take a DIY approach to a serious lawsuit that could put your family in jeopardy.

    Of course IRS/KGB problems aren’t as serious as a lawsuit. Or are they?

    Great article once again MMM

    Reply
    • Rebecca Stapler February 10, 2016, 8:12 am

      Justin, you posted just as I was writing my comment — couldn’t have been more perfect timing! I absolutely agree. Half of my business is fixing what non-attorneys screwed up when they tried to DIY their own divorce. Estate planning attorneys have similar stories about DIY estate planning. LegalZoom is great for attorneys, because it brings in business ;)

      Reply
      • Tyler February 10, 2016, 1:06 pm

        While I was only a wee-little 15 year old at the time my parents decided to get divorced, I think my dad was doing it right and trying to avoid attorneys throughout the process. My mom on the other hand took all the money they had collectively saved together and spent it on an attorney to make sure she “didn’t get screwed” by my father. If she had been a little more open minded at the time she would have realized my dad was going to give her almost everything anyway and she didn’t need an attorney at all to ensure that. But despite my father’s best attempts my mom flushed around 85% of their savings down the drain so she could basically get some really basic material goods that my dad had no use for anyway. My point being, I think more divorces could go better without an attorney if people weren’t quite so quick to anger.

        Reply
        • Johonn February 10, 2016, 4:47 pm

          Most marriages would go better if people weren’t quite so quick to anger…

          Reply
          • Rebecca Stapler February 11, 2016, 8:44 am

            Exactly! It’s not like people getting divorced typically get along well in the first place. The fact that your father told his 15-year-old child about the terrible things the child’s mother was doing tells me volumes about your father’s intentions at the time of the divorce. Divorces are not just about money, but things more precious than that — parent/child relationships!

            Reply
            • G. Oz February 12, 2016, 3:22 am

              What exactly did he say to make you assume his dad was manipulative, because it seems like that assessment came from his own observations. He was 15, not 5, and so fully capable of figuring out the dynamics of such an experience, as unfortunate as it was, himself.

              As an attorney [you], I [non-attorney] would assume (look who’s doing it now!) you’d draw conclusions based on the facts presented vs… personal experience/bias/whatever…

            • Aaron February 12, 2016, 9:19 am

              Funny you interpreted that way. The facts stated that the parents divorced when the poster was 15-years-old. It is also obvious that Tyler learned at some point about the intentions of mother and father. It isn’t stated where/how or at what age this was learned.

              Could have been as you saw it, and the dad was trying to destroy the relationship. May have even been the primary person causing the divorce in the first place. Or maybe the father (who by the story told seemed to be looking out for the mom financially, so may also have been doing so in other ways) didn’t say anything to the 15-year-old about the mother. Maybe it was said years later, maybe it was a combination of things said by mother and father and this is Tyler’s summary of everything.

              At the very least, it is not (in fact) a fact that the father did the things you accuse him of.

            • Rebecca Stapler February 17, 2016, 2:30 pm

              Ah! You’re right — I don’t know if he was telling him these things when he was 15. I did assume, because I hear about one parent telling the kids bad things about the other parent all the time. But maybe dad didn’t mention it until later. Good for him!

            • T-Lou February 25, 2016, 5:01 pm

              Many years ago as a junior lawyer I practiced some family law – hated it. Too many emotions driving bad decision making. Often with children used as a weapon against the other. One of the best techniques I found was to slow down on acting on clients instructions to let anger dissipate and cooler heads prevail to prevent the situation described by Tyler.

              I”ve seen family go through nasty separations with high legal bills and I’ve had friends never engage lawyers and slowly sort out their affairs asset by asset, issue by issue. Assuming the relationship is equal and parties reasonable the latter can be a good approach. Any uncertainty about fairness can be dealt with a consult rather than first jumping to litigation.

              Just having separated 14 months ago, I can happily report our family is doing well, our children are ok and our affairs are 99% sorted. Not suggesting I’m proud we separated, but I certainly am proud of the manner in which we managed it.

              As to hiring a lawyer to litigate family cases – it’s often more financially and emotionally draining than anyone ever imagines going into it.

              If people don’t know the law or their entitlements, I think it’s better to hire a lawyer trained in mediation to get to a settlement that is fair, both can live with and then have the lawyer paper the deal. That’s my two cents spoken from a Canadian perspective.

        • Miles February 13, 2016, 12:43 am

          Or better yet, if they come to an agreement, wrote everything down, and then hire a paralegal for an hour to draft it in a way that protects them both. That way the law office can also file the paperwork so they don’t have to deal with messy titling issues.

          Reply
    • Kevin February 10, 2016, 8:27 am

      As a CPA who does file taxes for a living (20+ years experience), my accountant still missed something this year.

      The MMM lifestyle is apparently so unusual, that she’d never encountered anyone who contributed to a spoual IRA, and didn’t realize my stay-at-home spouse could also qualify for the savers credit.

      Reply
      • ohyonghao February 10, 2016, 12:12 pm

        Speaking of the savers credit, I missed the fact that last years return would be included as this years income when I did my tax planning last year. I start doing my taxes this year and find that we both aren’t getting the credit because of going over the upper limit by about $500. We had also maxed out our HSA and both IRA’s and thus have no way to lower our income to qualify.

        This year we have restructured our contribution method, putting more into 401(k) first, then having room in our IRA’s to fix mistakes like that if they aren’t found until we go to file taxes.

        Reply
        • joy February 10, 2016, 2:03 pm

          You could donate 500

          Reply
          • Scott February 10, 2016, 2:21 pm

            I don’t think that will help. Savers credit uses an AGI phaseout. Charitable contributions do not reduce AGI.

            Reply
          • ohyonghao February 10, 2016, 2:44 pm

            Scott is correct, also donations made after 12/31/2015 cannot be dated back for my 2015 tax purposes, hence even if donations would count it is past the deadline for it. That is where the restructuring of my retirement contributions comes in play. IRA and HSA contributions can be made up to 4/15 in the following year, whereas 401(k) and charity donations have to be made in the same tax year ending 12/31 for most people. I’ll count it as a $400 lesson to not do that again.

            Reply
            • green_knight008 February 10, 2016, 4:42 pm

              Did you itemize deductions last year? If not, it is my understanding that you do not report your federal or state refund-after all, you’ve already been taxed on that last year.

            • Keith Schroeder February 10, 2016, 7:37 pm

              Your federal refund is never reported on the following year’s return; your state refund is included on the following year’s federal return only and only to the extent you benefit. Example: if you itemized last year and were over the standard deduction by only $10, you only claim $10 of the state refund the following year.

    • Jim Wang February 11, 2016, 4:27 am

      Plus the stakes are too high and the rewards for learning it are relatively low… it’s not building something with your hands, where gaining proficiency can be useful in other places in your life. :)

      Reply
    • Frugal Bazooka February 16, 2016, 10:27 am

      “KGB” – love it!

      Reply
    • JB February 24, 2016, 2:58 pm

      Most tax returns don’t change much from year to year. We use TurboTax and it keeps everything from the year before.

      Reply
  • Rebecca Stapler February 10, 2016, 8:09 am

    No, I don’t think you’re wussing out by hiring a specialist to do your taxes! I’m an attorney, so I wouldn’t hire someone else to do my legal work. But I have zero experience with home repairs, so although I will try some simpler things, I will always hire someone to do electrical work at my house. There are some things that are specialized, one-off activities that are best left to professionals because screwing it up could really screw you over!

    Reply
    • Stephen February 10, 2016, 11:33 am

      Exactly! Sometimes the peace of mind of having something done correctly far outweighs the cost of the service. DIYing is great, but only when the task is simple or you know full well what you’re doing. As you mentioned, screwing it up could result in much larger expenses down the line.

      Reply
      • Donna February 13, 2016, 8:54 pm

        I agree completely. Having someone do your taxes once there are so many variables involved is the only way to go. Granted, doing my own taxes was also my norm until business, etc changed the level of preparation needed.

        Reply
  • DJStrong February 10, 2016, 8:11 am

    Great article, nothing wrong with saving more scratch. MMM, you hinted at a book a few articles ago, any status on that?

    Reply
  • EL February 10, 2016, 8:14 am

    Yes once things get complicated with a side business it makes sense to hire out. I think the savings far outweigh the costs. I can now imagine that in 2016 you will take a longer vacation given the tax savings you just realized. The post is very timely, and good passionate accountants are not the norm.

    Reply
  • Bill G February 10, 2016, 8:16 am

    As two professionals with typical salaried incomes and the usual investments (in Canada) it’s straightforward to do your own taxes. The software is pretty good at making sure you are claiming (almost) everything. However, I’m self employed now and I’m going to an accountant this year. Any complexity in your financial situation requires it, IMO.

    Reply
  • Ray Austin February 10, 2016, 8:19 am

    This LLC / file as an S Corp is interesting but I don’t think it would be worth it unless you are in the 6 figures which puts you in the 25% tax bracket. I would like you to continue this discussion if you could and see where the break even point is… you know all costs considered and a likely amount -median- in which there is no gain one way or the other. I think this would be a good follow up article.

    I’m currently in the 15% tax bracket mostly because of a slew of healthy tax credits and while the 15%+ which is paid for social security and medicare is a hefty amount current capital gains are taxed at 20% so if you’re not in at least the 25% tax bracket or higher this would make little sense to do.

    The other down side is if your income can vary from one year to the next and you start paying yourself a salary what happens if you’re in a down year and there’s not enough to cover your salary, then you wind up putting money back in. So there’s a lot to consider I think in doing this, it certainly won’t work for everyone, but your examples are well written and it sounds like the break point would be at around 100K of profit after all expenses given the extra cost to pay the account, and the payroll hassle.

    Off course if more and more people start using this S Corp loop hole, congress will be more likely to close it. Then how hard would it be to switch back? Some times KISS is the best method after all.

    Reply
    • Meredith February 10, 2016, 10:49 am

      I’ve had self-employment income for the last 3 years. I talked about it with my accountant last year (after researching ways to cut self-employment tax) and she said the break-even point is around $50,000. However, as MMM alludes to in the article, there are some additional expenses/hassle associated with making the switch. So, if it’s an anomaly it probably isn’t worth it, but if you’re like MMM with an ongoing business generating significant income, then it’s worthwhile.

      Reply
    • Brendon February 10, 2016, 10:58 am

      Notice the income tax in both scenarios is the same (25k). The benefit comes from not paying payroll tax on the 40% of profit you take as dividends instead of salary. The only way an S-Corp would be worse is if dividends were taxed enough more than ordinary income to offset the payroll tax gains. When would that be?

      Reply
      • Bill February 10, 2016, 1:53 pm

        S-corp profits are always taxed as ordinary income. So Ray is incorrect about the 20%. If you’re in the 15% bracket, S-corp profits are taxed at 15% too. S-corp are not the same as corporate (C-corp) dividends. With C-corp, the corporation is taxed on its profits, then the receiver of the dividend is taxed again at the dividend rate when those profits are distributed. If you make over 118k, it will make no difference at all, because no one gets SE tax over 118k. But you take a hit long-term in the amount of social security you draw out when you start taking it; nothing is free (unless you are flat-out missing deductions you could have taken).

        Reply
        • Druid February 11, 2016, 8:05 am

          The C Corp is actually a decent structure for a small business owner as well. Last time i looked the C corp tax rate is lower than the individual income rate for tge first $50000 of income, and a mustachian could draw 39000 of dividends tax free if its his own income(assuming only source of income and single filer) A C corp first $50,000 of additional income would be taxed at a lower rate than an S corp. So the most efficient tax structure for a business making 100k a year would be a C corp that pays you a 13k salary(offset itemized deductions and exemption) pays a yearly dividend up to the rest of your 15 percent bracket, and take the rest of corporate profits to fund an employee pension plan.

          Its interesting that you bring up social security benefits, because although mr mustaches new LLC salary structure probably reflects the economic reality of tge partnership better it also underfunds his wifes social security benefits( similar to my c corp structure). My guess the tax savings will out weight the social security benefits if properly invested, but MMM is getting the best of both worlds. Maybe he should fund his wifes IRA with the tax savings.

          Reply
          • Druid February 11, 2016, 8:27 am

            Looked at C corp rates :

            15 percent tax rate first $50000
            25 percent for income from 50k and 75k

            Can deduct salaries and certain pension plan contributing.

            MMM could give himself a salary of $40,000 and deduct $18000 for 401k, $5500 for IRA, $3300 for HSA and only have roughly $13000 of income to offset the standard deduction/exemption. He can take dividends to the extent that him and his wife fill their 15 percent bracket.

            Any corporate profits that stay below $75000 will be taxed at lower rates than individual rates. Corporate income can be further reduces by creating a pension plan and/or employee matching.

            Reply
          • Keith Schroeder February 12, 2016, 7:16 pm

            The C Corp has one major problem, the double taxation of dividends. In a C Corp you pay taxes on the corporate level on all profits and again on dividends. You, as an individual taxpayer, pay tax on the dividend, but the C Corp does not get a deduction. In the S Corp the dividend is not double taxed.

            Reply
            • JB February 24, 2016, 3:01 pm

              Just don’t pay dividends.

      • Axecleaver February 10, 2016, 2:04 pm

        It’s not quite that simple. There are fixed fees associated with this model which factor into the equation. You also need to include the expense of higher accounting fees, higher filing fees for an LLC with S-corp election, unemployment insurance, liability insurance, etc.

        The salary you choose should be comparable to someone of your experience level in the same industry. You can’t, for example, give yourself a salary of $1 a year and pay out the entire corporate earnings as a dividend. That’s a one way ticket to Audittown.

        Reply
        • JayP February 11, 2016, 7:34 pm

          Exactly. If your business rakes in $1M in profits and you are the only employee paying yourself $50K per year, you won’t pass the “reasonable” salary hurdle.

          Reply
    • Ardis February 10, 2016, 2:26 pm

      I agree, I’d like to know the breaking point too. I’d love to pay myself a $60k per year salary doing a business that earns less than $2k per year.

      Reply
    • Keith Schroeder February 10, 2016, 7:40 pm

      Under $30,000 is tough to make work; $30,000 to $50,000 is a zone where it may make sense; over $50,00 works in most cases, especially with the new IRS safe harbor for owner wages in an S Corp.

      Reply
      • reader in the rockies February 14, 2016, 7:25 am

        Never heard of those new safe harbor rules for wages. What exactly are those?

        Reply
  • Keith Schroeder February 10, 2016, 8:20 am

    Awesome, Pete!!! I love the post.

    I also want to clarify a few points so all you dear readers understand what Pete is saying.

    1.) Unemployment Insurance: the reason I have small businesses without any employees accept owners pay UI is because the federal UI rate is much higher than if you pay the state and fed; it usually saves money.

    2.) Once you hit the Social Security threshold you still continue paying 2.9% for the Medicare portion (1.45% if you are an employee).

    3.) Rental properties have a lot of good tax deals, too. I am writing an article on my blog on this issue and should be published within a week or so.

    4.) I am so glad MMM decided to be a Wussypants just once. He and his family are awesome to work with.

    Finally, I feel obligated to keep track of the post for a while. I’ll comment as my day allows. I encourage comments. Sometimes a comment jogs a new idea and y’all know how I love ideas that reduce taxes.

    Reply
    • Scott February 10, 2016, 8:47 am

      Keith or MMM,

      So, did you actually dissolve/liquidate the LLC and create an new S Corp entity or did you simply make the election on Form 8832 to have the LLC file as an S Corp. I am curious about the pros and cons of this choice.

      MMM, thanks, great article!
      Keith, thanks for offering to comment!

      Reply
      • Matt K February 10, 2016, 10:12 am

        You went right in there didn’t you? ;) Fellow CPA here…interested.

        Reply
      • Keith Schroeder February 10, 2016, 11:47 am

        There is no reason to start another LLC. We just made elections.

        Reply
        • Rachel February 12, 2016, 10:08 am

          (for some reason I couldn’t figure out how to make a comment without hitting reply, but this works)

          My LLC would benefit so much from electing s-corp status. We are taking out profits that are much higher than reasonable salaries which is a good problem to have, right?!

          But I’m not sure how I could pull it off this year since we started the year doing our normal draws/guaranteed payments. Is it possible to start payroll say in March and someone do s-corp status. Would we have to pay back payroll taxes, etc? I know we have till March 15th to elect the status but not sure how to make it work with YTD distributions.

          Let me know if you are taking on new clients, I’d be interested in a consultation with you if so. I like my business accountant, however they don’t seem to be gung-ho about minimizing taxes and offering this type of strategic advice.

          Reply
    • Ryan February 10, 2016, 9:23 am

      Looking forward to #3 and look forward to reading your thoughts around options with real estate and the structure you recommend. As a landlord, I do not have a LLC setup and need to learn about the benefits of doing so. Also nice to see another MMM fan close by!

      Reply
    • Vince Granacher February 10, 2016, 12:25 pm

      I am a bit confused here. I thought that an LLC was in fact a legally recognized corporation. I was not aware that someone doing business as a sole proprietor or partner was or could be an LLC. I thought those would have been an LLP (limited liability partnership). Could you offer some clarification for me? What is the point of being an LLC and a sub S corp. I thought that with the IRS, there were three choices to make regarding incorporation– C Corp, S Corp, or Limited Liability Corporation.

      Reply
      • Andy C February 10, 2016, 4:44 pm

        An LLC is legally recognized for liability purposes, but to the IRS it is what is called a “disregarded entity” unless the owner(s) specificity elect to be taxed as an S Corp. Being a disregarded entity means it is taxed based on how it is owned, either as a sole proprietor if 1 owner or a partnership if more than 1 owner.

        Reply
      • Josh February 10, 2016, 4:58 pm

        An LLC is a Limited Liability Company (not a corporation) that is authorized by state statute. An LLC is taxed as a partnership by default unless it’s a single-member LLC, in which case the IRS will view it as a disregarded entity which means that any income received by the LLC is recorded on the tax return of the member.

        If an LLC doesn’t want to be taxed as a partnership, you can file a Form 2553 and elect to be taxed as an S- Corporation. You can also file a Form 8832 and elect to be taxed as a C-Corporation.

        Reply
      • Keith Schroeder February 10, 2016, 7:43 pm

        An LLC is an entity. There are no LLC tax forms. An LLC is taxes either as a sole prop; partnership, regular corp of S Corp. Think of the LLC as tuna, it takes on the flavor of whatever it is with. You default to a sole prop of partnership; you can elect to be treated as a corp or S Corp.

        Reply
        • With This Herring February 22, 2016, 10:58 am

          To clarify: There are no -Federal- LLC tax forms.

          There are some states that DO have LLC tax forms, in ADDITION to the business income tax forms of whichever “flavor” of business has been elected. For example, NYS’s form is the IT-204-LL. It is an easy form, and the tax (called a “filing fee”) ranges from $25 to $4500.

          Reply
          • Kristine - CA March 12, 2016, 11:39 am

            I’m glad someone pointed this out. Here in CA there is a required filing and minimum annual $800 franchise tax on LLCs. That fee and bookkeeping burden makes it less viable to form multiple LLCs for this that and the other thing. So, for example, you’d have to a real need/reason to hold each rental prop or rehab prop or each side hustle in a separate LLC.

            Reply
    • Chris22 February 10, 2016, 12:28 pm

      “3.) Rental properties have a lot of good tax deals, too. I am writing an article on my blog on this issue and should be published within a week or so.”

      Can you expand on this any? I have a rental property I almost exactly break even on (rent is $25 less than the mortgage) and thought I couldn’t deduct any significant losses (depreciation, etc) because I am not doing it as defined “as a real estate professional” or some such thing?

      Reply
      • mary w February 10, 2016, 2:14 pm

        What’s your income? If it’s less than 100K (of AGI I think) you can deduct losses which include depreciation. At 100k it starts phasing out and disappears entirely at 150k.

        Reply
        • Chris22 February 10, 2016, 2:15 pm

          AGI will be +/- $150k.

          Reply
          • David B February 10, 2016, 5:43 pm

            You should still record the losses as when your income drops below 150k you should be able to deduct the carried forward losses (I’m not a tax guy, figuring this out myself as I go, so fact check me)

            Reply
            • Kathy Abell February 10, 2016, 6:13 pm

              Yes, you should keep track of your unalloyed passive activity losses every year since these losses can be carried forward into future years when you AGI is less than $150k. Even if your AGI never falls less than $150k, the accumulated passive losses from all prior years can then be deducted from your capital gains when (if) you sell your rental property. Check the irs.gov site for details, or Nolo’s book “Landlord’s Tax Deduction Guide” which explains all this stuff very well.

      • John February 12, 2016, 10:01 am

        If it is an option for you, I think that the easiest way to take advantage of real estate tax deductions without qualifying as a real estate professional is probably to reduce your total real estate leverage/interest expense by paying down the mortgage enough so that you DO have a profit for the property(s). Once you factor tax effects into the ROI, you might actually make a higher per dollar return with a higher amount invested. Having positive cash flow (and taking advantage of real estate deductions) will be much easier with a slightly lower mortgage balance.

        Reply
      • jestjack February 15, 2016, 9:41 am

        Slippery slope with the rentals….I have some rentals that I have owned for a loooong time….like 37 years. The challenge seems to be in selling and avoiding capital gains….PLUS the “recapture” on depreciation is “breathtaking”….The only way I see around it is to perform a “like-kind exchange” and let my heirs deal with it….Thoughts?

        Reply
    • Edifi February 10, 2016, 1:26 pm

      Keith, your sessions were by far the best last year at CMII! Thanks!

      Reply
    • Bill February 10, 2016, 1:59 pm

      I mentioned this in a couple of other places, but since you commented here I’ll mention it again (other CPAs also have not mentioned it whereas I’m just a computer geek); the restructuring you did will reduce the MM and especially Mrs. MM future Social Security payouts, particularly for their shortened income timespans, as I’m sure you’re aware. There is a calculator people can download from SSN.gov or some such place that lets them figure this difference for themselves and do the long-term math. Many people will still choose to manage the money themselves rather than give it to the government, but they should be aware that is what they are doing, not getting money for free.

      Reply
      • Andy C February 10, 2016, 4:54 pm

        Not necessarily – search “Root of Good Social Security” for an excellent explanation of the inner workings of Social Security for extreme early retirement (because you’re essentially saying that anyone early retired with a low post retirement income is drastically hurting their future SS earnings).

        Reply
        • Diana February 12, 2016, 12:49 pm

          Andy – THANK YOU for flagging that! I’ve heard rumblings about early retirement’s effect on social security, a friend suggested becoming an employee in her corporation solely to keep up the SS contributions, but this article dispels that need. I hadn’t gotten to that point of research yet, and to be honest, SSA isn’t part of our retirement plan anyhow, but its nice to see how this will be nothing more than a blip in our earnings in the future. Can’t wait to pull our SSA statements and make a spreadsheet! :)

          Reply
          • Bill February 16, 2016, 12:15 pm

            SSA.GOV has a handy app that will let you add your current and future earnings to project how much you will be paid in different scenarios.

            Reply
            • JB February 24, 2016, 3:03 pm

              You need earnings from income to get SS so if you have all rental income, you won’t get SS.

    • Becky February 10, 2016, 6:30 pm

      Keith – I live in Neenah! I’ve driven past your business many, many times and have always meant to take a picture of your sign with the MMM website on it, which I thought was the most awesome thing ever. I guess I didn’t need to take the picture, Mr. MM already knows all about you. I’m glad to have a trustworthy accountant to recommend to anyone in need locally. Have a great tax season :)

      Reply
      • Keith Schroeder February 10, 2016, 7:47 pm

        NEIGHBOR!!!

        It sure is a small world, Becky.

        When things get normal for me feel free to stop in for a free soda or cup of coffee. You don’t have to be a client to get me to talk.

        Reply
    • Bourbon February 11, 2016, 10:20 am

      Keith,

      Sent you a note through the website with my details. I have intended to turn this work over to a CPA for over a year now, but haven’t been able to find a time. How do you find long distance accounting to work?

      Reply
      • Keith Schroeder February 12, 2016, 7:20 pm

        I prefer it. Over a 1/3 of my business is outside my area.

        Reply
  • zephyr February 10, 2016, 8:22 am

    HI MMM- if ya’all do another Camp Mustache in Seattle let us know please! -zephyr

    Reply
    • Keith Schroeder February 10, 2016, 8:34 am

      There is another Camp Mustache this Spring. Tickets are sold out for now. I will be there, too and if allowed, will present a different tax session. I’ll let the Mad Fientiest give the tax/retirement planning session (he is really good at it). I want to do something a little different; things most people (including too many accountants) don’t know about.

      Reply
      • Cameron February 10, 2016, 8:54 am

        Bummer. I wouldn’t mind attending either.

        Reply
      • David B February 10, 2016, 9:47 am

        Would have been awesome to attend. Do you all plan on taking video so it can be shared with the whole community? For now I’m doing my own taxes with a small side business so I would love to learn more of those tips or tricks that most don’t know.

        Reply
      • nathan February 11, 2016, 8:33 am

        MMM / Keith,

        Can you start streaming or record the sessions and create a video library on this site or on your blog?

        Just a thought!

        Reply
        • Keith Schroeder February 12, 2016, 7:22 pm

          As Camp Mustache gets closer I’ll talk with the facilitators. They make the decisions. I have no restrictions on anyone recording my presentations.

          Reply
  • Mrs PoP February 10, 2016, 8:24 am

    I was an avid DIY-er when it came to our taxes until we got our investment properties and I found myself having spent nearly 40 hours working on our taxes that year and STILL didn’t have the confidence that I would be doing them correctly. For now, we gladly hand them off to our very amazing tax guy every year, with the hope that by the time we retire we’ll have learned enough from him (and simplified our finances) to make taxes (once again) a task we feel comfortable doing ourselves.

    Reply
  • AM43 February 10, 2016, 8:24 am

    In our case with multiple income properties plus income from full time jobs, it gets complicated not to miss important details and I hate to leave money on the table so we let our accountant figure it out.
    Its one time per year when I find that its worth paying someone else to do it.
    Also If I am not mistaken we are deducting full amount of tax preparation fees.

    Reply
    • Keith Schroeder February 10, 2016, 7:49 pm

      You can deduct a part of the prep fee, the part applicable to the rental portion of the return. The remainder goes on Schedule A where it is worthless for most taxpayers.

      Reply
  • Str8cash32 February 10, 2016, 8:26 am

    Sounds like someone needs a catheter and a bedpan! The inner millionaire finally comes out, but its okay because we are able to see past this convenience for what it truly is due to your earlier writings. Is an electric Cadillac in your near future too? Jus t had to give you a quick punch in the face:)

    Reply
    • Heath February 11, 2016, 5:35 pm

      LOL! This was my gut reaction as well :-) I’ll expand in my own stand-alone comment below.

      Reply
      • Str8cash32 February 12, 2016, 9:44 am

        Sorry to vent, but here it goes. After thinking on it for a few days it actually angers me that MMM is willing to advocate DIY projects that can actually kill the average reader (as well as others), and then has the audacity to advocate farming out some simple tax crap. This isn’t a multibillion dollar multinational, its a relatively small blog and really taxes aren’t all that complex for a two person company. If you pay 2-5% more than necessary who cares because nobody is in danger of being blown sky high (DIY Furnace replacement). Many of the readers here aren’t able to change out spark plugs or repair a dishwasher much less tackle a whole house radiant floor system or replacing their own HVAC systems, and yet you challenge us to try those out when you aren’t even willing to try to spend a few hours learning how to cut the fat off your own taxes. MMM please stick to what you know which is DIY EVERYTHING, stick-to-itiveness, conservation and general positivity. Ads for your buddies line of work is NOT what I personally read you for. Thanks!

        No offense Keith I am sure you are a an awesome accountant:)

        Reply
        • S.G. February 20, 2016, 12:21 pm

          I think this is really fundamentalist view. I guess MMM was “Asking for it” giving punches around liberally for any kind of outsourcing, however there is a limit to DIY:
          – even the most hard core Mustachian would agree it is not a good idea to remove your own appendix using a mirror and a surgery handbook, although it is possible and people have done it. I myself as a doctor (but not a surgeon) would be hard pressed to do it and only in extreme situations
          – unless you want to participate in Judge Judy, it is usually good idea to hire a law professional to handle legal affairs
          – MMM loves to do carpentry and I enjoy reading about his “furnace replacement” and similar extreme sports projects, but would never do it. I would be bored and likely kill myself. HE would probably lose interest in my cancer cell experiments and DNA analysis, and I wouldn’t blame him.

          As for taxes.. I came to this country (US) with an old backpack, suitcase and $500. For first few years I easily did my own taxes with TurboTax and marveled how easy it is. But times changes, stocks here and abroad accumulated, rental properties, marriage and her investments and properties, move to a different state. And I started getting a sneaking suspicion I am overpaying and doing it wrong. One year I spent two hours with Turbo TAx advisor, trying to figure out $6 extra dividend one of my MLP investments has made and I realized. I reached my limit of intellectual stimulation. Found an awesome NYC accountant who for amended my taxes and filed. Got me back $14.000 just on amended taxes. Recognizing my limitations was the Mustachian thing to do bcs made me money, saved time I could use on my family. I still review my taxes, you are responsible for your accountants mistakes so it is a good idea to understand what they do.
          One may say that the same rule applies if a person making $500/hour hires a $50/hour gardener to cut his lawn. But it is a bit different. By cutting your own f…g lawn you purchased, you get some fresh air, your ass gets smaller as you get up from your Lay-Z boy chair and why did you buy a freakin’ house with a lawn if you don’t even fell like chopping some stuff?
          So there is a difference and the key is not to DIY everything, but everything that you can and like to do, push your limits but don’t pretend you can do it all. Because you can’t. Cheers to all

          Reply
          • Str8cash32 February 22, 2016, 2:21 pm

            I politely disagree with your “you didn’t build that” stance. But plowing ahead, taxes are a yearly exercise performed by all Americans, appendectomies are a once a lifetime procedure needed by a select few with death as a possible outcome. Apples to oranges, Doctors are always a no brainer when death is a possibility. And I DO have a fundamentalist approach in mind. The whole point of MMM is to live a simple uncluttered life that maximizes happiness, very fundamentalist I would say.

            To prepare taxes it doesn’t require any advanced degrees or knowledge that a person with a library card or internet connection cannot learn. Simply put MMM didn’t need to use the accounting firm to find his new tax savings. He could have buckled down taught himself how to do it and come out the other end with his hard work paying for itself many times over, not to mention the satisfying feeling of “YUP, I DID THAT SHIT!”

            I just want MMM to understand that he is a complainy pants in this instance. As one of the few who read here that has installed my own furnace and built entire houses before the age of 30 (29 today), I am proof that you can do most everything yourself, but you have to put in the time to learn how to do it. Here he wasn’t willing to put in time and effort to learn the system to maximize his own happiness (Happiness = money), which makes him a whiny complainy pants who paid good money to his buddy for something he could easily have done on his own. Then after doing this very unmustachian act, he wrote a diatribe on the benefits (probably for a discounted rate next year) for his devout followers to consume without even thinking twice about the hypocrisy of it. Seems disingenuous to me, but what do I know I’m just a silly fundamentalist.

            MMM if you hire a gardener or personal chef I’m done reading here:)Maybe…

            Reply
  • Justin February 10, 2016, 8:30 am

    I still do my own taxes (and by filling in actual forms manually on the computer). But I fall into the rather simple tax filing category. A few investment sales per year = some cap gains, some schedule B interest and dividends, some schedule C income as a sole proprietor. That’s pretty much it.

    Handing it over to a professional would require me to find the right person, organize my supporting docs sufficiently to hand them over, spend time chatting with the tax man, and making sure they are actually doing things correctly (oddly enough there are less than diligent tax prep “pros” out there). Strong case for DIY in this instance.

    In the mean time, manually filling out forms makes me research the tax rules and refresh my memory of how they work each year. That translates to better knowledge of how to optimize my taxes going forward. In the past we’ve managed to earn $150,000 per year and pay only $150 tax on the income. Couldn’t have done that if I allowed my tax guy to do all the work for me.

    Am I missing out on tax savings? Possibly. An LLC or S corp might benefit me slightly, but would also cost a lot more in time and money to set up, maintain, and prepare the taxes. Less complication, maybe losing out on a tiny sliver of tax savings net of the added expenses? It’s worth it.

    Reply
    • Allison February 10, 2016, 10:35 am

      You make an great point, Justin. I have a bad habit of assuming someone is fully competent if they hold a position as a professional. In my case, this resulted in some erroneous legal advice which cost me quite a bit of money.

      I think it is so important that even when hiring a professional, we are doing our part, being familiar with what is being done, and why, and what laws apply, etc. so that even when we are hiring out the work, we’ve maintained a little of the DIY nature and protect ourselves.

      Thanks MMM for another timely article.

      Reply
    • Paul February 10, 2016, 10:40 am

      This is what stops be from having someone do mine. The thought of gathering everything up correctly beforehand, explaining my weird situation (a K1 with pass thru income or loses that I don’t actually receive) and an side business that is growing but not sure if should do LLC as an S-Corp. If I had a guy like this to talk to I’d be set, but the one consult I did have the lady confused me even more.

      Reply
    • JayP February 11, 2016, 7:42 pm

      I do my own too. However, MMM has a signifincant business income, which justifies the trouble and restructuring. Any dividends and stock sales are pretty much routine and easily imported by tax software, no need to hire someone to do those.

      Reply
    • chacha1 February 12, 2016, 10:45 am

      I felt the same way. My husband is self-employed, and after we got married we used an accountant for a few years. But it didn’t actually save us much time, because we still had to pull together all the records; and when it came right down to it, I thought some of the advice the accountant gave us was kind of shady. Paying $300-400 each tax season in exchange for what I considered easily-avoided audit red flags seemed pretty stupid.

      We definitely could do better about optimizing, but have both decided that just doing things simply – even if it costs us a little more in taxes – is preferable to spending 2x or 3x as many hours trying to find workarounds that would actually not send up a different set of red flags.

      Those hours, after all, are in my case uncompensated (I have a full-time job) and in his case actively pull him away from potential client service, aka earnings.

      Reply
  • Jared February 10, 2016, 8:30 am

    This year I did my own taxes, But I’m taking the standard deduction, Next year Ill have to itemize, but will probably still do them for now unless I experience a boom of some sort.

    Reply
  • Kyle February 10, 2016, 8:32 am

    As a huge DIY person, I realized it’s IMPOSSIBLE to become an expert in everything I’d like to, and impossible to spend time building everything I want to. Over the years, I’ve been attempting to learn to pick my battles in order to keep my sanity. Most recently I really wanted to learn how, and build, tower speakers for a high end stereo system and did many hours of research. But with the laundry list of other DIY projects on my plate, struggling to get done, I decided to simply purchase them.
    I think relinquishing control is dangerous when it comes to money for obvious reasons, but you’ve put the legwork in to prove it’s a pretty large positive outcome to your situation. Where investing is actually pretty simple, disguised as something too complex for the average person, I do find taxes can be incredibly complex. After many hours of research I know I’ve only barely scratched the surface of tax laws, which only get more complex when you own a business as you pointed out. I will continue to do my own taxes but I think relinquishing control of yours was a wise choice, just make sure you always understand what’s going on throughout the years.

    Reply
  • Todd Nestor February 10, 2016, 8:32 am

    You know my boss sweats by http://gusto.com to handle all the payroll and tax needs for the company I work for.

    I’m not sure how much it costs, but he says it basically automated everything so it makes the payroll and taxes that much easier. Just in case you wanted to simplify your monthly salary and taxes check writing time.

    Reply
  • ChasinMyTail February 10, 2016, 8:40 am

    What is so special about 1040.com? It seems to be more expensive then Turbotax for the same level of service.
    A second question: If I have a Roth IRA question (withdrawing money), should I look for a Tax attorney or an Accountant to provide the answer?
    Thanks Chasin
    P.S. If any is curious my Roth IRA question is: all over the web it mentions that you can withdraw Roth IRA contributions (not earnings) without penalty at any time, yet Pub 509 from IRS doesn’t seem to say that. I’m confused and about to get hit with a 10% penalty.

    Reply
    • dandarc February 10, 2016, 9:04 am

      Plug the MMM forums again. This question comes up repeatedly there – basically when take a non-qualified distribution from a Roth IRA, there are very clear ordering rules as to what comes out first:

      1. Regular Contributions
      2. Conversions in chronological orders – any amount that is taxable first, then any amount that is not taxable from each conversion.
      3. Earnings

      And then if you read the details / look at the forms involved, it is clear that you only pay 10% additional tax on the taxable amounts. So regular contributions are withdrawn first, and not taxable so no 10% additional penalty.

      Also important to note that this ordering thing applies to a Roth IRA, but not a Roth 401K or 403B. People often think the rules are pretty much the same there, but they aren’t.

      Disclaimer: I am not an accountant or attorney.

      Reply
      • ChasinMyTail February 10, 2016, 10:42 am

        Thank you dandarc for the forum suggestion. I think I found my answer there:
        http://forum.mrmoneymustache.com/ask-a-mustachian/roth-ira-taxes-pissed-please-help!/msg50590/#msg50590

        Reply
      • Bill February 10, 2016, 2:56 pm

        It’s also important to note that there is a huge difference between a 401k and an IRA when it comes to, say, starting a business of your own or other big expenditures. You can borrow against a 401k, up to half, but you can invest an IRA directly in a business if you can buy stock in that business.

        Reply
    • dandarc February 10, 2016, 9:14 am

      The relevant IRS Publication for this information is 590B – section 2 Roth IRAs – Ordering Rules for Distributions.

      Reply
    • Elfsdad February 17, 2016, 2:04 pm

      I appreciated the 1040.com suggestion and I’ve made a note to try the service next year. I’ve been using TurboTax for years, primarily because of the free roll (or heavy subsidy) provided by Vanguard. But that ended this year, and by the time I was done with TurboTax this year, I was out of pocket $154 (premiere version plus two state filings) and a number of hours of frustration. The same access and filing assistance at 1040.com would cost $80. It seems that over the years TurboTax has also gotten increasingly opaque. This year, just as I was wrapping up my Federal return, TurboTax told me that my imported W-2 failed to include any Box 12 letter designations. So it was down a half hour rabbit hole inputting that information manually (largely by trial and error) and getting the return back on track – which kind of defeats the whole point of importing the W-2 in the first place.

      Reply
  • Hotstreak February 10, 2016, 8:41 am

    Excellent! I know a guy who does his own taxes, despite having 6 rental properties, two salaries, investment accounts, and multiple kids in college. He works in the finance department and doesn’t trust CPA’s, because he finds errors on the returns they prepare. A couple of Accountants posted upthread that they make mistakes on their own returns, too, which makes me think this problem is not limited to tax preparers who pay people to wave signs on the sidewalk.

    What would you say to a detail oriented person who’s going to check your work and maybe find mistakes?

    Reply
  • Tom February 10, 2016, 8:42 am

    I have to lend my vote for SimpleTax.ca. I used them last year and was really impressed – TurboTax would tell me I’d get a certain return, and the actual amount on the cheque would always be different. Using SimpleTax, it was the same TO THE PENNY.
    Almost makes me look forward to tax time. Almost.

    Reply
    • Mike S February 12, 2016, 12:56 am

      When I was filing in Canada, I used to use U-File. Seemed to do the same job as TurboTax, for about 1/2 the price.

      I’ve only filed 3 returns in the US. The first I did by hand. Mostly because the software I looked into didn’t seem to like that I didn’t pass substantial presence. I generally thought that the Federal forms were fairly straight forward. I called the IRS a few times and they were quite helpful (I don’t think they take calls anymore). The written instructions for the NY State forms were terrible. The advice they gave me over the phone was incorrect. But, after I filed my taxes incorrectly, they also re-did my return and gave me back $1k more than I asked for.

      The second year, I hired a tax guy and did them on HR Block software. Friends at work said they all used tax pros and I’d heard many things about complex tax loop holes in the US. I wanted to see if the Pro was worth the cost. The return from the software was like $50 more than from the pro, who charged about $100 (so I was out $150). I generally chip away at my taxes as I receive forms, so I don’t see it as a big time sink.

      The third year, I am only filing using software. In early January, Amazon has had deeply discounted (~ 50%) HR Block software both years I’ve looked.

      Reply
  • R0B0T-CAMEL February 10, 2016, 8:46 am

    Maybe it could be interpreted as ‘wussy pants’, but if you use it as an opportunity to learn from a professional about how to do it and they whys/what-fors, you would feel more comfortable about doing it in the future. It doesn’t have to be an either/or. :)

    Reply
  • dandarc February 10, 2016, 8:55 am

    Obviously you’re in a position to easily afford to pay for this service, so more power to you.

    Of course people can also research and do all of this stuff themselves. A great place to get free info, and specific to your situation no less, happens to be the Mr. Money Mustache forums.

    One thing on the S-Corp / SEP-IRA combination – the tax benefits of these often off-set to an extent, because with an S-Corp, you are limited to 25% of your W-2 wages, so if you take $1 as a dividend rather than W-2 income you are also reducing your tax savings from the SEP-IRA. Whether you come out ahead or not depends on your income level – once you are over the social security maximum, you’re not saving all that much in self employment tax by taking profit vs salary, so you could potentially come out ahead by taking more salary and deferring more to a SEP or SoloK. You’re also reducing future social security benefits by paying less self-employment taxes, which off-sets the current tax benefits as well.

    I’m sure a pro like Keith has taken all of these factors into consideration, but for anyone looking for a more DIY approach, it can actually be a pretty complex decision – lots of things to be aware of.

    Reply
    • dandarc February 10, 2016, 9:23 am

      Should have proofed that comment better.

      That sentence about reducing social security benefits applies only if your income is under the SS limit, whereas the off-setting SEP-IRA / Self Employment Tax savings is most relevant in the window between the SS limit and the point at which you’ve maximized your SEP-IRA – $212K usually.

      Reply
    • Rajib February 10, 2016, 3:35 pm

      I am glad someone pointed this out. I will be an independent consultant soon – working through my S-Corp and drawing a W2 salary. I was torn between taking a “low” salary so I could save some money in self-employment taxes vs paying myself a high salary so I could contribute 25% of that to my solo 401k (in addition to the $18k I would contribute from my wages, so get as close to the $53k max as possible). In the end, I opted to contribute more to the 401k.

      Reply
  • patrick February 10, 2016, 8:58 am

    I was in a similar situation for several years, making a high 5-figure income as a 1099 contractor. I finally formed an S-Corp this year and hired an accountant. After all is said and done, after paying her fees I should come out ahead about $4k.

    Something else I had to consider was the value of my time. Last year I spent 10 or 12 hours going through receipts, credit card records, and processing 1099s from three clients and a W-2 from some short term traditional employment. I’ve been very happy this year to just send it all to my accountant in an email and wash my hands of it.

    Reply
  • Roger Moore February 10, 2016, 9:00 am

    I take it from this article that you pulled well over 118K last year as a couple. Congratulations!

    Still, I’m interested to know: Where is this money going? Why is it so important to continue to save on taxes when you are retired, worth millions, and have stated time and time again that you do not need the money? I understand the drive to be efficient but this seems like overkill given your modest spending needs.

    Reply
    • LennStar February 10, 2016, 9:13 am

      mountaineers answer: because its there ^^

      You dont know what he did with the money. There are lot of things you can spend it on. Building a school in poor Africa is just one for example.
      I have the feeling MMM would not talk about this (except maybe as an example blog post)
      Anyway stocks are gong to be cheap this year, so time to buy some ;)

      Reply
    • Mr. Money Mustache February 10, 2016, 9:24 am

      Yeah Roger, I often wonder the same thing. What is the logical thing to do with extra money?

      The quick answer is that as long as I don’t use it to inflate my own lifestyle too much (still at $25k but we’ll soon see how 2016 turned out), everything will turn out well. I’ve started to ramp up donations, but not nearly as quickly as income so far. So I’m keeping the balance in efficient investments so it can continue to grow.

      I want to use the rest for making the world better in various ways, but maybe specialize a bit in the areas I feel are least served – like reducing car and consumerism culture. The amazing Gates Foundation is really efficient at improving the lives of the largest number of humans, but if we just export American consumption along with the higher health and incomes for 7 billion people, we might end up worse off than we are now.

      Reply
      • Roger Moore February 10, 2016, 9:33 am

        Thank you for the thoughtful response and your willingness to do some good with your extra earnings. I would love to see a blog post at some point with further details regarding charitable contributions in detail. I like the goals you have in mind.

        You do have to understand it’s difficult for someone who hasn’t made it yet — who is still on-the-path to wealth so to speak, all while donating 10% annually of post-tax earnings to charity — to see so much money still flowing into the MMM coffers. Love to hear you are planning to set some of it loose in ways that will benefit others.

        Reply
      • Scott February 10, 2016, 12:14 pm

        I know from previous posts that you are a big fan of the Gates Foundation. They are obviously helping a lot of people but I was wondering if you had any concerns with the unintended consequences and side effects of the foundation’s activities. Even while presupposing the best of intentions, the sheer size of the organization along with its economic and political power creates some cause for concern. I have read some articles that discuss some of these issues such as accountability, lobbying activities, and their ability to bypass local governments and health systems.

        Reply
        • joy February 11, 2016, 6:38 pm

          Ability to bypass local governments is helpful especially in countries like India, where every thing is corrupted

          Reply
      • snowcanyon February 10, 2016, 12:33 pm

        The Gates Foundation has not done so well with education. https://www.washingtonpost.com/news/answer-sheet/wp/2014/10/08/an-educator-challenges-the-gates-foundation/

        And there are a lot of complexities, not all good, with their approach to maintaining their finances. Just like the rest of us, I guess.

        http://www.thenation.com/article/how-gates-foundations-investments-are-undermining-its-own-good-works/

        Reply
      • LennStar February 11, 2016, 2:33 am

        You may want to have a look at commons-movements (Elinor Ostrom meaning) or things like OSE – make a work holiday there ;)
        https://en.wikipedia.org/wiki/Open_Source_Ecology

        Reply
      • Wendella February 11, 2016, 11:54 am

        Start a bike-only city!

        Reply
    • Bill February 10, 2016, 1:30 pm

      I’ll tell you where it’s NOT going is your social security fund. By taking an S-Corp draw at this low salary (well below the $116k wage base) you take out money now rather than put it into your social security fund, and it does matter in terms of how much you will get when you take SS later. Just a caveat for anyone wanting to go this route. It’s all well and good as long as you save it yourself. S-corp draw = personal privatization of social security.

      Reply
  • Lex February 10, 2016, 9:09 am

    Outsourcing taxes is probably one of the few areas of personal finance where it’s cost effective. (Unlike outsourcing your investing which usually doesn’t makes sense.) I’ve wanted to hire an accountant for some time now, but I’m just not sure how I can find a decent one.

    Reply
  • LennStar February 10, 2016, 9:10 am

    Its OK to let professionals make the taxes if it is complicated.

    The difference compared to e.g. mowing your lawn is that taxes are (or can be) way way more complicated – and change every year.
    It’s a bit like changing a tire at a bike or building one from scratch, including welding etc. It is not impossible, and if you want to spend hundreds of hours learning all the bits for fun – do it. But it will still be more expensive because you just do it once.
    If it is just a task there are better ways to spend your time.

    Reply
  • OJ February 10, 2016, 9:11 am

    One thing missing in Figure 1 is that on the left side you actually put more money into the high-yield annuity called Social Security. The left side may result in, let’s say an extra $25/month for 17 years, which would be $5100. (Those future dollars should be discounted, say be a factor of 2, to $2550.)

    Reply
    • Mr. Money Mustache February 10, 2016, 9:53 am

      Another good point OJ – I don’t view Social Security, Medicare, or other stuff as money truly lost. It gets spent on other things which benefit other people (and possibly even me), which is approximately what I wanted to use my money for anyway. Also a great safety net if this first 41 years of prosperity turns the other way.

      For SS, the payment maxes out at $2639/month, and even that is supposedly only for people who paid in the maximum for 35 years. The personal benefit of paying more in seems to decrease as you move up the scale, since it’s more of a safety net than a true retirement plan. Also, if the system truly runs short on money, us high-income people might be among the first ones to have the benefits cut. But again, these are just pennies in the swimming pool of wealth if you have more money than you need.

      Reply
      • Travis Deyle February 10, 2016, 4:30 pm

        Also, the calculus for SS is a little nuanced: You only receive it if you live to be old enough, and very little of it gets passed to your heirs. Case in point: My father had similar logic to OJ above. He passed away in November 2015 (miss you dad!) at the age of 62. He paid into SS his entire life, and the only thing my mom got out it was a measly little death benefit. Assuming my dad had been in MMM’s situation (he wasn’t, but it’s worth the example): his wife would’ve been much better served by going the IRA route, dividend, or salary route.

        TL;DR: A bird in the hand is worth two in the bush. I’d strongly consider SS to be birds in the bush. Keep the assets in something you can control at any time in your life.

        Reply
        • Brad February 11, 2016, 9:30 am

          These are some reasons why we decided to not “check the box” on our two kids (under 18 months) birth forms enrolling them into social security. One of the biggest financial decisions of your life is made for you by your parents on day 3 of your existence. How is that fair? What if you learn later your parents are financial idiots or Suckas as MMM calls them. What’s that – like 95% of the US population.

          Currently – neither have a SSN and will not have to pay into Social Security, Medicare, Medicaid, or any other future program. Thats a 0% to 15.3% raise we gave them from day 3 of their lives. Without a SSN I would have been able to hang with MMM 3 years ago.

          We are currently ok with paying the extra $1600 (thats it) a year (can’t deduct them since they don’t exist in the eyes of the IRS – lucky them!!) in taxes to give them the future gift of never having to pay into SS. Thats huge. Its like what Travis said above. Think about how much more money they could invest.

          Not sure about income taxes because how is the IRS going to track somebody who can’t be tracked. LOL. Maybe not “easily” tracked At a minimum – if it helps simplify their taxes and removes one huge financial line item in their favor then thats all good.

          Currently most companies will not hire somebody who does not have a SSN and this is probably the only real concern for us – for them. They could be self employed or work off the books but I don’t want to wedge them into a profession. Will be 14 years before that becomes an issue so we have time to figure it out. Once you get a SSN though, you can’t give it back.

          I am currently having fun with this and its a miracle my kids are alive without a SSN. So far none of the things we were told that you couldn’t get without a SSN are false. The only thing thats popped up so far is for Health Insurance as her employer asked. We told them neither had one each time. They said when we get them one to let them know. We said we would. We didn’t. So theres nothing to tell. Both of them are currently on her insurance.

          As MMM said at the top with the “fundamental recipe for human happiness: you must remain challenged and keep learning throughout your lifetime.” I feel thats what I’m doing here. I say currently a lot because I acknowledge things can change. If the system must break me like Drago in Rocky IV into getting them a SSN than it happens. In the mean time I’ll keep learning as much about this as I can – for them.

          Reply
          • Mr. Money Mustache February 12, 2016, 12:13 pm

            Wow, that is some wild stuff. I was pretty excited to get registered and have an SSN myself when I got to this country.

            Any disadvantage from having to pay into Social Security and other taxes is massively outweighed by the opportunity to do business with big, rich companies willing to pay you hundreds of thousands of dollars per year to hang out in a luxury office compound. This obvious net profit is the reason the US remains the wealthiest country in the world. An organized, above-board business system – embrace it!

            Reply
          • Dan February 17, 2016, 2:29 pm

            Brad, sorry for your loss. I’d like to point out that while your dad didn’t receive income, if your mom is younger, she qualifies to collect social security at 60, two years earlier than normal early age. Also, another benefit of her being married to him is, assuming he paid in more over his career, is your mom will receive the higher of the two benefit calculations. If she had been single, she would only get her calculation, even if it was lower. So no direct benefits, but SS does benefit married people to a point in a welfare kind of way.

            Reply
      • Suzanne February 10, 2016, 5:22 pm

        Exactly. SS is not straightforward “free” money. It is fully taxable on receipt if filing married separately and half is taxed if filing married or single, both of which can tip you over into a higher bracket. My tax planner assumed I could file jointly but with a nonresident alien spouse (no TIN- wants his privacy from US taxman), I can only file separately. So I am stuck with a surprising tax bill in my first full year of retirement. Now that I am 65, I also have to pay full monthly medicare fees even though I’ve retired overseas and cannot/will not use it unless I am in the States. Also, my advice is to not take any large distributions from investments during the year prior to starting SS as that year will be used as your “basis” for establishing your future monthly medicare fees. Just Sayin . . .

        Reply
      • JB February 24, 2016, 3:10 pm

        You can be a high earner and lose all your money in a medical issue. I am in favor of raising the SS limit up to $300K or just remove it, but those high earners shouldn’t get penalized too much either. stuff happens and a person could have all their wealth in a single stock and lose it all, then only have SS to fall back on. it doesn’t happen often, but then the 1% are only 1% of the high earners.

        Reply
  • Talltexan February 10, 2016, 9:14 am

    There’s also a marital satisfaction component: often getting the tax return filed in April can be a source of discontent between two spouses, one of whom can nag the other about it relentlessly. Outsourcing this task is definitely a way to solve that problem. Something about fear of the IRS and complexity of the paperwork makes this dimension greater than other DIY projects for some reason.

    Reply
    • Jeff February 10, 2016, 11:59 am

      In that case, the nag should be doing the taxes.

      Reply
    • Embok February 14, 2016, 11:41 am

      So true. Hiring a good accountant to prepare and file our quite complex taxes has been one of the best decisions ever yielding marital harmony for my husband and me. In addition, it frees up hours for us to do work that has a better financial yield.

      Reply
  • BCBikier February 10, 2016, 9:17 am

    I was just looking at incorporating my wife’s new business that looks like it is going to be reasonably profitable! Very good timing! I was going to try to set this up myself and you have not swayed me away from this! :)

    I also just realized the stupid Amazon affiliate exclusion for Colorado. Given I don’t have any monetization on my site it isn’t a big deal for me but I’m sure it is for MMM!

    Reply
    • Keith Schroeder February 10, 2016, 7:58 pm

      The technical term of the Amazon issue is called nexus. If you have a need for an affiliate with nexus issues as Amazon has with a handful of states I have a work-around.

      Reply
  • Lisa February 10, 2016, 9:18 am

    I am fortunate that the great guy I share my life with happens to be a tax accountant. He only became a CPA a couple of years ago but he has always had an aptitude for being able to read and comprehend the CRA guides. He started preparing his parent’s and grandparent’s tax returns when he was fifteen. They don’t speak English well or at all, so he took care of things. When I set up my landscape architectural consulting business, I had an accountant do the taxes that first year.(and had a lawyer review my legal risks). My husband (then a metallurgical engineer) used the accountant’s filing as a template for future filings. Now that I have added solar panels and other more complex income strands to our family, he has been navigating our way through this. I have to say that I feel so much more comfortable knowing that I have professional expertise for that area of my life and then the further back up of his mentors at the firm he now works for if I was ever to need it. If he wasn’t an accountant, I would have paid for expertise to evaluate the solar panel business rather than worry about whether I was doing it correctly at each year end and wondering how long it will take for them to catch up to me.
    Another example of using professional services – I have been practicing as a landscape architect for over 20 years and also doing renos on interiors of houses we fix up. I always run my plans by architect friends to make sure that everything is good. Often they make small suggestions for tweaks and I accept these. They are experts in their area and I am not. I see so many examples around me of people doing stupid things with their landscape construction and maintenance.

    Reply
  • CincyCat February 10, 2016, 9:41 am

    I love this article! I used to really enjoy doing our taxes, but then our financial lives got a lot more complex. I found that instead of it taking me 2-4 hours, it had started to take me 8-10 hours or more. For about $50 more than the fancy software I was buying every year, I could hand the whole pile over to someone else, and get a whole Saturday back. Worth every penny.

    PS – I really look forward to your annual “year in review” MMM family spending posts. Will you have one for 2015?

    Reply
    • baldvagabond February 10, 2016, 11:23 am

      Exactly!
      And in the event I get audited there is professional help used to dealing with the vagaries of the bureaucracy.

      Reply
  • Res February 10, 2016, 9:42 am

    I consider experts as force multipliers. Frugality as a goal is noble, but for me it is a means to an end. The end being positivist impact in the world. If I can use an expert to do something for me better than I can by all means let him earn his living while I work at what I do best. I want to work now, in order to achieve FI and be happy later. This I will do, not just to sit around and smoke the pipe, I need to see my time converted into world goodness. A few years to go still …

    Reply
  • Anthony February 10, 2016, 9:44 am

    No shame in minimizing your taxes via a professional. The question is: what are you going to do what that extra scratch? You could take this opportunity to direct the saved money to worthy causes of your choice rather than let the government choose where it goes.

    Reply
  • mike delbrough February 10, 2016, 10:14 am

    Do you think that having rental properties and a business necessitates the need for a tax pro?

    Lets say I only have three investment assets: 401k (max 18k yr.), Roth IRA (max 5k yr.), and a primary residence. Using these 3 basic investment methods I can save at least 25k year mostly or entirely tax free and with relatively simple accounting and uncomplicated taxes. Are there really a lot of people saving more than 25k a year? 85% of americans make less than 100k yr. Sometimes I wonder if this blog should focus on how to make as much money as possible in as little time as possible instead of focusing on how to spend as little money as possible in as much time as possible. Both are critical to an early retirement, the latter gets by far the most attention though.

    Reply
    • David B February 10, 2016, 11:43 am

      I have a rental property and I use the tax advantaged accounts you mention and I do not yet have a tax guy (been using turbotax premier) but I’m thinking about it now.

      As far as why this blog is more about spending less is because secretly it is an anticonsumption blog bent on saving the world/environment.

      Reply
    • mikey g February 10, 2016, 11:49 am

      Don’t worry, the other 99% of blogs focus on making money

      Reply
      • mike delbrough February 10, 2016, 12:09 pm

        So true mikey g. Just dont want to give false hope to those that think they can have an early retirement with an average salary ($51k per year) and a frugal lifestyle. Not saying there aren’t exceptions but most early retirement success stories are high wage earners, usually those in the top 10% or so of US incomes who also apply frugal principles to their lifestyle. From what ive read here, MMM is not an exception.

        Reply
    • Jeff February 10, 2016, 12:02 pm

      The majority of blogs focus on making more money. MMM is unique in showing that you can retire early with your current income.

      Reply
    • JB February 24, 2016, 3:12 pm

      We save over $200K a year. We both max out 401K, (24K and 18K), the wife gets profit sharing of $30K and a bonus of 5K into retirement and I have to save another 8K in my pension, plus all the rest of the disposable income goes into the brokerage account. We save about 40% of our income.

      Reply
  • Andres February 10, 2016, 10:44 am

    The importance of understanding taxes and having a good accountant cannot be overstated.

    When I first got a job, I just used TurboTax. I plugged in numbers from my W2, it figured out stuff for me, and I didn’t really understand it.

    When I became a consultant, I hired an accountant. When I asked how to save money on taxes, he suggested getting a mortgage. He mentioned nothing about S-Corps, or even 401k/IRAs! Looking back, he also did some questionable stuff tax-wise. I lost a lot of money to taxes, but since I had no idea what was going on underneath, I didn’t know better.

    When I stopped consulting, I finally sat down and started doing my taxes by hand (using the IRS’s website). Wow, what a difference. I finally understand all this stuff. I get why you want to maximize retirement savings, how the income brackets work, why we’re better off not making an equal amount of money between my wife and I, and so on. I also realize just how bad my prior accountant was. And, I realize throughout the year how various actions would save money.

    So, if you have at least basic math skills, do your own taxes at least a few times. Not TurboTax, but actually reading the forms. If you don’t feel comfortable, have an accountant go over the finished results with you. Knowledge in this field can be the difference between unnecessarily giving up tens of thousands of dollars per year! Even if your taxes are complicated and you need an accountant, understanding this stuff allows you to look over his work and see exactly how much they’re saving you, which tells you if their fees are worth it.

    Reply
    • Becky February 11, 2016, 8:22 am

      I ran the Navy’s free tax preparation center out in San Diego one year. The software we got for that (I can’t remember the name now) was amazing. You completed taxes by filling out electronic versions of all of the IRS forms. The software did the math for you, and you could quickly link back and forth between forms.

      I don’t think the software is really available to individuals, or if it is, it’s cost prohibitive. Ever since then, doing taxes on H&R Block or any of the other programs has made me nuts!! Stop asking me questions, just show me the forms, then I will know I’m not missing anything! If anyone can remember the name of that software, or has heard of a similar program that is available for purchase, I would love to hear about it.

      Reply
      • Becky February 11, 2016, 8:28 am

        Ha – I just went to the IRS website and saw that there is something similar available now…not sure how it works, but maybe I will try that next year!

        Reply
        • Isaac February 11, 2016, 10:44 am

          Check out https://www.freefilefillableforms.com/ They are just the forms with no slow Q/A website like the others. The forms have most of the calculations done, but not all. Some of the IRS flowchart questions (AMT etc) you still need to pull from the 1040 instructions. I’ve used it several years now and I like it since I can go line by line through the form and see what deductions are available, learning a lot in the process. Also it give much better insight into where certain deductions like the student loan interest deduction begin phasing out.

          Reply
      • Tim H February 22, 2016, 1:07 pm

        Fasttax? We used it at my old accounting firm back in the day.

        Reply
    • JB February 24, 2016, 3:13 pm

      Getting a mortgage is not a way to save on taxes. You still have to pay the bank the interest on the mortgage.

      Reply
  • MEL810 February 10, 2016, 10:53 am

    Although I am doing my own simple taxes this year, next year I will have to hire out. I inherited a house, land and personal effects from a sister who died intestate. I have to pay a boat load of her leftover bills, in addition to paying an attorney and I want to be able to deduct every cent I can. I also will sell some of her property. She was a hoarder and there are tons of collectibles in the house. Ebay here I come!
    I certainly do not know how to optimize this situation using tax software. Maybe I’ll look up the $100.00 tax accountant you recommended here. I probably won’t need the more expensive option, but I shall see.
    Has any Mustachian had experience with such a situation, esp. in the state of Virginia? If so, please post about your experience or email me. Thanks! MEL810

    Reply
    • Keith Schroeder February 10, 2016, 8:03 pm

      Make sure you don’t forget the step-up in basis. The basis of the inherited house is the value on date of death. If you don’t have it appraised and sell it many years down the road your accountant can use a formula to determine its value at date of death compared to the selling price.

      Reply
  • Rob Halford February 10, 2016, 10:58 am

    Any basic tax planning book will tell you to use an S-corp to save on payroll taxes and a SEP for a higher deduction. It’s certainly no more complicated than installing your own furnace, especially for someone financially inclined like yourself.

    Reply
  • CashFlowDiaries February 10, 2016, 11:08 am

    Once I got to my 3rd rental property I decided it would be smarter for a professional to do my taxes. Doesnt help that I owe money every year and a CPA is more likely to minimize the impact.

    Now I have 5 rental properties and 1 performing note that I am the lender on which is a pain in the butt to do. Luckily my CPA does it! ;)

    Reply
  • Diane C February 10, 2016, 11:10 am

    My CPA is worth is (considerable) weight in gold. I get more back with him marshalling the tax code than I can do on my own.
    To your point (and completely controversial, I know), I also avail myself of the services of a Financial Advisor. It took me a few tries to find one who’s principles were reasonably mustachian, but it was worth the effort and the fees. I would not be FIRE now if I hadn’t taken this step. Worth every penny. YMMV, but hiring a professional got me over the finish line. And yes, the grass is greener on this side.

    Reply
  • Giovina February 10, 2016, 11:11 am

    I like doing my own taxes and so far it has been simple enough to do on my own. Maybe if it gets more complicated I’ll eventually seek out professional help but for now I haven’t seen the need. I sometimes wonder if I’m missing out on any deductions, but when I go through line by line I don’t see anything else that applies so I hope not. I’ve even got some of my friends to do their taxes, and they realized it was easier than they thought.

    Reply
  • ZeroGBuff February 10, 2016, 11:17 am

    One thing I haven’t seen mentioned yet: using TurboTax, et. al. is *not* doing your own taxes!* It’s a catheter and bedpan software package that gives no real insight into how the tax code works. Getting out the pencil and paper (or keyboard and spreadsheet) gives insight into the tax code, lets you see what activities are incentivized, and keeps your elementary-school-level math sharp. Especially for people who only have a couple of W-2s and a Vanguard account, it’s only difficult the first year, until you understand the logic.

    The other reason to avoid using these software packages and services is that their parent companies use some of the profits to lobby Congress to prevent any streamlining or simplification of the tax code, which keeps taxpayers scared of making mistakes, and therefore paying them more money.

    If you have a really complicated tax situation or a need for tax optimization beyond your own skills, I take no issues with paying a good accountant to get it right. But it bothers me when people say they’re doing their own taxes when they’re actually paying a piece of software to do it instead. One activity teaches you about finance and government, while the other merely enriches a company that wants to keep you dependent on their product.

    * Disclaimer: I used the software once, about 15 years ago, and it made some big mistakes that could not be traced, due to the opaque nature of the software. This inspired me to actually learn how to do my own taxes, which turned out to be fun!

    Reply
    • Marty February 10, 2016, 11:44 am

      But remarkably, one does not pay more money each year for the tax software. Maybe it is the result of competition, or the increase in people who know how to code, but every year there are more options to get your taxes done for free.

      Reply
    • Jeff February 10, 2016, 12:06 pm

      The software has improved a lot in the last 15 years. It automatically updates what you’re getting back/owe so you can fiddle with numbers here and there to figure out what it’s actually doing. They’re not posting the formulas on their website, but it’s pretty obvious what it’s doing.

      Reply
  • AZjoe February 10, 2016, 11:26 am

    I did my own taxes for many years. However, they became more and more complicated. Eventually, I started “buying” an hour of an accountants time to review my self-done taxes and make suggestions. On a number of occasions she saved me 2 or 3 times her fee with suggestions. As time has passed, my taxes have become more complex. Now I prepare a questionnaire she sends me, then she does them for, usually, under $200. The aggravation, time and accuracy are well worth it.

    Reply
  • Scott February 10, 2016, 11:28 am

    I think it’s absolutely worth having someone do your taxes, particularly when you have a company. Once it gets past I make x amount of money, and need to pay x percent tax, there are too many legal loopholes you just don’t know about. With your investment accounts, home (or rental), and a company, I’m surprised you didn’t switch earlier just to save the hassle.

    The S-Corp thing is something that came up recently for me. I just incorporated a single member LLC, and I went to an accountant for advice on how to maximize tax savings and how to handle small business situations I hadn’t come across yet. He recommended the same thing about S-Corps, if I’m making more than I thought (hitting 80K or more), to come back to him and talk about turning it into an S-Corps.

    An LLC is a great way to try out running a business and see if it can produce the money you are looking to make. If it can, and even more, apparently you can retroactively turn it into an S-Corp as long as you’re still in that tax year. His advice to me was if you just end up killing it this year, come back to me before end of 2016, we’ll switch you to an S Corp and save you a bunch of money on taxes.

    The caveat being that S Corps are more complicated, need more accountant oversight, quarterly filings, etc. However with a 6k savings like you got, paying someone to deal with this added headache is a no brainer!

    Reply
    • David B February 10, 2016, 12:41 pm

      From what I understand you can also just have the LLC taxed like an S corp and get the benefits and complications that way, and you can switch to that any year.

      Reply
  • Syed February 10, 2016, 11:28 am

    I don’t see anything wrong with outsourcing tax work, especially if the time value is just not there. If owning some rental properties is making you money but is taking up too much time to do taxes yourself, it makes perfect sense to outsource the task to a reputable professional. You can use that free time to make some more money!

    Reply
  • Marty February 10, 2016, 11:37 am

    For any person with even mildly complex finances, doing your own taxes is like a surgeon doing his own appendectomy. You just can’t get the right viewing angle.

    Reply
  • Kevin February 10, 2016, 11:47 am

    If your S-Corp shows a $40,000 profit, isn’t that subjected to the 35% corporate tax rate, plus state taxes as well? Aren’t those taxes assessed before the dividend can be distributed?

    Reply
    • Keith Schroeder February 10, 2016, 8:06 pm

      S-Corps don’t pay income tax. They are pass-through entities. You are thinking of a C-Corp.

      Reply
      • Kevin February 11, 2016, 11:03 am

        Gotcha, Keith. Why then take any salary income? If the entire profit was taken as a dividend all payroll taxes could be skipped, correct?

        Reply
        • dandarc February 11, 2016, 12:21 pm

          Because that is illegal. You have to pay yourself a reasonable salary when you are structured as an S-Corp. Reasonable has some wiggle room, but $0 is definitely too low.

          Reply
  • Jeff February 10, 2016, 11:50 am

    I don’t see anything wrong with hiring a tax accountant. He’s the equivalent of a pneumatic nail gun. Sure, you could drive nails the old-fashioned way with a hammer, but the nail gun lets you achieve more in less time, which frees you up to achieve even more things.

    For that matter, I don’t see anything wrong with hiring out the lawn maintenance and laundry, provided you can afford it and you’ll do something more useful/challenging with your time.

    Reply
  • Keith Schroeder February 10, 2016, 12:00 pm

    I’m getting a lot of questions in my email box. The most common question is using this strategy (LLC treated as an S corp) with rental real estate. a short answer is NOOOOOO!!!

    A slightly longer answer: Real estate fits into an LLC nicely and I encourage the activity. However, real estate should never be inside an S corp (incl an LLC treated as an S corp). The reason is too long to write here. Maybe I’ll write a blog post in the near future on the topic.

    Recap: place real estate in an LLC; do NOT elect S corp status!!!

    There are other ways to save taxes on RE rentals.

    Reply
    • Lee February 10, 2016, 1:34 pm

      As another CPA, Keith is right…… Do what he says, Real Estate – LLC, no s-election!

      Reply
    • Lee February 10, 2016, 2:11 pm

      I’m a CPA and CFP. Been doing taxes for 10+ years in various firms, etc..

      To some degree, I think a lot of people can DIY, but there’s a lot that are leaving money on the table… With that being said, there’s tax accountants that leave a lot on the table or do a return wrong. There’s been articles on this in the past, give 20 tax accountants the same source data and you will have 20 different returns! Do I do all returns right? To my knowledge, yes, but if some other CPA came along and reviewed it, they may find something I had no idea about or they may question something I did they have no idea about and then, they may figure how I interpreted the information was incorrect…… The Tax Code is immense and with all the immensity comes the gray…..

      With all that said, if your financial life is not too difficult, more than likely, you are going to hit the high notes with personal tax software as long as you go through with their interview items properly and you have a complete firm grasp of all your financial affairs. If you have some complexities, probably should get a preparer, but try and stray from the ones you see on tv commercials…. You may not pay more for a CPA compared to the tv guys, depending on what you have involved and the CPA’s practice…. Shop around, but make sure you find someone you feel comfortable with to talk about some of your deep dark secrets about.

      That’s my two cents.

      Reply
      • Keith Schroeder February 10, 2016, 8:10 pm

        The enrolled agent exam given by the IRS to license practitioners has errors. After the exam each year the questions are released for tax guys to verify. Several questions have no right answer as a choice or the IRS finds they had the wrong answer. If anything, taxes will teach humility to those who think they know it all.

        Reply
  • SCraig February 10, 2016, 12:12 pm

    I live right by the Tax Prep and Accounting Services location…I noticed he had MrMoneyMoustache.com on his sign out front, which let me know he had to be a really awesome accountant!

    Reply
    • Mr. Money Mustache February 10, 2016, 1:02 pm

      Haha, glad to hear Keith is such a loyal Mustachian. But I hope he didn’t really misspell the website address like that :-)

      Reply
  • jimmylomax February 10, 2016, 12:15 pm

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    I am a huge fan of http://www.excel1040.com. I have absolutely no affiliation, but was thinking I should make a contribution this year.

    My advice is to take your previous year return and put it into the corresponding excel file. Then you can do all sorts of what-if and sensitivity analysis. You can spend a little time or quite a bit dependent on your level of interest and excel proficiency. I unlock all the sheets each year and build in my own crude sheet for my state.

    I also use it as a forecast and budget for the next year… as soon as I’m done with the current year I save a copy to be an estimate for the next and then use it to make sure I know exactly how much to contribute to our pretax plans to keep under that 15/25% marginal tax bracket switchover point, for example. It helps force my discipline and pay myself first with the pretax contributions to retirement accounts and then deal with the take-home pay that I am left.

    I hired a CPA that specialized in rental property when I was first getting started and doing this has helped me so immensely in understanding what we’re doing and how it affects the bottom line. But, I think it can make sense for anyone to do this exercise and keep that tax brain active. I usually run through one of the online tax sites and that has some great benefits, but in their attempt to simplify everything you lose the mechanics of how it works and what drives the numbers.

    Reply
  • Scott from Detroit February 10, 2016, 12:16 pm

    I’m still in the “working” phase of my life. I would be willing to go full-mustache, but my wife isn’t, but we’ve found a good compromise that will help us both accomplish our goals in life. I simply don’t have time to stop, fully understand all the tax stuff, and get the refund I’m entitled to. My wife and I make about 150K together, we own two houses (renting one out), have two kids, and things are rather complex on the tax side.

    Three years ago I did an experiment. I did my taxes, twice, once in one software, once in another. I then also took my taxes to a professional tax dude that lives and breathes taxes and accounting. The tax-dude found nearly a thousand dollars of “stuff” that I didn’t know about and that the tax software didn’t know about. His fee was $200.

    So for me the solution is simple. I can save time, money, and frustration by hiring a professional. There are no negatives.

    The thing is, even if you learned how to do your taxes 100% effectively, it’s not like learning to change the brakes on your car. Taxes change EVERY YEAR, but learning skills like working with tools and cars don’t change. The brake job on my 2007 Saturn Ion will always be the same, and that’s a skill worth investing in.

    Reply

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