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News, information, and opinions about:

  • Federal, State, and Virginia Beach Taxes
  • The Tax Preparation Business
  • Tax Planning

If you have a question or comment, please drop me a line. Paul @ PIM Tax.

01 April 2016

virginia beach tax preparation sheldonTax Preparation is an oxymoron. In the English language the word prepare means to make yourself ready for something you will be doing in the future; to get ready for upcoming events. Tax return preparation is about what happened last year. When we generate the return we are looking backward, not forward. Even though I think it should, tax preparation usually has nothing to do with getting ready for upcoming events.

A better description for generating a tax return would be tax reconciliation. You are comparing what you paid in taxes for the previous year to what your final tax bill actually was, and then you reconcile the difference. If you paid too much you get a refund. If you did not pay enough, you owe.

I don’t want to make too big a deal of this. Fussing about the language is like howling at the moon. I am known as a tax preparer, and most people understand that to mean I assist with the reconciliation of last year’s taxes, generate the tax returns, and get them filed with the appropriate federal, state, and local authorities. All of that is true, and I see no reason to go on a crusade to try to change what it is called. My inner Sheldon finds it curious, though, and I would stress that one of the primary advantages of hiring a professional tax preparer over do-it-yourself tax preparation software is that a professional tax preparer can, in fact, help you prepare for the future.

I would like to dispel a different tax myth, however, and that is the myth that all tax preparers are also accountants. Some are, but many are not. I, for example, am not an accountant.

The opposite is also true – not all accountants are tax preparers. Many accountants are, but not all. I have a client who is an accountant. He works in the accounting department of a large corporation. He seems sharp and I suspect he is good at his job, but he doesn’t know individual income tax law, so he hires me because I do.

It’s rarely a problem being confused with an accountant, but from time to time I will get a call from a potential client who does not understand there is a difference between accounting and tax preparation. They assume that since I do one, I must do the other. I think the easiest way to explain the difference is this:

An accountant tracks and assesses your financial situation. They keep track of income and expenses, assets, debts, and equity. They can tell you your financial status at any time, to include the end of the tax year. (Accountants do much more than this, but I think my brief description will suffice for this article. My apologies to any accountants who disagree!)

A tax preparer applies your financial situation (your annual income, expenses, etc.) to the tax law to reconcile your taxes in the manner that is both legal and most advantageous to you. A true tax professional, such as an Enrolled Agent, can also provide you with tax advice so you can actually prepare for taxes in future years.


In short, accounting gets you ready for the preparation of your tax return.

The vast majority of my clients are essentially their own accountant. They keep track of their finances and bring me the results from the previous year so that I can apply them to the tax laws and generate their tax return.

virginia beach tax preparation box of receiptsA few, usually with a rental property or a home business, will bring me a box (or an accordion file) of receipts that need to be sorted and totaled before I can begin generating the tax return. This is an accounting function, not tax preparation.If they bring me a lot of receipts this can be quite time-consuming, so I charge a bookkeeping fee to compensate me for the time. (I call it a bookkeeping fee to distinguish the fact that I am not an accountant.) My bookkeeping fees (currently $120/hour) are quite reasonable when compared to the fees most actual accountants charge for a similar service, but can add quite a bit to the cost of tax preparation for a client.

An easy way to avoid paying me (or another tax preparer) bookkeeping fees is to sort and total your receipts prior to engaging me as your tax preparer. I encourage all part-time landlords and small/home business owners to do this.* I have some helpful guides available for download if you need assistance with understanding the categories of business and/or rental expenses the IRS wants you to track. Or you can always call or visit my office and ask. There’s no charge for helping you get prepared for your tax appointment.

Don’t sweat the small stuff. I don’t look for excuses to charge for bookkeeping. You don’t have to build a master spreadsheet to total a handful of charity receipts or two semesters of college books. It only takes me a few minutes to add those up and put them on a tax return. I consider that just part of the tax prep fee. I like to think I apply common sense to when and where I charge for bookkeeping. I also never surprise people with bookkeeping fees. If I don’t mention it when I give you a price quote, there won’t be a charge for it.

Most people want to keep their tax preparation fees as low as possible, and I completely understand that. I’ve said for a long time I think most tax preparation fees are ridiculous. I don’t charge for bookkeeping to drive up my fees. I charge for bookkeeping because the time I spend doing it cuts into the time I have available to assist others with reconciling last year’s taxes or preparing for next year’s taxes – my primary service area.

If you have any questions about tax preparation or bookkeeping, please contact me.

*If your business is an S corporation or a C corporation, you should probably consider using an actual accountant. The complexity of those entities typically makes hiring a professional accountant a bargain.

Disclaimer

Information in the Tax Blog is current as of the day it was posted. Tax laws change frequently, and it is likely that as time passes acts of Government will make some of the older blog content out of date.

The information provided is for education purposes only. It is general in nature and may not pertain to the Reader's situation. Every taxpayer's circumstances are unique. Reader's are urged to do some research or talk to a tax professional before acting on any of the information posted in this blog.

Paul D. Allen is a proud member of the National Association of Enrolled Agents, the National Association of Tax Professionals the Financial Planning Association of Hampton Roads, the National Association of Personal Financial Advisors (NAPFA), and The Tidewater Real Estate Investors Group. You can read more about Paul's background here.

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Common Acronyms

ACTC - Additional Child Tax Credit

AGI - Adjusted Gross Income

AMT - Alternative Minimum Tax

APTC - Advanced Premium Tax Credit

AOC - American Opportunity Credit

CTC- Child Tax Credit

EIC - Earned Income Credit

HoH - Head of Household

LLC - Lifetime Learning Credit

MFJ - Married Filing Jointly

MFS - Married Filing Separately

MAGI - Modified Adjusted Gross Income

PIM - Plan of Intended Movement

PTC - Premium Tax Credit

QC - Qualifying Child

QHEE - Qualifying Higher Education Expenses

QR - Qualifying Relative

QW - Qualifying Widow(er)

 

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