When Shouldn’t I File My Own Taxes?
If you have questions like “is life insurance taxable” or “do I need to save my invoices,” then you should probably hire a professional. Here are some telltale signs you need an accountant.
You Don’t Want To Spend 7-20 Hours Gathering Records
Employees may only need 7 hours to gather their records, but if you’re self-employed, you’ll have to spend at least 20 hours preparing for your taxes. If that sounds like too much, then hire a bookkeeper. If you want to do your own taxes for another tax year, start fresh in January.
You Can’t Navigate Self-Employment Tax Forms
Do you know what a Form 1099-NEC is or why it’s used? Can you tell the difference between a W-2 and a W-4? If the answer is no, you may need extra help. If you submit the wrong tax forms to the IRS, you could get audited, which is a pain if you don’t have your records up-to-date.
You Don’t Want To Track Deductions Or Quarterly Taxes
If you’re at the end of the tax year and you haven’t organised your deductions, you should hire a bookkeeper to do it for you. While you can use a quarterly tax calculator to quickly estimate your quarterly taxes if you’re self-employed, you won’t be able to track your deductions so easily.
How Can I Do My Taxes Without A Professional Accountant?
While the process of filing your taxes isn’t simple, it doesn’t have to be complicated. There are 7 steps you can take to file your taxes, and you can simplify the process by using tax software.
1. Prepare Your Tax File
Freelancers should keep a folder on their desktops where their deductions, invoices, and other necessary documents are saved. Employees can do the same for their deductions. If you keep all of your documents in one place, you can easily refer to them during tax season.
2. Gather Necessary Forms
Collecting your tax documents is the first step to tax compliance. For example, employees need Form W-4, while self-employed individuals need to use Schedule C and Form 1040-ES. You may receive Form 1099-NEC if you’re a freelancer, but you don’t need to send it to the IRS.
3. File Online (If Possible)
If you’re not sure how to file your taxes digitally, don’t worry. The IRS has plenty of free tax filing tools you can use online. You’ll also receive your refund faster if you sign up for a direct deposit. Some people will qualify for free tax return preparations if they meet specific requirements.
4. Report Your Benefits
If you claimed disability, unemployment, or any other benefit during your tax year, you have to declare them on your federal tax return. But be careful. Some benefits aren’t taxable. For example, Economic Impact Payments aren’t taxable and shouldn’t be treated as income.
5. Claim Your Credits
Employees aren’t eligible for as many deductions or credits as their self-employed counterparts. However, employees can claim Child Tax Credit and Earned Income Tax Credit. Freelancers can claim things like rent, business expenses, marketing materials, utilities, and internet costs.
6. Know Your Rights
As a taxpayer, you’re entitled to certain rights that are outlined in the “Taxpayer Bill of Rights.” For example, you have the right to know what you need to do to file your taxes and pay only the amount of tax legally due. Study your rights to know if the IRS is taxing your income fairly.
7. Ask For Assistance
Tax season can be stressful, especially if you don’t know what you’re doing. It’s okay to ask for additional assistance if you have a question. There are plenty of resources available online that can help you, but if you think you’ve bitten off more than you can chew, hire an accountant.
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To move abroad and leave the US can be a life-changing decision and is of course a big step. To make this step happen, a lot of things need to be considered before you are actually settled in your host country. How should you apply for a visa? What about the visas of your family? How can you apply for rental property abroad? A lot of things need to be arranged locally, but for US citizens there is an extra requirement to consider which is often forgotten by US expats. This could result in an annoying administrative burden and a risk of being audited by the IRS. This article outlines why you should file, what to consider and how to file.
Specific IRS forms for Americans abroad
When you as a US citizen live abroad, all your foreign income should be reported on your form 1040 as usual. As you most likely also pay tax locally, form 1116 and form 2555 make it possible to reduce your US tax bill by claiming the Foreign Tax Credit or the Foreign Earned Income Exclusion.
Different tax terminology
The tax terminology is very different from how it is in the US. Form 1116 and form 2555 use Foreign Tax Credit, Foreign Earned Income Exclusion, Foreign Housing Exclusion, Physical Presence tests and many more. This does not make it easy to easily understand your return.
Tax software not supporting the expat forms
Most tax software providers do not support these specific forms as they are not specifically designed for the expat market, but more for the US domestic market. Even if the forms are supported, it is still difficult to complete as the tax terminology is different. However, there is some DIY US expat tax software designed specifically for the US expat market that can aid in quickly e-filing US tax returns with the IRS platform.
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Tax professionals not familiar with form 1116 and 2555
There is a good chance that your trusted tax professional is not familiar with the forms 1116 and form 2555 as they are specifically for Americans abroad.
How to file from abroad
These are the options you have as a US expat:
- Do it yourself and fill the forms 1116 and/or 2555 yourself.
- Use DIY software.
- Hire a US expat tax professional. This can easily cost you $500 or even more.
Conclusion
Clearly, you need to file your US taxes when living abroad. This is often forgotten and could result in unwanted hassle which you really just don’t want. A lot of Americans will owe no taxes, but still have the obligation to file. Just file, it is not that difficult to get your US taxes filed!
Also expect that these forms will be new to you and that different terminology will be used from that which you are used to. These new forms 1116 and form 2555 are often not supported by tax software and you should check whether your trusted tax professional is able to complete these forms.
When you have plans to move abroad, just research the options to make sure you pick the right fit to file your US taxes.
To hear about tax practices in the UK, this month we spoke with Rebecca Potton - a Chartered Tax Advisor with 15 years’ experience and Head of the Private Client department at Myers Clark, Chartered Accountants.
Established in 1912, Myers Clark is one of the largest independent firms of chartered accountants in Watford, UK. Myers Clark offers a broad range of services for thousands of businesses and individuals, as well as national and local organisations in the Not-For-Profit sector.
Can you tell FM a little about the services you provide and the kind of clients you deal with?
We are able to provide a full range of services including accounts, tax returns, tax planning, trustee and executorship. I also act as an expert witness often in cases of matrimonial disputes.
Myers Clark is very fortunate to have a varied client base, comprising sole-traders and partnerships to high net-worth individuals and top executives.
What are the most common tax planning solutions that you offer to your clients?
Assuming the role of a trusted advisor and professional friend, our clients seek our guidance on trusts, inheritance tax and estate planning, together with the routine compliance matters such as self-assessment tax returns. Many clients utilise the expertise of our department to arrange their affairs tax efficiently whilst also maintaining their current standard of living.
We frequently act on behalf of a director both in an individual and business capacity, which affords us a unique perspective from which to advise. Such cases require us to consider a mutually beneficial tax solution for the business and the individual without incurring increased tax liability to either party.
What would you say are the specific challenges of assisting clients with tax-related matters?
Many of our clients seek tax planning because they wish to pass their wealth to their families, however in most cases they wish to do so without comprising their current standard of living. Similarly, there are a number of clients who prepare their finances to facilitate a comfortable retirement whilst achieving the greatest tax efficiency. We ensure that tax is not the sole motivation behind our advice, it needs to be the most effective solution for that client’s individual needs.
Do you have any examples?
A client, let’s call her Alison, was widowed in her early sixties and was worried about her inheritance tax liability because she was still earning a significant salary. Not unlike many people in the South East, Alison’s home fully utilised the inheritance tax reliefs available. Alison also had a stock market portfolio and an investment property, which was becoming cumbersome to manage. When organising her affairs, Alison was clear that she did not want to distribute her assets to her children immediately, but wanted to prepare effectively.
As a result of the planning, Alison was able to sell her rental property and decided to invest in products which gave her sufficient income to maintain her lifestyle, retained her capital and reduced her exposure to inheritance tax.
Another example is Bill, who sought advice on an exit strategy from his trading company to minimise this tax liability and whilst enabling him to access sufficient funds to spend his retirement sailing. Like many individuals, Bill had not worried about inheritance tax nor had he made sufficient provisions for his retirement. An issue for Bill, which is also faced by many other clients, is that the value of his shares in his company were exempt from inheritance tax by virtue of business property relief. However, as soon as he retired and sold his shares, Bill would have a cash asset liable to inheritance tax, in his case generating a tax liability of approximately £300,000.
Our priority for Bill was to ensure he would have enough capital to buy his boat and built this into the planning, which when completed saw Bill with a pension providing him with income for his retirement and an inheritance tax saving of £60,000.
As a thought leader, how are you ensuring that clients are engaged and informed about the development of new tax regulations or permissible strategies in the UK?
We pride ourselves on being the go-to accountants for many businesses and individuals in Watford, and have established a reputation of excellence, integrity and innovation. Our specialists are trusted by clients to provide accurate information about tax regulations. We provide our clients with the opportunity to actively engage with this information through a calendar of seminars and events, as well as targeted communications.
Can you tell FM about your involvement in the community?
Myers Clark has a CSR policy which includes charity fundraising events, being involved in corporate charity partner networks and establishing partnerships with local schools. This year we are introducing a new programme of work experience and summer job placements to local students in Year 10, Sixth Form and University Students.
In terms of market competition, where does Myers Clark stand nationally and what are its goals moving forward?
Myers Clark is one of the largest independent firms of Chartered Accountants in Watford with a well-established reputation for highly skilled specialists. Our goal moving forward is to continue to provide support to individuals and businesses navigating the complex maze of tax and facilitating tax planning to ensure a profitable future.
