It is easy for humans to move toward the extremes. The “spender” is often frivolous to the point of recklessness. The “saver” is often frugal to the point of greed. The friend who loves golf only thinks about the next tee time and the friend who loves work is bordering workaholism. Balance is a difficult goalpost to reach.

As you are reading this you probably fall into one of two categories on “the professional”. Either you are like me and have a tendency to try to do everything yourself or you do not want to deal with it and pay someone to handle it for you without question. Now more than ever, having balance in this decision and these advisor relationships is mandatory. First, the importance of the CPA. Next, the importance of the financial planner.

The Year of the CPA

Congress is making a mess of our country’s tax laws. That is not a partisan statement, it is the truth. If I were in their shoes in D.C., I would be making many of the same decisions. When you want to incentivize certain behaviors and punish others the most logical way to do that is through the tax code. When the economy slows, or a pandemic hits and you want to provide relief, the most logical way to do so is through the tax code. When you want to raise the minimum wage, or remove Obamacare, or {insert your chosen agenda here}, and you do not have the votes from the other side to actually do so, you can use a procedure called budget reconciliation and use the tax code to achieve your policy goals.

The House is set to vote tomorrow on a $1.9T COVID relief package. This comes ahead of expanded unemployment benefits set to expire March 14th, 2021. I am not going to tell you what all is in this bill, I am going to ask you to hire someone who will appropriately advise you on how this bill affects you.

Bill and Jill live in Texas. Due to the snowstorm and power outages, the IRS extended the tax deadline from 4/15 to 6/15 for all Texas residents. Bill usually handles their tax return on TurboTax and wants to file now to get his refund and get it over with. Jill is more of a procrastinator and thinks, “why do we not just want till early June to do that?”

Bill and Jill had combined salaries of $155,000 and Jill received unemployment benefits of $10,000 in 2020.  Bill and Jill had their first child, baby Will, at the end of 2020. If Bill hops on TurboTax and completes his return today his total income would be $165,000 and the total income tax for the year would be $20,424. Do you remember the economic impact payments (stimulus checks)? Bill and Jill received theirs but were entitled to a $500 stimulus check for baby Will in March of 2020 and another $600 stimulus check for baby Will in January of 2021 however, the IRS did not know about Will since he was born in 2020. In addition, this new bill calls for $1,400 checks for each Bill, Jill, and Will however, the checks quickly shrink for those who report above $150,000 on the most recent tax return. Bill can file today and get his refund sooner or they can wait till June at Jill’s suggestions, OR they can find a qualified CPA who might make the following recommendations.

A high-quality CPA would work up a draft of Bill and Jill’s tax return prior to April 15th (June 15th this year). The CPA would recognize that the $10,000 of unemployment benefits are not taxable (under this proposed bill) if total income is less than $150,000. The CPA begins to ask Bill and Jill if they have retirement accounts and what type of health insurance plan they have. The CPA explains that Bill and Jill can each contribute $6,000 to an IRA for 2020 by April 15th and they can take a tax deduction since their employers do not offer 401(k)s. This brings income down from $165,000 to $153,000. The CPA also explains that Bill and Jill can each contribute $3,550 to their HSAs they set up years ago but have not funded this year. Even better, they can put the $7,100 in the HSAs, take a full tax deduction, and reimburse themselves for the medical bills paid out of pocket for pregnancy and delivery and Will’s infant visits which have totaled over $7,100. These contributions bring their income down to $145,900 but since they are now below $150,000 the $10,000 of unemployment is no longer taxable so total income on the tax return is $135,900.

The above recommendations from the CPA save the family $6,402 in income tax alone! In addition, Bill and Jill will now qualify for the $500 and $600 stimulus payments for Will as a credit on the 2020 tax return increasing the tax savings to $7,502. Further, Bill, Jill, and Will now each qualify for the full $1,400 payment considered under this new bill adding another $4,200 of benefits to the CPA’s advice.

The Cost

I often hear of the high cost of a CPA driving people to TurboTax and H&R Block. I would imagine a quality CPA would not charge Bill and Jill over $1,200 depending on how organized and responsive they were. Comparing the $1,200 cost to the $11,702 of immediate tax savings plus increased benefits, I think the answer is clear.

The Warning

I am no longer in public accounting so this is not a sales pitch. In fact, here comes the warning. There is one extremely large assumption in the above example. The CPA actually takes the time to notice the income level, notice the unemployment benefits, and calls Bill and Jill to talk about retirement and HSA contribution eligibility. If this CPA would have just prepared the return with the information provided and charged $350 for their work, that is the worst $350 you ever spent. The true value of the CPA is the planning ideas, guidance, and conversations that happen after the tax return is prepared and throughout the year. You must be inquisitive and take on the responsibility of arriving at the best answer since most quality CPAs are going to have more work than they can handle in this environment of Congress changing tax laws every month. Be patient but be your own advocate to make sure you arrive at the best answer.