What is the best way to file? Using a professional tax preparer versus a third-party tax prep tool or the new free IRS Direct File online system?
GK: I’m laughing in my head because I’m very biased because you should always use a tax preparer.
But I think you have to be able to gauge your level of comfort with finances and taxes. If somebody says, “Look, I feel confident that my tax situation is relatively easy. I understand what my tax return needs to look like and I’m comfortable using the free IRS filing service [for federal taxes],” then I would say, please go ahead and do that if that’s what you want to do.
I am not opposed to free filing services and I believe some of the tax prep companies do that as well. But my concern is unless you really feel like your taxes are simple, which means “I received a W-2, I take a standard deduction. I’m single. Nobody claims me as a dependent and I don’t have anything else” — anything beyond that, I just feel like there are questions to be asked. Being penny wise and dollar foolish? If you go to a local tax preparation company and you spend, maybe a few hundred dollars, I think that’s money well spent. You’re getting somebody who knows what questions to ask because this is very important. And unless you know what questions to ask, you run the risk of preparing your tax return incorrectly.
[Note: Free federal filing is available IRS Direct File and some third-party tax preparation companies; visit California’s Franchise Tax Board for more information on filing your California state taxes.]
What tax myths should people watch out for?
GK: When you feel an ache in your body, do you just Google it and find out you’ve got some incurable disease? No, you go to the doctor. I think the things to watch for are the “too good to be true things” where people are basically saying flat-out wrong tax theories. Don’t listen to random websites and random TikTok videos.
It’s really these two broad groups. One is what we call the tax protester arguments, which isn't new; it’s just now on TikTok. People see more of it today, but tax protesters have been around for many, many years and the argument is that income tax is unconstitutional. They make some frivolous arguments, they don’t pay their taxes, and they always lose. The 16th Amendment of The Constitution says you have to pay federal income taxes. So, whenever you see a TikTok video that tells you to fill out your W-4 and claim exempt — beware — it’s completely false advice.
The other group are the people who say you can deduct all of your expenses, including your personal expenses. One example are the influencers who are saying that you can deduct your makeup, your clothing, and everything, and that’s just straight out false. It’s even people who say, “I went on a business trip and I took my family and I deducted the whole thing.” We need to remember that people who are employees cannot deduct their unreimbursed business expenses. There’s no ability to do that. I almost want to put that in capital letters with exclamation points.
Now, I’m not trying to say some personal type expenses can never be deducted. I’ll give you an example. Let’s say that you’re best friends with somebody who is self-employed and they run an advertising agency. They take you to lunch and you start with talking about business … maybe they ask you for business advice and then you catch up as old friends do. A case can be made that they could deduct that meal as a business expense because you spent time actually talking about business-related items. There is crossover [between personal and business expenses], but we have to be careful.
How should people get ready for next year?
GK: So, other than being organized, I want to center the conversation around financial literacy. I believe that taxes should be an afterthought. Say, I’m talking to somebody and we do their taxes and they owe $1,000. If they have the savings put away to pay for that, then they’re a little bit happier than the person who has zero savings.
We’re coming up to a new presidential election cycle and a lot of people will talk about this person’s tax proposals and that person’s tax proposals and everybody will get excited. But it’s a big ado about nothing. Typically there aren’t major law changes in the presidential election year. If you just take a step back, tax law is tax law; we may have [helpful] changes, some things may move the needle, some things don’t. But even when we have major tax law changes, I think the average U.S. person doesn’t feel a major difference. Preparing for next year, I would say, it’s not about preparing for taxes per se. It’s preparing for financial planning, which is a subset of financial literacy.
And by that, I mean, the more organized you are, the more you know where you’re spending your money. The more you know where your money is coming from, the more control you have over money in general, the better you’re able to budget all household expenses, which then includes tax.
This whole idea of financial literacy, knowing your finances, balancing your bank balances each month, having your expenses accounted for in some sort of systematic and organized way because then the tax discussion just becomes a subset of that.
Any final thoughts?
GK: The biggest issue is there’s so much misinformation and misunderstanding with income tax laws. There are different prices in the tax preparation community. I still think that finding a reputable tax advisor, whether that’s a CPA, whether that’s an enrolled agent, there’s people out there for everybody. And if somebody just says I want to do it by myself. Well, then I’d advise getting a good third-party tax processing software. And if your tax situation is more than just the basics, pay the extra cost for them to connect you to their live support people.