To DIY or not to DIY your taxes

Steven (00:05):

Hello everyone, and welcome to the next episode of the Retirement Tax Podcast, aka the least boring tax podcast you know. I am one of your hosts, Stephen Jarvis CPA, and with me as always, the illustrious Benjamin Brandt. Ben, welcome to the show.

Ben (00:20):

The least boring co-host, Benjamin Brandt. Happy to serve as always. 

Steven (00:23):

So Ben, today we wanna talk about a topic that I definitely get differing opinions from people on and sometimes pretty passionately. And that is this idea of should I be a DIY tax preparer?

Ben (00:36):

I can give you a solid, maybe you should. Now, I don’t wanna get the cart too far before the horse, but you know, if you total up all of Steven’s episodes individually, and all of my episodes individually and all of our co-hosted episodes individually, we are well north of 300 episodes. So the information is out there. We are fully in support of DIY investors. Do yourself, investors, or else, why would we create all these podcasts? We just know that because of the law of large numbers, there is a one fraction of one 10th of one centimeter of our listening audience that says, I like to learn about all this stuff, but at the end of the day, I want someone, a partner, a Sherpa, a shaman, I wanna hit the easy button and have an expert do it for me or with me.

(01:19):

And so that’s what we wanna talk about. So we have absolutely no beef with DIY do-it-yourself, investors, we love them. Steven and I do our own investments as well some of them in tandem lately. But we love DIY investors. So yes, you can do it yourself, but I will say, but if you want to do as good of a job as someone that you would hire and pay sometimes a significant fee to do, you should be willing as to do yourself investor, to do at least as much as that advisor would do. Now if you flip that on its ear, if you’re hiring an advisor, they better be able to do at least quite a bit more than you are willing to do for yourself. So I mean, that sort cuts both ways. So those are my thoughts on do yourself investors and, some about moving from a do yourself investor to hiring an advisor. You’ve gotta be willing to do as much as the advisor does if you wanna do it yourself. If you wanna hire an advisor, they darnt, sure better do a lot more than you did when you’re doing yourself. So more doesn’t necessarily mean more trading or anything, it’s just more accumulation and then distribution of knowledge.

Steven (02:21):

Ben, as I think about other things that I DIY in life, the other reason I wanted to talk about this on the podcast is that sometimes that kind of thought process changes over time. I spent most of my adult life as an adamant DIYer when it comes to doing things around my house. And we had a great time, my wife and I, learning to do all these things together. She’s actually phenomenally better at most of those things than I am. She tiled a bathroom, we’ve done all sorts of things together. But then this last year as we were DIYing our roof I just became pretty convinced that that was the last big DIY project for me, that just as I shift my focus to whether it’s work or honestly spending time with my kids, take doing all to travel, like there’s just other things I’d rather prioritize.

(03:04):

It’s not that I got to a point where I couldn’t DIY, just, I was kind of ready to let it go. So specifically to taxes, let’s talk about a few reasons that DIYing your taxes can potentially be a real positive. Cuz like you said, at the top, we have a lot of listeners who are very adamant DIYers and fully support that. I mean, some of the things that come to mind for me of pros of DIY-ing, specifically when it comes to taxes, it definitely is a cost savings. I mean, the accountant in me always brings that out of, Hey, I can go get, you know, spend 20 to 50 bucks on tax prep software that I can use that’s gonna get the job done. And that’s compared to hundreds, potentially thousands of dollars tax preparer might charge me depending on my situation to your point of spending the time that an advisor would spend learning these rules.

(03:53):

If you are going through and doing your own taxes every year, guaranteed, you understand taxes better than most people out there because you’re going through that process every year. Even if you have software to help you, you’re still learning a ton along the way. You’re understanding how these things work. You’re understanding what the foundation is around taxes. So when we talk about tax planning, you have a much better starting point of knowledge and understanding, and those can be huge. That’s not something that you’re gonna get to the same level if you’re having someone else do your taxes. Another one that comes to mind, especially this time of year, is the speed of your filing, which we’ve talked about on the podcast. There are no awards for being the first one to file your return, but if that’s important to you, if you just wanna get it done and out of the way, you are definitely gonna get it done faster than a paid professional will. And I’m even including myself in that. My clients that come to me as DIYers, that’s one of the things that we talk about of, hey, it’s gonna take a little bit longer for us to get the documents from you to get it drafted, to review that with you, as opposed to you sitting down on a weekend and just knocking it out yourself. So there definitely can be some upsides to just doing it yourself.

Ben (05:01):

Right? That’s correct. And if you are a taxpayer that has done your taxes well for the last decade, I would say, just to give you credit, you know, more about tax filing, tax prep and filing than a meaningful number of financial advisors as well. I mean, there are advisors that don’t focus on this. So yeah, you shouldn’t be paying for that you know, if your advisor’s not doing that for you. So yeah, a lot to think about there. So we’ve got cost savings, better tax education. The third point there is no one is ever going to care more about your situation than you do, right? I would say that’s a big plus of doing yourself investing.

Steven (05:33):

Yeah, absolutely, Ben. So let’s switch from, okay, here are some of the good things about doing your own taxes to, I wanna phrase this frame as signs that you might need to start considering working with a professional, because, Ben, to your point, for people who’ve been doing their taxes successfully for years, that might be a great option that you just can continue for the rest of your life. But there might be some things that come up along the way, and you’ll start noticing some themes here. These are areas that we typically talk about quite often on the podcast. And, as you wade into some of these, it might be time to look for professional help. So one of those things is, as you see forms start popping up in the tax software that are new to you, thankfully we don’t have brand new forms that are new to everybody every year.

(06:19):

But through, as you go through life, there might be things you haven’t seen before. Two, that immediately come to mind, especially for our people who are thinking long term. First one is form 8962. This isn’t a quiz, I’m gonna tell you what it’s for, but form 8962 is where we report or calculate the premium tax credit. So this is the tax credit that you get or that you’re potentially eligible for if you are getting insurance from the insurance marketplace. And this is a complicated calculation. There’s a bunch of different inputs that go into it but it’s potentially very lucrative. The last one I was looking at, and part of the reason this is on my list, the original credit calculated for this taxpayer was $11,000 of a tax credit, which is fantastic. Now, they had also decided to do a $50,000 Roth conversion in conjunction with their financial advisor.

(07:17):

And doing that $50,000 Roth conversion meant that they missed out on $3,500 of that premium tax credit. And so these things are very interrelated and they start moving together. And while that can still absolutely be the right decision, it gets more complicated to do other planning when we’ve got this form 8962, this premium tax credit involved. So if you’re dealing with a premium tax credit, if you’re getting insurance off of the marketplace, this is a time where you might take a step back and say, do I have someone help me to make sure I don’t get this wrong? Because what can add a lot of pain to this particular one, Ben, is that this is when you’re getting your insurance for the marketplace, you estimate at the beginning of the year, here’s what I think my income’s gonna be. And then you start getting those credits in advance. You get ’em throughout the year. So if you’ve misestimated your income or you have unexpected income, or you change your mind later in the year, you might have to pay back some of that credit you received in advance. So this can be a very complicated, and at times painful if we get it wrong area, that I would say this is an indication. It might be time to talk to a professional.

Ben (08:22):

I’ve had that happen to me when our kids were young and the business was new. I thought that I had, you know, paid all of my taxes up to that point using the calculations and things like that, but I had forgotten about where I thought my income would be versus where it ended up being. And it’s like, Hey, you know, you were getting a $300 a month subsidy that you didn’t and that we now know that you didn’t need. We need all that money tomorrow. So, and if you don’t see around all the corners, you know, there could be some unruly surprises.

Steven (08:50):

Another form that comes to mind that when you start seeing it might be time to say, Hey, do I need to engage with a professional? Is form 8606, which is where we report backdoor Roth contributions and Roth conversions. We talked a lot about it in the last episode, which I’d highly recommend you go back and listen to. Certainly an example that we’ll use in our webinar on May 24th at 9:00 AM Pacific that is going to be free and live for all of our audience members. You can go to retirementtaxpodcast.com to get registered there. These are definitely forms that seem visually are gonna help you understand a little bit better. But as you get into some of these forms that you’re not as familiar with, it might be time to ask for some help. The next thing that I would add to this list I would love for you to weigh in on as far as how you work with clients in identifying these and discussing them, is that there are certain life changes that impact your taxes. That might be times where you take a pause and say, okay, is it time to start working with a professional?

Ben (09:45):

Well, the first place I think I would go is just, what’s happening in between your ears? What’s happening in your head space? You’ve done it for a long time and you’re good at it. You’ve never gotten any nasty grams from the IRS, but one, you’re approaching retirement and you’re kind of going through this transition. And you might be wondering, is this the highest and best use of my newly found free time? Maybe you haven’t had free time in the last, you know, couple decades. Is this the best and highest use of my time? And two, is this an above the line or below the line activity for you? Above the line is energy generating activities below the liner energy sapping activities. And of course you’re retired, your financial independent, you’ve saved up all this money that we want to see you spend.

(10:27):

We want you to do more above the line activities than below the line activities. Don’t. If there’s something in your life that is easily able to be outsourced, maybe it’s someone else doing your taxes, maybe it’s someone else shoveling your driveway. Once you’re financially independent, you can make those decisions that you maybe couldn’t make a few years or a few decades sooner. So I would say analyze, are you looking forward to doing this? Or is this a thing that’s creeping closer and closer to the deadline because you kind of sort of don’t want to do it anymore? That’s a below the line activity. I would consider outsourcing that activity. So that’s the first thing I would look at. Where is your head space as we have this thing that’s waiting for us, this tax thing? 

Steven (11:04):

I think that’s a great framework to use. And I mean, some of the life changes you might be on the lookout for, that might cause you to think about that even a little bit harder that are gonna impact your taxes changes in your filing status, whether that’s getting married, getting divorced, becoming a widow. These can all affect what your filing status might be. It might have a big impact on your tax situation. Retiring, switching from somebody else takes my tax money and sends it to the IRS automatically from my paycheck every two weeks to, Hey, I have to be responsible for this now. And I might, I might have multiple sources of income. Might be a good time to say, should somebody be helping with me with this.

Ben (11:40):

When you’re working you know, the holding is just sort of done by magic. Now when you’re retired and you’re taking money out of your IRAs, you are responsible for creating that magic. So better figure out what that magic is and make sure it’s the right amount cuz they’ll come looking for it.

Steven (11:55):

Yeah, absolutely. They will couple of other changes in income that might even happen while you’re still working. Things that I see where you might want some additional help. Starting to get equity compensation, stock based compensation can get a little bit tricky when it comes to taxes. You might want someone you can talk to if you start getting into rental properties. There’s definitely a lot of rules there that you need to understand. Not just rules, but just kind of how the tax benefits really play out. Some people get this idea that having a rental property is nothing but a magical tax savings device, but the IRS does have some pretty restrictive rules on how you can recognize some of those tax losses. And then the other one I see, especially as people are getting close to and in retirement, is picking up some kind of side business, doing consulting, have some sort of side hustle that becomes more and more popular. And again, the taxes are just different in that situation we’ve got now we’ve gotta think about what are our business expenses, what are our deductions, are there other opportunities there? So those, those might all be situations where we say maybe it’s time to work with a tax professional.

Ben (12:58):

I would probably tack an additional one on this is more financial planning with some tax aspects than tax first. But on retirement, you know, it’s frequent that we’ll have a listener to the show and they’ll say, well, I retired six months ago. I know at the end of the year where you say we should do Roth conversions, how much should I do this year? Now without asking some questions, that might not be a great time to do Roth conversions your first year. When we think about, and the equity compensation and things like that got me thinking of this, maybe you are offered a buyout, a severance package. Maybe you are gonna get paid out all your vacation and sick leave. Maybe your stocks are gonna invest. This is something that Steven and I worked with and now we’ve got three months to sell your stocks.

(13:36):

You know, so that could be a big spike in your income. Probably not the best time to do Roth conversions if we have a big spike on our income in 2022, if we’re living off of those after tax savings in 2023. Now we have amazing opportunity with a whole bunch of after tax money to do some really cool things like Roth conversions, funding, donor advised funds, all kinds of neat things. So when I think about big life changes, if your income, your last year of retirement looks drastically different than the previous 10 years, there’s almost certainly gonna be some amazing planning opportunities in there that can help save us taxes for decades to come. So life changes, retirement, that would be some time that you might want to call a pro.

Steven (14:16):

Yeah, absolutely. Ben. Two more things that I’m gonna note on here of signs that might be time for professional help. One is, if the IRS becomes your pen pal, if you start getting love letters from the IRS it might be time to engage someone and get some help. Unfortunately, interacting with the IRS is not fun or simple. We’re dealing with a situation right now with a client who got a love letter from the IRS saying that they owed another $900,000 in taxes. And we fully expect that it’s gonna take multiple rounds of back and forth with the IRS to get that all cleared up. And then the last one I’ll throw out, and this will lead us right into the last section of our show is that you’re starting to have questions and you’d like someone besides Google to help you answer them, which of course you come to Ben and I for answers to those questions.

(15:02):

But for the most part, since we don’t know your specific situation, we’re talking in very broad terms. And so when you have a question like our listener today that we’ll speak to, this might be time to say, I need to be able to sit down with someone or get on a zoom call with someone and talk very specifically about my situation. So let’s switch to the listener question, Ben, which of course is brought to you by our webinar coming up on May 24th at 9:00 AM Pacific. You can register a retirementtaxpodcast.com to join in on that fun and spend some time live with Ben and I. But the listener question for today, Ben, is says, we have 1.2 million between Roth IRAs, taxable IRAs and 401K money. Congratulations, by the way. We also have over a hundred K.

Ben (15:46):

Congratulations, that’s amazing.

Steven (15:47):

We also have over a hundred K in brokerage. Should we focus on putting more in brokerage than retirement as we are getting closer to retirement?

Ben (15:53):

That’s an excellent question and congratulations to you. I think, you know, I’m a financial advisor, Steven is a CPA and it’s really easy to get blase about seeing big accomplishments in the form of numbers. Cause we look at numbers all day long, right? But I want to tell you that you saving up a significant amount of money over a million dollars, I don’t want it to just cross this podcast being unsaid. That is a tremendous financial accomplishment and you should feel fantastic about it. So you’ve done all the heavy lifting and Steven and I can potentially be of some help. I’ve kind of helping to put some of the pieces together to make your retirement even better. So you’re already off to an amazing start. So congratulations, the question, should we focus on putting more in brokerage than retirement?

(16:35):

As we’re getting closer to retirement? I’d have to look specifically at the numbers. But with 1.2 million, if you’ve got 1.2 million all in IRAs or all in Roths, you know, we wanna look at getting more equity. We wanna get more balance in what we have options to. So if we’re breaking those down into three levels, we’ve got our 401k, we can let that ride all the way until 72 and we don’t have to take any money out. And so that would be tax later. And of course it’s gonna be 70, 75 at some point in the future, but we don’t take money out until later. That’s tax deferred. We have tax now, which are our brokers accounts. So as a dividend pays, capital gains pays, we do buying and selling, right? We over to pay as you go account. And then the Roth IRA, we pay taxes going in.

(17:21):

So after that there’s some five year rolls that apply, but that’s tax never. So we have tax later pay as you go tax now essentially and tax never. So as long as we don’t have one of those buckets that’s significantly larger than the other, what we’ve given ourselves is some tax liquidity. We’ve given ourselves some options. So when I look at how we’re taking money out, every client is a little bit different, but I wanna spend more time on the IRA first because with the IRA, our hand is forced eventually with how much money has to come out of that. And that’s where we’re gonna do Roth conversions from as well. So I want most of my attention and my income coming from the traditional IRA 401k. Now that’s monthly income. Now, if we have lump sums, let’s say we’re a year and a half into retirement and we find the perfect vacation home, we’re tired of shoveling the driveways in, you know, the middle of the country.

(18:09):

We want to go to Florida and Steven said we paid less taxes anyway, so hey, pack up the suitcase, hun, we’re leaving. So, but I need a hundred thousand to put down on this condo that I want. Well now we have a choice. We can go Roth IRA that would, we wouldn’t pay any taxes on that. We could go brokerage account. We may or may not pay taxes on that or we could go regular IRA and we’ll definitely have to pay taxes on that. And so that’s, and I can’t tell you which is the right solution cuz we’d have to kind of run some figures and pull up our tax software and do some “what ifs”. But the benefit of it is we have the choice to do so. Now, if we had everything in the IRA, we simply wouldn’t have the choice.

(18:42):

So we’d have to, you know, if we have income-based health insurance that would potentially be out the window if we have, you know, accounts that are down, potentially out the window if we’ve done Roth conversions earlier in the year and then we need to take this big lump sum after that, we don’t have as many options. So having that tax now, tax later, tax never gives us all those options. I like options. I’d like flexibility because we can look at multiple scenarios with our advisors, with the tax software, arm ourselves with information and make good choices based on that. So I can’t tell you without knowing all the percentages, you should put X in here and Y in here. But I’m just trying to tell you how I look at it and how I think it’s beneficial for clients.

Steven (19:19):

Yeah, Ben, I think it’s an awesome framework for how people should be thinking about this. So, and back to our earlier point, when you’re getting to these questions where you would love somebody to get drilled down to your specific situation, that’s when it might be time to engage a professional. So Ben, as always, it’s such a pleasure being here on the show, talking about taxes, making taxes just a little bit less boring. For everyone listening, until next time, good luck out there. And remember to not let the tax man hit ya where the good Lords split ya.

Steven (disclaimer) (19:48):

Hi everyone. Quick reminder before you go. While Ben and I feel very strongly about the information we’re sharing on this podcast, it is for educational purposes only and should not be taken as specific tax, investment or legal advice. You need to make sure that you are working with a professional to evaluate how these concepts apply to your specific situation before you take action.