Financial Advisers, and How to Handle Taxes

I want to be clear on this point, because I believe that some of my previous posts may have been a little misleading: CPA’s will save you  money.  When I say that 80% of the US doesn’t need financial advisers, what I mean to say is that 80% of the US doesn’t need someone selling them products and raking in commissions.  Your CPA should be an objective and independent service provider.  Don’t confuse a CPA with a commission driven salesman.  However, the moment that your CPA tries to sell you an investment product, you should immediately ask yourself: what’s in it for him?

Some of you will want to rely solely on a key income threshold to determine whether or not you should consult with a CPA.  Although it may seem counter intuitive, low income individuals may have more of a reason to at least briefly consult with a CPA.  Why?  Because most tax breaks are centered around low income households, and if you don’t have a comprehensive understanding of how the rules work, you may be missing out on literally thousands of dollars. 

Case #1: The Recently Married Student/Graduate

Only five minutes ago I prepared a tax estimate for my best friend who in 2006 graduated from college, and married his beautiful wife (still student throughout 2006).  Although their taxable income was only $16,000, they qualified for $2,800 in tax credits (Lifetime Learning education credits and the Saver’s credit for contributions to a retirement account).  Note: tax credits are not the same as tax deductions.  Whereas a deduction only serves to lower your taxable income, a credit is actually a dollar for dollar reduction in the amount of tax that you are required to pay.

Of course, since the newly married couple are friends of  mine, they were not charged for my advice, or return preparation time.  However, if I were to have charged them, the total bill would have amounted to $200 ($50 for the initial consultation, and $150 for the return preparation).  In other words, you must think of professional fees paid as investments: you pay $200 and earn $2,800.  That is a 1,400% return.

The Moral:  There is only so much you can do on your own (even with the help of the internet), because you can only do research once you’ve identified the issue.  A quick $50 consultation will be the best money you spend all year.  In that quick session, a CPA should be able to identify all of the issues and tax savings opportunities relevant to your situation.  If from there you choose to do your own research, then so be it, but make sure that you allow a professional to at least identify your issues.