I can do my own taxes; why would I pay someone to do them for me?
Have you ever said this but then regretted it? Don’t worry, we get it. People start out thinking — how hard can it actually be — then end up tangled in forms, calculations, and deadlines, horrified they might have missed something that will result in a penalty.
Especially when they’re not even in the US and may have their residence country’s taxes to worry about as well.
But does it really pay off to pay someone to tackle this bureaucratic beast instead of you? Well, below, we outline the potential costs of doing the taxes yourself vs. working with a tax professional.
But first… Some factors that affect your US tax situation
Not every tax situation is equally complex. If you’re a full-time employee born and raised in the US working for a single employer—you might be able to file your taxes without complications or professional support.
But, if you’re in the US as a green card holder, have multiple streams of income, or live in a foreign country while still having your US citizenship, you might face a few hurdles before you submit your tax forms.
Here are some factors that may affect your filing status and impact how much you’ll pay:
- Residency status: US tax resident vs. non-resident alien: This status, determined by factors including days spent in the US, impacts which income is taxable and whether a tax treaty might apply.
- Income sources:
- Salary from a foreign employer: US taxes may apply, but the Foreign Earned Income Exclusion (FEIE) can reduce or eliminate them.
- Other types of foreign-earned income: Interest, dividends, or rental income earned abroad can be reduced based on foreign taxes paid with foreign tax credits.
- US-sourced income: Income from US sources (rental properties, investments) is generally fully taxable.
- Tax treaties: Agreements between the US and your host country can prevent double taxation and offer tax benefits specific to the income source.
- Time spent in the US: The number of days you spend in the US can affect your residency status and tax liability.
- Foreign Housing Exclusion: Qualifying expats may exclude a portion of their foreign housing costs from taxable income.
- Dependents: Your dependents’ location and filing status can impact your filing requirements and potential benefits.
Consideration #1: The value of your time
Time is one of the most valuable resources for both individuals and business owners. Efficient tax filing processes not only save money but also conserve time that can be better spent on growing your business or investing in your personal life.
Efficiency equals savings
Engaging with a tax professional streamlines the entire tax process. Experts equipped with deep knowledge and cutting-edge tools can handle complex tax situations swiftly and effectively. For instance, a tax advisor familiar with the latest regulations can quickly determine the best filing strategies, significantly cutting down the hours you would spend trying to navigate these on your own.
Reducing errors, maximizing time
Every error in tax filing can lead to a time-consuming and often costly resolution process. Professionals minimize these risks, ensuring that filings are correct the first time around. This precision not only avoids potential financial penalties but also spares you from the time lost in rectifying mistakes—time that could be redirected towards more productive activities.
Consideration #2: Maximizing your savings with strategic tax planning
Filing your taxes with the assistance of a seasoned tax professional can do more than save time — it can also result in significant financial savings. By employing a strategic approach to tax filing, a tax advisor can help you leverage every available deduction and credit, tailoring their advice to your specific financial situation.
Real-life benefits of strategic tax planning
Consider the experience of a small business owner who worked with Bright!Tax. In their case, comprehensive tax planning led to an astounding discovery: they were eligible for deductions that had previously been overlooked. By adjusting their approach to include these deductions, they saved over $15,000 in a single tax year.
This level of detailed attention is not just about compliance; it’s about optimizing your tax position to your best advantage. The right tax advisor looks beyond the mere preparation of returns and actively seeks ways to enhance your financial outcomes. Whether it’s through identifying lesser-known deductions, structuring business expenses efficiently, or planning for future tax implications, the benefits are tangible and measurable.
In this context, the cost of hiring a tax professional must be weighed against the potential savings. Not only can you avoid the pitfalls of incorrect or late filings, but you also position yourself to make informed decisions that could significantly reduce your tax liabilities over time.
Consideration #3: Avoiding penalties and the consequences of incorrect or late tax filings
While our intent isn’t to alarm you, being upfront about the realities of tax compliance is crucial. Missteps in filing your expat taxes, whether they involve inaccuracies or missed deadlines, can lead to significant penalties:
- Failure-to-file penalty: This penalty kicks in if you don’t file your tax return by the deadline (including extensions). It starts at 5% of your unpaid taxes for each month or partial month you’re late, with a maximum of 25%.
- Failure-to-pay penalty: If you owe taxes but don’t pay them on time, you’ll face an additional penalty of 0.5% of the unpaid amount for each month or partial month it remains unpaid, capped at 25%.
- Interest on unpaid taxes: The IRS charges interest on any unpaid taxes from the due date until they’re settled. This adds up quickly, further increasing your tax burden.
- Accuracy-related penalty: If the IRS finds a significant understatement of your tax liability on your return, you may face a 20% accuracy-related penalty. This applies if the understatement is due to negligence or intentional disregard of the rules.
But there are a few more consequences to keep in mind beyond penalties:
- Loss of benefits: Missing tax deadlines or filing incorrectly can disqualify you from claiming expat tax benefits such as the Foreign Earned Income Exclusion (FEIE) or the Foreign Housing Exclusion.
- Difficulties renewing your passport: In severe cases, the IRS can deny passport renewal or revoke existing passports until outstanding taxes are paid. (Note: The IRS will only influence passport matters if you owe more than $50,000 and are delinquent on paying them.)
- Criminal charges: In rare situations, if the IRS believes you deliberately evaded taxes, you could face criminal charges.
⚠️ Remember:
These are just some potential consequences. Their severity depends on the specifics of your situation—it’s not always the worst-case scenario, and there are filing extensions, too, to help you meet your obligations in time.
Here are two examples of different scenarios to help you better picture these potential fines:
Scenario 1: A married expat couple misses the filing deadline
Elisabeth and Christian Foreman are a married US citizen couple living and working in France. They mistakenly believe that since they are earning income abroad, they don’t need to file US taxes. Unfortunately, they miss the tax filing deadline (including extensions) by 8 months.
- Failure-to-file penalty: Let’s assume their unpaid taxes amount to $10,000. The penalty starts at 5% per month, capped at 25%. For 8 months, the penalty would be: 5% x $10,000 x 8 months = $4,000. However, the maximum penalty is 25%, so they would owe a maximum of $2,500 (5% x $10,000 x 5 months).
Additional consequences:
- Elisabeth and Christian will also owe interest on the unpaid taxes for the 8 months they were late.
- They may miss out on claiming expat tax benefits like the Foreign Earned Income Exclusion (FEIE) due to late filing.
Scenario 2: A single US resident files late with unpaid taxes
Sarah Jones is a single US citizen living and working in California. She freelances for several companies and struggles to keep track of her income and expenses. She files her tax return late (without an extension) and realizes she owes $2,000 in taxes but doesn’t have the funds readily available.
- Failure-to-file penalty: Since she filed within 60 days of the deadline, the penalty might be lower. Assuming a 5% penalty for the late filing, it would be $100 (5% x $2,000).
- Failure-to-pay penalty: If Sarah doesn’t pay the $2,000 owed within a reasonable timeframe, the failure-to-pay penalty kicks in. At 0.5% per month, the penalty would be $10 per month (0.5% x $2,000). The longer she waits, the higher the penalty accumulates.
Additional consequences:
- Sarah will accrue interest on the unpaid taxes from the due date until she settles them.
- Late filing and non-payment could flag her tax return for further scrutiny by the IRS.
So how much does it really cost to hire a tax professional to prepare your taxes?
Still wondering about the cost? While there’s an upfront fee, it’s generally far less than the potential penalties for incorrect filings. And as outlined, hiring a tax professional brings invaluable benefits:
- Peace of mind: Rest easy knowing your tax situation is handled correctly.
- Time savings: Reclaim your time to focus on what matters most to you.
- Future financial optimization: Receive expert advice on how to improve your tax situation in the future.
Depending on the state and experience of your chosen tax advisor, the prices range from around $100-$150 for forms and reports like FBAR and Schedules C, D, and E. For other forms, like 1040 or Schedule A, the price may reach several hundred dollars, usually around $300.
There are often online reports where you can check the average fees for federal tax returns for the year you’re interested in.
What may affect the final price?
- Complexity of your tax situation: The more complex your tax return (multiple income sources, self-employment, investments, etc.), the more time and effort the preparer will need, leading to a higher fee.
- Location: Tax preparers in major cities or high-cost-of-living areas typically charge more than those in rural areas.
- Tax preparer’s experience: Certified Public Accountants (CPAs) or Enrolled Agents with extensive experience may charge more than basic tax preparers.
- Pricing structure: Tax professionals may charge by the hour, per form, or offer a flat fee for specific tax packages.
Hiring a Bright!Tax professional
Hiring a tax professional not only helps avoid penalties but also enhances your financial efficiency.
Our clients often find that the strategic planning and detailed attention provided lead to significant savings that outweigh the cost of services. This approach ensures not just compliance but an optimized financial strategy, turning what seems like an expense into a wise investment in your financial well-being.
If you’re considering trusting the Bright!Tax team with your expat taxes, you can check out some of our services on our Fees page.