[Tax Season] Only 40% of Americans have enough money in their bank accounts to cover anticipated tax bills.

There are some key reasons why an individual would want to seek out a tax professional:

1. Complex situation: If your tax situation is complex, such as moving from one state to another, having multiple sources of income, owning rental properties, or lacking the knowledge and confidence of how to file your taxes, you should contact a tax professional.
2. Accuracy: If you are ... unsure about the tax laws and regulations, an accountant may be able to deploy various tax-saving strategies that reduce your liability by more than they are charging. The penalty for negligence or disregard of the rules and regulations is 20% of the portion of the underpayment. Penalty for underpayment due to fraud is 75% of the underpayment.
3. Time savings: How much is your time worth? For a business owner or successful professional, time is one of their most valuable non-renewable resources. They may choose to hire a professional because the accountant’s cost is lower than the value they put on their hourly rate. However, I would argue that most people who use a tax professional wouldn’t fall into this category and instead use a combination of time savings and accuracy.

I recommend establishing an LLC for legal reasons immediately when starting a business. However, a separate business entity may not be necessary for self-employed individuals or gig workers if their annual income is expected to be below the $400 tax filing requirement. LLC entities also provide legal protection that also should be considered.

Numerous factors outside of salary can impact whether someone receives or owes money when filing taxes. The first is above-the-line deductions such as business expenses, moving expenses, and Health Savings Account contributions. Then there are a litany of below-the-line deductions such as excessive medical bills, mortgage interest, donations to charity, and many more. In essence, the government provides credits and deductions for certain activities. An individual could be doing these activities and not claiming the benefit. That is why tax professionals can save their clients so much money.

Most individuals can use tax software to file their taxes. A person may want to seek a professional in complicated situations such as selling inherited property, exercising stock options, or operating a small business.

Taxable salary is affected by how much is contributed to tax deferred accounts such as traditional retirement accounts, health savings accounts (HSA), and flexible spending accounts. Contributions can reduce the current year's tax liability. HSA distributions used for qualified medical expenses are not taxed, so they are very tax efficient. Tax credits have a big impact.

A tax credit is a dollar-for-dollar reduction. Refundable credits can reduce tax liability to below zero. (Your tax liability could be eliminated, and you could also get money back.) The Earned Income Credit is a refundable credit that offers big benefits to modest income earners with qualifying children. The Child Tax Credit and the American Opportunity [Tax] Credit are partially refundable, and the income limit phaseout is relatively high. Examples of other popular credits include the [Child and] Dependent Care Credit, Saver's Credit, and the Lifetime Learning Credit.

Certainly products like TurboTax and H&R; Block’s tax programs make filing on your own more user friendly. As a rule of thumb, if you’re not itemizing and you only have W-2 income and interest income, and maybe even some retirement income forms and/or a brokerage statement, the tax programs can guide you through your return pretty easily and efficiently.

So when should you consider a paid preparer? Consider if the past year resulted in life changes like getting married or divorced, welcoming a child or taking on a second job. These life events may require use of outside help (as well as a review of your tax withholding may be in order). Other situations conducive to considering a paid preparer include if you are making estimated tax payments due to non-wage income, and/or have income from sources such as unemployment income, self-employment earnings, annuity income, or even digital assets.

Finally, if you are filing taxes in multiple states or have moved, it may make sense to ask for help in that particular year.

The smart-aleck answer is that it’s comparable to the formula to losing weight — you lose weight when you expend more calories than you take in! In the tax world, you get a bigger refund when you get more money withheld on the front end or if you make too big of an estimated payment on unearned income.

Usually employees receive bigger refunds, because IRS tax withholding tables for employers are set up to try to protect employees from being under-withheld. On the other hand, retirees, the self-employed, and individuals with successful investment portfolios typically have much smaller refunds since they have to proactively work much harder through estimated payment requirements (or pension withholding) and amounts can fluctuate significantly from year to year. Also, in the case of many retirees, the tax on social security and retirement income may be more minimal, and so the potential for refunds is then lower as well!

Opening an LLC for most self-employed individuals would, in my opinion, not be a good first step since every state has its own unique LLC provisions.

The sole proprietorship route is automatic for a self-employed individual since he or she must prepare a Schedule C as part of the Form 1040. A helpful recommendation to a self-employed person is that he/she document expenses incurred while conducting their "gig" or business. Another hint is to inform the self-employed individual about the federal self-employment tax which is paid in addition to the regular income tax.

When the individual has more than a W-2 and standard deduction.

LLCs are important when the individual wants some sort of liability protection, in addition to general business liability insurance. Otherwise, having a sole proprietorship is sufficient.

Lots of items. For example, the tax liability is reduced by tax credits such as the tuition credit, child and dependent care credit, etc. The tax liability is increased by, for example, self-employment tax, alternative minimum tax, etc.