Tax Strategies

The Cost

The single biggest reason most people consider preparing their tax return themselves (just like with home improvements, painting a room, or fixing the plumbing) is the cost savings.

This does not mean that preparing taxes yourself is free though, as many people choose software to assist throughout the process. You will find a large number of software providers to choose from, like TurboTax and H&R Block, just to name a few. The costs of this software range from as little as $29 to as much as $299 depending upon the amount of guidance provided during the preparation process. So if you’re aiming for help to identify deductions or remembering all the different types of income that need to be reported, it could cost you.

Perhaps the most costly factor that most people forget about though, is the time it will take to prepare your tax return yourself. The time necessary will depending upon your level of knowledge of tax law and the complexity of your financial situation. And to give you an idea, according to the IRS, the average person will take 11 hours to prepare their 2019 tax return. [footnote]

 

2020 Tax Law

With the Tax Cuts and Jobs Act (TCJA) of 2018, you might want to reconsider the help of a professional to prepare your 2020 tax return, even if you consider yourself capable of preparing your own tax returns. This new TCJA tax law made sweeping changes to the tax code when it went into effect in 2018, which had significant effect for professional athletes and their tax returns.

Our tax department at Athletes Financial has noticed a marked difference in the effects of this new tax law on our clients effective tax rates. For example, the TCJA limits the state and local tax deduction (SALT) to $10,000 per calendar year. So if you are paying more than $10,000 in taxes to the states where you played plus your real estate taxes, your deductions will be significantly limited compared to before. Additionally, Personal exemptions have been eliminated from the tax code as well. [footnote]

NOTE: You might be better off hiring a professional to make sure your return is right if you think you might be better off itemizing your deductions despite the provisions of the TCJA.

 

How to Get Started

The best place to get started to prepare your own tax returns is to download the relevant forms and instructions from the IRS.

By figuring out whether you need to file Form 1040 as an Individual, or Form 1120 as a Corporation, or Form 1065 as a Partnership, or Form 990 as a Foundation, is the first crucial step. Each of these IRS forms comes with its own separate set of instructions that will walk you through Who Should File and all other relevant details.

Once you know which form(s) to file, you can begin the process of narrowing down your tax software choices that will be best for you.

TIP: Don’t forget to get tax returns from your resident state’s tax department website, as well as each state where you played this season, while you’re online.

 

Tax Preparation Software

Your best option might be to use tax preparation software. It’s the next best thing to having a tax professional sitting next to you as you work.

 

There are several options for you to choose from, including free and paid software. Some of the more well-known software providers include TurboTax and H&R Block. Prices range from free to $100 or more for premium versions, or if you have more complex tax filings.

 

Free internet programs are also available through the IRS Free File Alliance, but this program is limited to individuals whose incomes were $72,000 or less in the 2020 tax year. This may work if you were in minor league baseball, NFL practice squad, or golfer with earnings below this threshold. But for just about every other athlete, your income will put these options out of reach.

NOTE: You can expect these tax preparation softwares to be up to speed with the TCJA changes and will provide the updated 1040 form.

 

If You Hire a Tax Professional

The majority of professional athletes decide it would be best for them to hire an accountant or tax professional to prepare their tax returns because they want to be sure that it’s done right. They don’t want to hear from the IRS or any of the multiple states after they file tax returns.

Be sure to find a tax professional with extensive knowledge and experience working with professional athletes like you. Some accountants are general practitioners. Athletes Financial specializes in helping athletes like you who are required to file multiple state tax returns, have state residency issues, wages and self-employment income, and so much more. We know your tax situation, because we have prepared thousands of tax returns just like yours for over 20 years.

 

The Final Decision

Keep in mind that you will still have work to do yourself even if you hire a professional.

In many cases, it will be up to you to gather all your tax-related documents. The sooner you start, the more information you’ll have at your fingertips to make the best decision.

You’ll want to save time for reviewing your tax return for accuracy when it’s completed regardless of which route you take. A professional will certify accuracy and can help you down the road in a tax audit, but your tax return is only as good as the information you provide.

Additionally, you will want to keep copies of your tax return and related supporting documents for at least three years just in case any of the tax agencies have any questions for you.