Tax time can bring out the worst in people, and not necessarily because of what they may end up owing the IRS. The process of preparing a return is intimidating. All those forms. All that math. Check your facts and figures, then check them again.
Why not have a professional prepare your taxes for you? Just pass the job on to someone who won’t get a headache from tackling it. Sure, it costs money, but that doesn’t have to be a deterrent because the cost of hiring a tax professional to prepare your tax return is deductible.
What Can You Deduct?
Your deduction isn’t limited to costs associated with having a tax professional prepare your return. You can also deduct expenses like the purchase of tax software, tax planning advice, and representation in a tax-related audit, collections and/or criminal investigations. Business taxpayers can deduct their professional tax preparation fees as a business expense.
Basically, if it has to do with taxes and you pay some to help you, it’s often deductible. Here are a few examples:
- Fees for preparing a tax return
- Advice on tax planning
- Legal counsel on tax issues
- Legal fees for representation in a criminal tax matter
- Fees for representation in a tax audit
- Fees for representation on tax collections
- The cost of tax preparation software
- The cost of tax-related books and other publications
When and How to Deduct Tax Preparation Fees
Assuming you hired a professional for other reasons and you’re preparing your own return, you have to know how to claim the deduction.
Fees for professional tax advice must be deducted in the same year the fee is paid. If you hire someone for advice related to your 2016 return in 2017, you would claim the deduction on your 2017 return if that’s when you paid him.
Here’s what the IRS says about how to take the deduction in Publication 529, Miscellaneous Deductions:
“Deduct expenses of preparing tax schedules relating to profit or loss from business (Schedule C or C-EZ), rentals or royalties (Schedule E), or farm income and expenses (Schedule F) on the appropriate schedule. Deduct expenses of preparing the remainder of the return on Schedule A (Form 1040), line 22, or Form 1040NR, Schedule A, line 8.”
In other words, professional tax preparation fees can be deducted in the following places on a personal return:
- Tax preparation fees related to preparing a sole proprietor’s Schedule C are deducted on Schedule C on the line for legal and professional fees.
- Tax preparation fees related to preparing Schedule E for rental income and expenses are deducted on Schedule E on the line for legal and professional fees.
- Tax preparation fees related to preparing Schedule F for farm income and expenses are deducted on Schedule F under the section for other expenses.
- Tax preparations fees related to other parts of the tax return are deducted on Schedule A on line 22 as a miscellaneous itemized deduction.
About That Miscellaneous Itemized Deduction
You must itemize to claim this deduction if you’re not involved in farming, you’re not a landlord or you’re not self-employed, so you have a choice to make.
You can either itemize or claim the standard deduction for your filing status but you can’t do both.
Let’s assume you’re unmarried and have no dependents. You would file as a single taxpayer so you would be entitled to a standard deduction of $6,350 in 2017. You’d therefore need $6,351 in itemized deductions to justify the work involved, and even then it might not be worth it for that one extra dollar.
The Process and Rules of Itemizing
Itemizing means tallying up all your deductible expenses for the tax year. Your tax preparation fees are just one of them. You can also deduct things like charitable contributions, mortgage interest, medical expenses, some work-related expenses and state and local taxes you’ve paid. When you add all this up, the total should exceed your standard deduction.
Otherwise, you’ll end up paying the IRS more than you have to.
It seems simple enough on the surface, but now it gets a bit more complicated. You can’t deduct 100 percent of all these expenses. Some are subject to adjusted gross income thresholds. For example, you can only deduct the portion of your medical and dental expenses that exceed 10 percent of your AGI. So if you have $5,000 in qualifying expenses and your adjusted gross income is $52,500, 10 percent of your AGI comes out to $5,250. You wouldn’t be able to claim these expenses because 10 percent of your AGI is more.
And here’s another wrinkle: Your tax fees are also subject to a threshold, in this case 2 percent of your AGI. You can only deduct the portion of your miscellaneous expenses that exceed this amount. Of course, you can add in any other miscellaneous deductions you might have, but the same rule applies. In this case, you’d need more than $1,050 in overall miscellaneous deductions so you could claim the balance over this amount. If you don’t have any other miscellaneous deductions, that’s a lot of tax preparation fees or software.
In the end, you may have to pay someone just to figure out if it’s worth it to claim the deduction.