CPA Talk: Part 2

We’re at it again with Part 2 of our CPA Talk with Cory W. Johnson. Cory provided such immense insight and knowledge on the nuances of taxes and how to be proactive with your financial situation to avoid some of the common pitfalls. If you haven’t had a chance to check it out feel free to take a look.

CPA Talk: Part.1

Now onto CPA Talk: Part 2

1)      How do you go about finding a quality Tax Professional?

One, they need to be transparent. If you ask a question they need to be able to provide an answer for you; and not just an answer where you are left sitting like “Okay” or “Yeah” as opposed to actually understanding your tax information. (As a Tax Professional) I should be able to give you: numbers, comparisons, and help you see what the difference is. For instance, if you owe in one year and you are trying to figure out why you owe; most of the time the answers to that can be found in the W-4 form and how many allowances a person has put down.

Second, all tax professional are given a Preparer Tax Identification Number (PTIN). This has to be applied for and given from the IRS. This is the IRS’s way of saying they have checked out this persons’ background to an extent, and they know that if this person files a tax return that they will put their PTIN number on the return. This allows the IRS to associate the return with the Professional with that PTIN number, and in the case something goes wrong or has to be investigated the IRS knows who the preparer was.

Third, is the Electronic Filing Identification number (EFIN). The PTIN number allows a professional/firm to prepare your taxes, the EFIN number allows the firm to process your tax return on their behalf. The only thing that cannot be done by a preparer/firm is to issue a refund to you individually. Some banks charge on refunds done through direct deposit.

Fourth, have someone who is reachable. Not only should they be able to answer your questions but, they also should be able to: What you did on your part, what it resulted in, and what can be done to get your financial situation to where you would like it to be?

2)      Every time I start a new job I have to fill out a W-4, how can I understand what I should put?

The W-4 has been a tax form that hasn’t been updated in decades and as a tax professional, I tell my clients and others not to use those directions. At the same time, the IRS published a Circular E for Employers which states the proper amount of tax to be withheld from an employee’s paycheck based on their W-4, but that information isn’t updated by the employer on an annual basis. The number of allowances that you put on Line 5 is tricky and backwards at the same time. It goes as follows

0 - 100% of gross wages subjected to tax withholding

1 - low % of gross wages subjected to tax withholding

2 - lower % of gross wages subjected to tax withholding

3 - much lower % gross wages subjected to tax withholding

The allowance number is multiplied by an amount determined by the IRS and then subtracted from your gross wages to calculate the amount of tax to be withheld. It’s complicated to understand, therefore, I tell everyone to put ‘0’ allowances on Line 5 because you have a better chance at not owing if your entire gross wages are subjected to tax withholding.

3)      Are there dynamic changes that happen when you move to a new state with regards to your taxes?

Most states are similar in tax laws and codes and each have their nuances. In terms of similarities, all your income is going to be subject to taxes across all states. Your state return more than likely will mirror your federal return in that, it should have the same taxable income amount no matter if you were in Virginia or Florida.

The nuances come into play in that; your state may recognize standard, itemized, or both for deductions. The second is tax rate; this does vary state-by-state.  

Special circumstances apply for some states based on a common scenario specific to their area. An example of one is the reciprocal tax agreement. This is an agreement between two states that allows residents of one state to request exemption from tax withholding in the other (reciprocal) state. This can save you the trouble getting taxed twice.

For example, let's say you live in Maryland and work in Virginia – two states with a reciprocal agreement. You can ask your employer to stop withholding Virginia taxes. If your employer stops withholding Virginia taxes, you would only have to file a Maryland return. The same would be for the reverse.

However, not every state has a reciprocity agreement. For example, New York does not have a reciprocal agreement with any state. Therefore, you cannot have your taxes withheld in your work state and would have to file a return for your work/where you company is based state and residential state.

This interview highlights not only the importance of being aware your financial circumstances when it comes to your taxes; I believe it also points out the vast amount of knowledge and insight it takes to be well versed in taxes and have the ability to ensure that you are maximizing your tax return. Thankfully, there are professionals where this is their passion and their craft. As people with the abundance of day to day activities and growing within our own professions it can be difficult to understand and keep up with the various changes in each state and the impact of changes we go through personally (new job, relocation, purchasing a home, etc.)

We hope that CPA Talk(s): Part 1 & 2 have helped you understand your financial situation better and things to be mindful of as your proceed in every tax season from here on out. Let us know your thoughts and questions around what we asked Cory. For the folks in the DMV (D.C., Maryland, and Virginia for the folks not familiar) feel free to check out Cory’s firm for your tax needs and financial planning.

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For everyone else, we hope after reading these pieces that you feel empowered and informed to handle your tax filing better; whether that is selecting a quality tax professional or filing them yourself.