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Hey there, fellow real estate investors, FIRE enthusiasts, and tax aficionados! Welcome to "Real Estate is Taxing" – your go-to weekly podcast for all things real estate taxes, hosted by Natalie Kolodij, EA- Real Estate Tax Strategist and dry humor extraordinaire.
Each week, we're breaking down complex tax topics into bite-sized, understandable explanations, with no regard for how many obscure references it takes to get there.
Speaker: Welcome to Real Estate is Taxing,
where we talk about all things real estate
tax and break down complex concepts into
understandable, entertaining tax topics.
My name is Natalie Kalady, I'm
your host, and I am so excited
that you've decided to join me.
Microphone (Shure MV7): How would you
feel if you were told that the price
to complete your taxes this year?
Was going to be just shy of $30,000.
What if that also didn't
include an additional $8,500
fee for the upfront tax plan.
This was the Facebook thread I
stumbled across today and it aligned
perfectly with today's topic.
I want to chat with you guys about
a very common question that comes
up and that is how much should I
be paying to have my taxes done?
Now, when it comes to this question,
there is no one size fits all answer.
And that's why the responses, when
this is asked in a public forum.
Are rightfully all over the place.
Some of you guys heard that introduction.
And do you thought 30,000
to have my taxes done?
Holy shit.
What did that person possibly
have on their tax return?
They must've had some crazy corporation,
maybe some international items.
This must be a huge company.
There are other people who
heard that number and thought.
Well, yeah, I would happily pay that
if it saved me more than it costs me.
And every opinion in between.
And this is always what comes up when
this is asked in a Facebook group.
When it comes to tax return
pricing, there are an infinite
number of things that go into this.
But we are going to focus on three
core things that are tying into the
current pricing market for tax services.
We are going to talk about the
difference between a tax return
preparation and tax planning.
These are apples and oranges.
And a lot of people intermix the two.
We also have.
A huge shortage.
Of professionals in the industry right
now, and it is only getting worse.
And based on the laws
of supply and demand.
Pricing is going to be impacted.
And lastly, all of the individual
circumstances that go into what
your tax return is going to cost.
Now we don't have enough time
on this episode to cover each
and every little thing that can
change your tax returns pricing.
But we are going to hit on
some of the big picture things.
That people often don't consider or
common misconceptions when it comes
to what impacts pricing and why.
So let's get into things.
Microphone (Shure MV7)-3: Now at
the beginning of the episode, I
mentioned someone who was quoted
around $35,000 by a tax firm.
And this was for their tax returns
and also some tax planning, but we
don't really know the details of that.
All we really had from the post
was that this person had four
rentals and two small businesses.
That could mean almost anything and we're
missing a whole lot of other information.
Microphone (Shure MV7)-5: So let's
fill in some of those blanks.
Tax preparation.
It's typically going to be a lower
cost service that occurs once a year.
This is a transactional event.
This is you gathering all of
your financial documents for
the year and sending them, or
bringing them into a professional.
Who is going to enter them in to
the tax forms, applying the tax code
and what they know to be accurate.
And submitting it to
the IRS on your behalf.
It is very transactional.
It is a snapshot of your
situation from the past year.
There are only a few things
that can be done after the fact
to change your tax position.
A large part of this is already done.
What's happened, has happened.
And attacks prepare is just
reporting the end result.
So this isn't a service that is
necessarily going to save you any money.
That is going to apply
additional strategies that
might relate to your situation.
This isn't a service that is
necessarily going to put a ton of time.
Into the big picture of what you have
going on and what could change going
forward and provide advice, et cetera.
Tax planning.
Tends to be on the very opposite end.
Of the spectrum.
Tax planning and strategy.
Tends to be a more expensive service and
it is being proactive instead of reactive.
Instead of this being a
one-time transactional event.
Where you work with a professional.
Where you hand your documents off.
This is an ongoing relationship
with a professional.
This is working with
someone throughout the year.
This is being able to ask
those tax questions of an
expert throughout the year.
This is being able to have suggestions
made to you when you are thinking about
selling a business or buying a property
or any of these big decisions that can
have a tax impact and receiving in depth
feedback on the differences of outcome.
Tax planning and strategy
is designed to look forward.
To save you money on taxes.
But that might not be the only
thing that's important to you.
It might be important.
For you to qualify for a specific loan
in the next year, because you're trying
to buy a business or buy a property.
It might be important to you
to plan your income levels.
To be able to qualify for
certain credits or subsidies.
Or things of that nature.
All of these forward looking
items are what tax planning
and strategy will address.
So let's think back to that
beginning of the episode.
$35,000.
We don't know.
What her exact details
were, but $8,500 of that.
Was for an initial tax plan.
If someone has multiple properties
and multiple businesses.
I can think of at least 25 different
things that could potentially
be applied just off the cuff.
To put them in a better position tax wise.
If those items that can be
applied to one of their multiple
businesses or properties.
Saved them.
A total of $20,000 in tax next year.
Would it be worth $8,500 to
have received that advice?
Most people would say yes.
And that's the difference where if they
had gone to a very transactional tax
firm, Those things wouldn't have ever
been investigated in most situations.
Onto the next current impact.
Of tax return pricing.
Everyone is getting the hell out of
this industry and COVID, didn't help it.
I graduated college almost 10 years ago.
To the day it was August of 2014.
And at the time I graduated, I
was told that something like 70%.
Of currently practicing CPAs were
set to retire in the next 10 years.
We are there.
Well, we are at that.
10-year mark.
And during COVID.
We had all of these new requirements.
We had cares act.
We had all of these laws
that were coming out.
With tax implications and credits and
all of these things we had to learn.
As they were happening
pretty much like mid taxis.
And you were learning new
things to apply to the PAX
returns sitting in front of you.
And there were some people who
might've stayed in and worked in the
industry for another five or 10 years.
And they were just close
enough to retirement that they
said, nevermind not worth it.
And they bounced.
Okay.
We are having people exit the tax
industry at a much quicker rate.
Then we have people coming into it.
There was a recent study
that said that 75%.
Of the CPA workforce reached
retirement age in 2020.
Between 2020 and 2022.
Over 300,000 accountants and
auditors left third jobs.
That 300,000 accountant figure came
from a wall street journal article that
recapped that as being a 17% decline of.
Accountants in the workforce
during that two year span.
There's a number of reasons
that came into play here.
the accounting industry doesn't line
up with a lot of tech industry jobs.
For salaries versus amount
of education required.
In addition to that tax law has
gotten increasingly complex.
And technology has added more
requirements that we need to maintain.
To keep data secure.
And when firms are having a data breach.
Most of the time, it forces
them to close as a result.
The financial outcome of affirm
having data breached is tremendous.
And most firms can't survive that.
So the cost to maintain a
secure environment and to
operate in compliant manners.
Is getting more and more expensive.
And the tax code is getting
more and more complicated.
And it's just becoming harder.
To operate in the industry.
These factors in conjunction
with the fact that we have not
made tax season sound sexy.
At all.
Is also keeping people
out of the industry.
So between those similar years,
which part of this is due to COVID.
But between 2019 and 2020, there
was less than 73,000 people who
received a bachelor's of accounting
or a master's of accounting.
And that was the lowest
figure in a decade.
So again, I'm sure part
of that relates to COVID.
But some of those other
factors come into play as well.
In alignment with the reduction of
people getting degrees in accounting.
During those same years,
there was a 17% decrease.
In CPA exam candidates.
So fewer and fewer people are
coming into this industry.
And.
75% of practicing people are
ready to get out of this industry.
So what this means.
Is that pricing is going to
reflect someone's demand.
So right now in accounting, it
has been incredibly hard to hire
adequate professionals in tax.
That's because anyone
who's really good at this.
Has basically either.
Started their own practice or.
They are demanding such a substantial
rate because they know there is scarcity.
And so these costs are
going to apply to you guys.
Let's pull it back to the
start of the episode again.
$35,000 for an annual cost for tax work.
Does that person need
services that cost $35,000.
Is there a chance that
their circumstances are.
Simple enough that they could
go somewhere and have it done
for $3,500 or maybe even $350.
Microphone (Shure MV7)-10: Absolutely.
But here's what it comes down to.
If there are becoming fewer
and fewer tax professionals.
Those who are in that average band.
Is going to get skewed down as well.
So the amount of practicing
tax professionals who are
just pretty good at this.
The total number is
going to become smaller.
If you want someone who is by
definition above average or
absolutely kick ass at this.
The number that fit into that category.
Is also going to be much smaller.
So could that person
with the $35,000 quote.
Could they have a simple enough situation
to go somewhere else and pay much less.
Absolutely.
But regardless of how complicated
someone's situation is.
If the person they want to work
with is someone who is capable of
doing much more complicated work.
That level of work is
the value of their time.
There is no reason for them to
substitute your easier work in for work.
They could charge three times as
much for when they have a demand
for them and their skillset for that
higher quality more complicated work.
So this doesn't mean you
can't work with that person.
Who has that incredible skillset?
It just means.
That you are paying for their level
of expertise, regardless of if you
need every bit of it at this point.
And that is what is currently happening.
With the supply and demand
issue in accounting.
So if you want someone very good.
And do you want someone with that skill?
Expect to pay more for it.
And that's what it comes down to
this isn't going to get much better.
The last thing that comes
into play with pricing.
Is someone's literal circumstances.
This is why a post of people discussing
what they pay for their CPA or
their EA or their tax professional.
Isn't really of much value.
Because while there may be
some similarities between
people's tax circumstances.
Without knowing.
An infinite number of additional facts.
We have no idea.
If what they're paying
is a good deal or not.
Every now and then I come across a post.
Where people are talking about
what they pay for their taxes,
what they have included, et cetera.
And there's always someone who's so cocky.
To say, oh, I only pay my accountant
a dollar 50 to do my taxes and
I have 46 rental properties.
And the only thing I can
think is, oh God, what?
I wouldn't pay to see that tax return.
Because there's no way in hell that
if you are going to someone who is
charging a fraction, Of what the
majority of other people are charging.
That they are also miraculously
better than all of those other people.
Maybe it exists, but most of the time
you are getting what you pay for.
Microphone (Shure MV7)-11: When
it comes to certain explanations
related to tax returns.
What the taxpayer hears and
what the accountant hears.
Are completely different things.
So I'm going to provide you
guys with some translations.
First up is my business.
Isn't very big.
It shouldn't be too complicated.
The taxpayer is under the
assumption that, because this
isn't a high revenue business.
And they don't have a bunch of
complexity around having multiple
locations and employees and millions
of dollars of revenue, et cetera.
That this should make for an easy.
Quick and cheap tax return filing.
The tax professional hears.
I'm going to hand you a pile of
disorganized numbers and half of
them, I will not have receipts for.
Because a business is small
or quote, not complicated.
Doesn't mean it is going to
be any easier to prepare.
And oftentimes it's actually worse
to prepare because it's not yet
being treated like a business.
And there aren't reliable reports
there isn't money being put into
maintaining the information needed.
To complete an accurate let
alone strategic tax return.
Whether you are running.
A business that does $10,000 a year.
Or $10 million a year.
The amount of work.
Is the same.
Having there be more or less
zeros attached to each number
that goes each place on the form.
Does not change the amount of work
that goes into doing the tax return.
That was an extreme.
But at the end of the day, just
because your business only made
a couple thousand dollars instead
of a couple of hundred thousand.
It doesn't mean it should necessarily
cost less to do the taxes for it's
likely going to be more work than a
well-organized structured business.
Microphone (Shure MV7)-12: The next
phrase that requires translation.
Is going to be.
My wife and I just have some
LLCs for our rental properties.
To the taxpayer.
This says we're married.
We set up some LLCs together.
Shouldn't be anything special.
It's just us.
And all it has is a rental
property in each one.
This shouldn't be complicated.
This shouldn't cost much to do.
What a tax professional hears.
Is that there is a good chance.
Both spouse and taxpayer
are the owners of that LLC.
And in the majority of situations
that creates a partnership tax return.
With a entirely separate 10 65 tax filing.
In addition to that since the taxpayer
likely didn't know, that was the case.
There was not books and records maintained
appropriately for a partnership.
And in addition to that, partnerships
have much more information
that go into the reporting.
So while the taxpayer says,
everyone says to set up LLCs, This
shouldn't have been a big deal.
We didn't move any money
around nothing crazy happened.
We just structured things
for legal protection.
The tax professional looks at this.
And their first concern is that these are
multi-member LLC creating partnerships.
And often at the advice
of the general internet.
People feel that every single
rental should be in its own LLC.
And now what we have is 10 different
partnership tax return filings.
Do you think that taxpayer was
expecting to pay, to have 11 tax
returns filed that year 10 of which
need to have essentially books created
for them as part of the process?
Absolutely not.
But that is the situation
that was created.
So the phrasing of just have
some LLCs or only set up a couple
LLCs or any variation there of.
Can have a dramatic impact on the cost
of your tax services for the year.
Microphone (Shure MV7)-13: Another
phrase that requires translation between
the general populace and those of us
who are on the dark side of things.
Microphone (Shure MV7)-16: My taxes
are pretty much the same as last year.
I just invested in a few
syndications and REITs.
So that I could help diversify
my investments a little bit.
What the tax professional hears.
Is I now have 30 new state tax filings
that I was not expecting to have,
and I'm not expecting to pay for.
What many people do not consider
when investing in a syndication,
especially a well-diversified
one across multiple states.
Is that if you happen to earn above the
minimum filing requirement for a state
in which this partnership holds real
estate now you have to file a state
tax return for that state as well.
I have seen a K one.
Where the taxpayer earned maybe
a few hundred dollars from
that investment for the year.
And it resulted in nine different
state tax returns being filed.
Most firms charge a few hundred
dollars per additional state.
So.
Be mindful.
That what you might consider
a simple investment.
Could result in multiple
additional filing requirements.
Microphone (Shure MV7)-17: So all
of this information, just to say.
That what you should pay
to have your taxes done.
Can be literally any amount.
If you are paying substantially
less than the average.
I would consider that a red flag.
If you are paying substantially
more than the average.
But it is working with someone who has
the knowledge and credentials to give
you a level of expertise and quality and
planning that you feel comfortable with.
Then I would consider that a green flag.
Even if it's much more
than your friends pay.
There are national surveys
that you can look at for this.
Right in front of me is the Nat P.
2023 average tax fee survey.
And you can look at this online.
For 2023, the average base
price for a 10 40 tax return.
With $250, 2 48.
That didn't include if it
had extra schedules on it.
So if we had a schedule a and
someone itemized, or a schedule
C for a business, et cetera,
Microphone (Shure MV7)-18: This
study also shows a breakdown
of what type of designation
people held, who were surveyed.
And also the years in the
business, and this is interesting.
So 32% of those who were surveyed were AFS
P, which is annual filing season program.
It's a voluntary program for
those who are non-licensed.
To take continuing education year
to year to meet a requirement.
Of the remaining categories of everyone
else here, we had 9% of other 10%
of people had no designation at all.
Meaning these are people who have no
type of credential have taken no classes.
Maybe, maybe not.
So keep in mind that these
people who are not licensed are
included in that average fee.
Of that $248.
The survey had 17% of participants
who are CPAs, 43% who were EAs.
So even in a survey combined with those
who have federal licenses or CPA licenses,
And those who have no designation at all.
248 was the average across
all of them combined.
Looking at the years in business.
This is interesting because it
holds true to everything else
that was being said earlier.
About those leaving the
industry versus coming in.
Those who are surveyed, who have been
doing this for less than one year, 0%.
People who have been in the tax
business for one to five years.
5%.
Six to 10 years.
6%.
At the other end of the scale.
Of those who have done
this 16 to 20 years.
That is 12%.
So that one category is as much as
the people who have been doing this.
In one to five years and
six to 10 years combined.
The highest category by far.
21 plus years in the tax business.
67% of people surveyed.
Again, 67% have been
doing this over 20 years.
They've worked a full career already.
They're at retirement age.
5% have only been in this
industry for under five years.
The scales are going to keep shifting
to a smaller and smaller availability.
Of skilled tax professionals.
A closing thought.
That ties everything we've
talked about together.
Not all, but many of those
professionals who have been in this
industry for 20 plus years, Have
pricing models that are going to be.
A little bit on the lower end.
Because they've worked with a lot
of these clients for 20 years.
So if they started off charging
someone $30 to do a tax return 20
years ago, They're not going to
jump that fee up to $30,000 now.
So many people who are
leaving the industry.
Had a lower pricing model, then those
who are coming into the industry.
UH inflation.
Everything costs more.
In addition to that,
what we are also seeing.
Is that every firm I know right now, Is
having a hard time keeping up with demand.
That's because as these older
prepares retire, And as they have
these large client bases, which
normally you would sell your firm,
you would transition someone who you
trained up to be partner, et cetera.
The difference between a firm that is
still operating in a manner to which
they had been operating 30 years ago.
Versus a new from today.
I can be very different.
So it's not as desirable for someone who
is five to 10 years into the industry.
To buy a firm.
Where the clients are
used to working on paper.
They're used to coming in and
working in person with someone.
And they're used to paying a
minimal fee because they've been
with this person for decades.
For someone who is new in the industry.
Where a lot of things are paperless.
Now there's a lot more technology.
There's a lot more automation.
It's a fully different.
Dynamic.
So the transition.
Of those people retiring
out of the industry.
Also means that in addition to those
of you who are currently just looking
for a tax professional, There are
thousands of people every year.
Where they're professional
they've had for decades.
Is retired.
And now they're also
looking for someone new.
So I hope this episode helped you
come to the realization that what
you should pay for your taxes.
Is a completely arbitrary question and
it doesn't directly relate to any amount.
There is no correct amount
to be paying for your taxes.
There is a concerningly low amount,
and there's a ridiculously high amount.
If it's really not something you need.
But keep in mind, you are paying
someone for their experience.
Not for the service you specifically need.
So as always, I hope that you took
away some value from this episode.
If you have any thoughts
on this, any comments?
Feel free to find me on social
media and share those thoughts.
Come find me on Facebook.
Join the Facebook groups linked
below, or find me on Instagram.
I'm R E tax strategist on most platforms.
And as always, I will talk
to you guys next week.
Mhm.