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.