Essential tax questions to ask your accountant
Key Takeaways
A tax planner offers more in-depth services than a tax-preparer and can offer money-saving guidance.
Ask the right questions to find the right tax planner for you.
At the minimum, inquire about their scope of work, necessary records, and your retirement accounts.
Many doctors choose to fly solo for tax preparation, and that’s fine. But a good CPA will earn their pay in the deductions and tax-savings strategies that they find for you—ones you might otherwise miss. If you choose to work with a CPA, here are the most important questions you should ask.
Are you a tax planner, or a tax preparer?
Full disclosure: If you ask your CPA this question directly, they might be offended. The answer might take some digging on your part.
Ask yourself if you feel like your CPA is striving to save you money, or do you get the sense they’re just pushing paper? This is an important distinction, one that your CPA might not understand or be forthcoming about. A tax preparer essentially does the paperwork on your behalf. They’re not looking to save you money. They’re looking to get the job done with no mistakes.
A tax planner takes a more proactive approach. They hunt for deductions and complete tax projections on your behalf. Tax planners look at your financial situation and offer guidance for the year ahead.
If it sounds like you’ve been working with a tax preparer, it might be time to find a new CPA. According to Ben Utley, Certified Financial Planner and President of Physician Family Financial Advisors, you want a CPA who:
Calls you back quickly
Uses modern technology
Can answer the following without looking up the answers: How does the new 199A work? Are taxable bonds or municipal bonds better for my taxes and why? How does the alternative minimum tax work? How does the backdoor Roth IRA strategy work? What happens if you make a mistake on my return?
Am I contributing the right amount to retirement accounts?
Certain retirement accounts, such as 401(k)s and 403(b)s, are tax-advantaged, meaning you can deduct contributions from your income, up to a specific amount. For fiscal-year 2022, for example, the IRS set the maximum for these plans at $20,500.[]
What’s ‘the right amount?’ The answer depends on a delicate balancing act that a skilled accountant can perform. For example, while you may be lowering your taxable income now by maxing out your retirement contributions, you will have to pay taxes on your withdrawals later in retirement. This can be problematic for three reasons:
One, you’ll have a fixed income in retirement. Having a lower tax burden is advantageous.
Two, historically, taxes tend to trend upward, not downward.
Three, historically, inflation tends to trend upward, not downward. The buying power of your future retirement dollars is on a downward trajectory.
A good CPA can calculate appropriate contributions, as well as explore other retirement account options.
Do I have the right types of retirement accounts?
As you might surmise from the previous question, certain retirement accounts have certain advantages. Most of you likely have a 401(k) and a 403(b) from your employer. The tax advantage of those is lowering your taxable income. Many also come with an employer match, as an added bonus.
Things get a bit trickier for self-employed doctors, or doctors who do contract work on a 1099 basis. This might include locums work, part-time urgent care work, or consulting.
In this case, a good accountant might point you toward a Roth IRA. With a Roth IRA, you pay your taxes, make your contribution, and then your money grows tax-free. You can then withdraw your money after age 59.5 without penalties and without paying taxes.
A skilled CPA may also suggest what’s informally known as a backdoor Roth IRA, if you’re a high-earning physician. This process converts a traditional IRA, which is fed with pre-tax contributions, into a Roth IRA. Backdoor Roths may help you legally avoid certain income limits.
What records should I retain?
Again, this is where a good CPA will clarify things for you. The answer to this question depends on your employment situation, secondary sources of income, your number of dependents, qualifying deductions, and health coverage—just to name a few things!
Most employed physicians will need to have the following:
Your (and if you’re filing jointly) and your spouse’s W-2 forms and tax ID/social security numbers.
Dependent information: I.E.: Dates of birth, social security numbers, etc.
Any 1099 forms for contract work
Amount paid in student loan interest
Documentation of pre-tax contributions to retirement accounts
Documentation of mortgage and property tax payments
Profit and loss documentation for any individual investment accounts
Things get more complicated for self-employed physicians, or practice-owning physicians. Your accountant most likely will want to see the following:
Access to your ledger and/or bookkeeping software
Profit and loss statements
Documentation of all business-related expenses
Documentation for work-related mileage
When you receive any of these critical documents, scan them and save the files in a secure location, then retain the hard copy in a secure, preferably fireproof location. It pays to be proactive here.
Your CPA will get specific about what they need, and how long you need to retain the records. Ask your CPA what they require at the beginning of the new tax year, then stay organized. Remember, clear, meticulous documentation goes a long way in avoiding audits.
What this means for you
These are just some of the questions you should be asking your CPA, but they are, in our opinion, some of the most important ones as they can save you money and aggravation. Don’t make tax season more aggravating than it has to be, and don’t pay more than you have to.