Tax Preparation Fees: What You Need to Know
Tax season is here, and many individuals find themselves surrounded by receipts and financial documents, trying to understand how much they will owe. One common question is whether the costs incurred to prepare taxes are deductible. Understanding tax preparation fees and their deductibility is essential for those looking to minimize tax liabilities.
Tax preparation fees are the costs associated with preparing and filing tax returns. These fees can be incurred by hiring a tax professional, using tax preparation software, or purchasing materials for independent preparation. For instance, hiring a tax professional involves paying for their time and expertise. Alternatively, tax preparation software guides users through the filing process at a set fee. These expenses are common for individuals and business owners who want to ensure accurate filings.
For personal tax returns, tax preparation fees are not deductible for the tax years 2018 through 2025. This change resulted from the Tax Cuts and Jobs Act (TCJA), signed into law in December 2017, which aimed to simplify the tax code by increasing the standard deduction and removing many itemized deductions, including those for personal tax preparation costs. Business owners, however, can still claim these costs as a business expense. For example, a small business owner preparing their company’s tax return can still include these costs as a deductible business expense.
Self-employed individuals can deduct tax preparation fees as a business expense. If someone runs their own business, the costs incurred to prepare taxes can reduce taxable income. For instance, a freelance graphic designer or an independent contractor can deduct fees paid for tax preparation services or software. This exemption is crucial for self-employed individuals, helping manage the financial burden of tax preparation.
Several groups can deduct tax preparation fees as a business expense. These include sole proprietors, business owners running partnerships or LLCs, farmers filing Schedule F, and individuals with rental properties or royalties reported on Schedule E. Independent contractors and statutory employees, such as full-time commissioned salespeople or life insurance agents, can also claim this deduction. For example, a DoorDash driver classified as an independent contractor can deduct the costs associated with preparing their tax returns as part of their business expenses.
Various expenses connected to tax preparation can be deductible. These include purchasing tax preparation software, fees for e-filing, and charges for hiring an accountant or tax professional. Additional costs, such as legal fees or audit representation related to the business, can also be included. Only the portion of these fees related to the business side of taxes is deductible. For example, the cost of preparing a business’s Schedule C is deductible, but fees for preparing personal tax returns are not.
Consulting a tax expert can help determine which expenses related to tax preparation are deductible for specific situations. Tax experts provide guidance and ensure all available deductions are taken advantage of. They can also assist in keeping track of business expenses throughout the year, making the process of claiming deductions easier when filing taxes.
For more information on how tax experts can help with tax preparation and deductions, contact a professional today.
