16

I am going to start working in a software development company in Colorado, United States very soon. I am also single. The tax system here seems pretty complex to understand as well.

Do employees in US generally hire a tax consultant to do your taxes to increase your tax deductions? What are some good tips to minimize the amount of income tax? This is the first time I'm working in the United States, so I'm a little bit confused on what the general strategy on managing your tax here.

Edit based on questions:

I will be a full-time employee and the salary will be paid monthly. I am also a non us-citizen and non-resident. I will be reporting my tax using W-2 form.

  • 2
    I've never hired a tax consultant, but I've always purchased a software package. For a period of years, my brokerage offered a coupon that offered a common tax prep, "midrange" license for free; I'm not as pleased now that I have to pay on the order of $80 per year, but I haven't changed my ways yet. I sense that most of the advertised tax prep services are essentially paying someone for handholding to use the software package for you. If you want true professional help, look for a CPA and expect to pay professional rates. Only you can decide how much is worth it. – user662852 Dec 21 '16 at 20:16
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    Are you a US citizen? Your comments imply that you are working in the US on a visa. This complicates your tax situation. You should consider hiring a pro who is familiar with the relevant tax treaties with your home country, and with taxes in your home country and the US. This way you can legally minimize/avoid double taxation. – Xalorous Dec 21 '16 at 20:24
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    Colorado has relatively low taxes compared to the rest of the states. – Ben Miller Dec 21 '16 at 20:29
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    I'm curious where you're from that US taxes seem abnormally high (since US taxes are comparitively low to most of the rest of the world...) – Joe Dec 21 '16 at 20:37
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    Will you be a full time employee with wages reported on a W-2 form, or will you be a contractor with wages reported on a 1099? – zeta-band Dec 21 '16 at 21:14
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75k is short of the 'highly compensated' category. Most US citizens in that pay range would consider paying someone to do their taxes as an unnecessary expense. Tax shelters usually don't come into play for this level of income. However, there are certain things which provide deductions.

Some things that make it better to pay someone:

  • rental income
  • income from multiple sources
  • unusual status such as yours, dealing with tax treaties between US and your home country.

Use the free online tax forms to sandbox your returns. If all you're concerned about is ensuring you pay your taxes correctly, this is the most cost efficient route.

If you want to minimize your tax burden, consult with a CPA. Be sure to get one who is familiar with resident aliens from your country and the relevant tax treaties.

The estimate you're looking at may be the withholding, of which you may be eligible for a refund for some part of that withholding.

Tax treaties likely make sure that you get credit on each side for the money paid in the other. For example, as a US citizen, if I go to Europe and work and pay taxes there, I can deduct the taxes paid in Europe from my tax burden in the US. If I've already paid more to the EU than I would have paid on the same amount earned in the US, then my tax burden in the US is zero. By the same token, if I have not paid up to my US burden, then I owe the balance to the US. But this is way better than paying taxes to your home country and to the host country where you earned the money.

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    " Be sure to get one who is familiar with resident aliens from your country and the relevant tax treaties." Amen to that. I did had a dual country return once and hired a professional. Fortunately I did some work up front and so I could tell that the guy had no clue what he was doing. After I called him out, he admitted as much and refunded his fees. – Hilmar Dec 21 '16 at 20:34
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    +1 for unusual status making paying a professional worthwhile. If the fees make having a professional do all of the work prohibitively or unreasonably expensive, a middle ground could be to pay a professional to locate the relevant information, which can then be used while preparing the tax paperwork. – a CVn Dec 21 '16 at 20:54
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    @MichaelKjörling or, pay the professional the first time then mimic that process in following years. – Xalorous Dec 21 '16 at 21:09
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    +1 for getting someone familiar with resident alien issues. I had to do that, but I was able to ask around and find someone who was familiar before consulting them. They've been very good, and I've stuck with them ever since. I believe it's worth it for my still slightly-unusual tax situation. – Peter K. Dec 21 '16 at 21:37
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    @Xalorous that's not necessarily a bad idea even if your "special circumstance" is as mundane as "got my first job". While in the latter case the defaults/auto-advice in tax prep software will probably be sufficient there's still a value in peace of mind and despite having done them for mumblemumble* years I still normally run into one or two questions that have me asking "does this apply to me?" and having a previous form where the same question applied is helpful as a sanity check. As a first timer it's much worse. – Dan Neely Dec 21 '16 at 22:55
9

There are few things going on here:

  1. Some people hire tax advisers some don't. It depends on your own preference and level of comfort with numbers.
  2. A really good alternative is tax software for example HRBlock or Turbo Tax. They take you to a very detailed questionnaire and do the tax return for you.
  3. I've used both and always came ahead with tax software. I had a fairly complicated year once and got a well recommended professional. He, indeed, got me a lower tax bill, but not enough to offset his fees, so in hindsight I would have been better off sticking with the software
  4. You are mixing various taxes: federal income tax, state income tax and social security. They also add sales tax, fuel tax and property tax in there, which is mixing totally different things that you can affect in very different ways.
  5. The federal and state tax are subject to deductions. If you buy a house or apartment, you can deduct interest, on the other hand you have to pay real estate taxes. This all depends heavily on your specific situation
  6. As complicated as it may seem, if you are a normal salaried employee, most of these things are outside of your control. You just have to pay them and there is not a lot you can do about it.
  7. US doesn't have a federal sales tax. Colorado has a 2.9% sales tax. Most countries in Europe have a build in sales tax of 20% that's automatically included in everything you buy. You need to factor this in when you do an tax comparison between countries.

My advice would be: with 75k income and a regular pay check there isn't a whole let you can do to adjust your tax burden. It's unlikely that any adviser will save enough money to warrant professional advice and the associated cost. Use off the shelf software for tax return and tax planning.

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    Many off-the-shelf software packages won't handle tax returns for a non-resident alien, or they'll charge extra higher rates for those forms. OP will want to shop around and confirm the software will handle his or her situation before paying for it. I know that my university had a contract with glaciertax.com to help their international students prepare their US taxes, so that's at least one option. – bjmc Dec 21 '16 at 23:24
2

It's going to depend entirely on your tax situation, its complexity, and your willingness/interest in dealing with tax filings. Personally I find that not only do I not enjoy dealing with figuring out my taxes, but I don't know even a fraction of the possible deductions available and all the clever ways to leverage them. Plus the tax code is changing constantly and staying on top of that is not something I'm ever going to attempt.

I am of the philosophy that it is my duty to pay only the absolute minimum tax legally required, and to utilize every possible exemption, deduction, credit, etc. that is available to me. Plus my business activities are a bit on the non-traditional side so it requires some unorthodox thinking at times. For me, a trained professional is the only way to go. What it costs me, I way more than make up in savings on my tax bill. I also go out of my way to never get a refund because if I get one, it just means I gave the government a free loan.

The last time I computed my own taxes (used TurboTax if memory serves) was I think in the late 90s.

1

Good professional tax advice is expensive.

If your situation is simple, then paying someone doesn't give you more than you could get from a simple software package. In this case, doing your own taxes will save you money this year, and also help you next year, as your situation grows steadily more complex. If you don't do your own taxes when you're single with a part time job, you'll never do it when you have a family, a full time job, a side business, and many deductions. Learning how to do your taxes over time, as your 'tax life' becomes complex, is a valuable skill.

If your situation is complex, you will need pay a lot to get it done correctly. Sometimes, that cost is worthwhile. At bare minimum, I would say 'attempt to do your taxes yourself, first'. This will force you to organize your files, making the administrative cost of doing your return lower (ie: you aren't paying your tax firm to sort your receipts, because you've already ordered them nicely with your own subtotals, everything perfectly stapled together).

If your situation is complex, and you find a place to get it done cheaply (think H&R Block), you will not be getting value for service. I am not saying a low-end tax firm will necessarily get things wrong, but if you don't have a qualified professional (read: university educated and designated) doing your return, the complexities can be ignored. Low-end tax firms typically hire seasonal staff, train them for 1-2 weeks, and mostly just show them how to enter tax slips into the same software you could buy yourself. If you underpay for professional services, you will pay the price, metaphorically speaking.

For your specific situation, I strongly recommend you have a professional service look at your returns, because you are a non-resident, meaning you likely need to file in your home country as well. Follow what they do with your return, and next year, see how much of it you can do yourself. Before you hire someone, get a fee quote, and shop around until you find someone you are comfortable with. $1k spent now could save you many headaches in the future.

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    I'd also add that using a professional doesn't really save you any time either. They ask you to provide just as much information as using any of the standard tax preparation software. In my experience, they don't sit down with you and go over things in detail either. You send them information, they fill things in and send you the returns to review and approve. – Eric Feb 6 '17 at 17:44
  • @Eric Fully agreed. In fact, if someone feels they are saving a significant amount of time by using a professional, it implies that perhaps they are not carefully reviewing the results and understanding the process. – Grade 'Eh' Bacon Feb 6 '17 at 19:05
0

I've been highly compensated for a while now, and I have never used a tax professional. My past complications include the year that my company was bought by a VC firm and my stock options and stock held were bought out to the tune of 5x my salary. And now I have two kids in college, with scholarships, and paying the remainder out of 529 accounts.

Usually, I don't even use tax software. My typical method is to use the online software -- like turbotax online -- and let it figure out where I am. Then I use the "Free File Fillable forms" online to actually complete the process. Search for "Free File Fillable Forms" -- it's not the same as using turbotax or TaxAct for free.

My suggestion to you: download the PDF form of 1040EZ and 1040A from the IRS. Print the EZ, and fill it out. This will give you a better feel for what exactly is going on. With your income, I don't think you can file the EZ, but it's a good way to get your feet wet.

The way income taxes work here in the US:

  • some of your income is not taxable. For example, if you pay for health insurance through your employer, or make 401k contributions, that premium is typically excluded from your income for purposes of computing income taxes
  • After making some additions (like bank interest, stock dividends) and subtractions (like for IRA contributions), the form tells you your "Adjusted Gross Income".
  • Then other income is excluded. There's the "Personal Exemption" (one per family member if you're not single), and the "Standard Deduction". If you own a home or contribute a lot to charity and churches, it might be better to itemize deductions than take the standard deduction.

According to the IRS, the Personal Exemption this year is worth $4,050, and the Standard Deduction $6,300, assuming you're single.

Lets assume that your salary will be in fact 75,000, and you don't pay for any benefits, but you do make a 401k contribution of 15% of your salary. Then your W-2 at the end of the year should tell you to put 63,750 in a particular box on your 1040 form. (63,750 is 85% of 75,000). Lets then assume 63,750 is your AGI after other additions and subtractions. 63,750 - 4,050 - 6,300 == 53,400.

The federal Tax system is graduated, meaning there are different ranges (brackets) with different percentages. The term tax people use for taxable income of 53,400 is "marginal tax rate"...so the last dollar they tax at 25%. Other dollars less. According to the IRS, if you're single, then on 53,400, you pay "$6,897.50 plus 25% of the amount over $50,400" Or 6897.50 + 750, or 7647.50.

Note this is only Federal Income Tax. You will also be paying Social Security and Medicare payroll Tax. And I'm guessing you'll also be paying colorado state income tax. Each state has its own forms and methods for figuring out the taxes and stuff.

By the way, when you start, you'll fill out a "W-4" form to "help" you figure out how much to withhold from every paycheck. (I find the W-4 is not helpful at all). Your company will withhold from your paycheck some mysterious amount, and the process of filling out your 1040A or 1040EZ or whatever will be, likely, to get the over-withheld amount back.

0

Whether you do decide to go with a tax advisor or not, be sure to do some research on your own. When we moved to the US about 5 years ago, I did find the taxes here pretty complicated and confusing.

I went ahead and read up all different tax documents and did some calculations of my own before hiring a CPA (at that point, I just wanted a second opinion to make sure I got the calculations right). However, when the office of the CPA was finished with my taxes, I found they had made a mistake! When I went back to their office to point it out, the lady just shrugged, corrected her numbers on the form and said "You seem to know a lot about this stuff already. Why are you here?" I swore to never use them again - not this particular CPA at least.

Now, I am not saying all CPAs are the same - some of them are pretty darn good at their job and know what they are doing. All I am saying is it helps to be prepared and know some basic stuff. Just don't go in all blind.

After all, they are also humans prone to mistakes and your taxes are your liability in the end.

My suggestion is to start with a good tool that supports tax filing for non-residents. Most of them provide a step-by-step QA based tool. As you go through the steps, Google each question you don't understand. It may take more time than hiring a tax advisor directly but in the end it will all be worth it.

-1

Good tax people are expensive. If you are comfortable with numbers and computers, you can do it better yourself.

  • This answer has been downvoted (likely due to its brevity), but I think it is correct. Good tax help is very, very expensive. Sometimes, that expense is worth it. – Grade 'Eh' Bacon Feb 6 '17 at 14:30
  • It goes beyond just being comfortable with numbers. You have to invest a fair amount of time in understanding the rules about how to fill the forms in. – Eric Feb 6 '17 at 17:56
  • Yes, I am the DV. (Well there are 2DV and 1 up) - This is comment quality. It doesn't really answer the question, in my opinion. The question itself is yes/no, but invites the reason why to use a pro or SW. – JoeTaxpayer Feb 8 '17 at 14:39

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