Can you Deduct Tax Preparation Fees from Your Taxes?
For many people, tax season feels like a time of either relief or increased anxiety. Many people who do not want to file their own taxes choose to hire a tax professional for help. This service is not inexpensive. A lot of taxpayers ask if they may reduce their taxable income by claiming tax preparation fees. The situation is not simple, as a number of factors must be taken into account. We will explain in this article the situations in which tax preparation fees can be deducted and the steps you should take to get the most out of your tax benefits.
Understanding Tax Preparation Fees
Tax preparation fees represent what you pay a professional to handle your tax preparation and submission. How much you pay for tax preparation services depends on the complexity of your returns, the qualifications of your professional, and the services they render.
Some common services include:
- Handling the preparation of your individual tax return.
- Providing tax planning advice.
- Assisting you in case the IRS questions your tax return.
- Helping you resolve tax-related issues.
Because tax preparation fees may become sizeable, understanding if they are deductible can help mitigate the cost.
How to Determine If Your Tax Preparation Fees Are Tax Deductible
In the past, the cost of preparing taxes was deductible under itemized deductions. However, the Tax Cuts and Jobs Act (TCJA), which was enacted in 2017, dramatically altered the rules for tax deductions, and tax preparation fees were included. We will examine the changes and see who might be eligible for a deduction now.
The TCJA and Its Impact
According to the TCJA, most taxpayers are not permitted to deduct the cost of tax preparation. Until the TCJA took effect, you could deduct these fees as part of the ‘miscellaneous itemized deductions,’ which also covered expenses such as investment fees and unpaid employee costs. Since 2018, the TCJA has temporarily forbidden the deduction of miscellaneous itemized expenses, so most taxpayers may no longer deduct tax preparation fees.
Timeframe for the TCJA Impact
The TCJA changes will no longer apply after 2025 unless Congress decides to act before then. Before 2026, most taxpayers will not be permitted to deduct the fees they pay for tax preparation.
Which Taxpayers Can Still Claim a Deduction for Tax Preparation Fees?
Although fewer taxpayers can now deduct tax preparation fees, there are some cases in which a deduction is still possible.
Listed here are the key cases in which you may still deduct tax preparation fees:
- Deduct the Fees you Pay for Preparing your Business Taxes
Self-employed people and small business owners can still deduct the fees they pay for preparing their business tax returns. The reason for this is that these fees are treated as part of your business expenses.
Business Deductions: The cost of tax preparation services for business taxes may be deducted if you are a business owner.
Schedule C: In most cases, self-employed persons report both their income and expenses on Schedule C. Tax preparation fees you pay to complete this schedule are deductible as part of your business expenses.
- Fees Paid for Tax Preparation by Rental Property Owners
The cost you pay to have your rental property tax forms prepared may be treated as a deductible business expense. You may include these fees among your rental property management costs.
Schedule E: Most rental property owners use Schedule E to report both their rental income and related expenses. The expense of hiring someone to complete your rental property forms may be included in the deductible rental expenses.
Are Tax Planning Fees Eligible for a Deduction?
Services related to tax planning are not the same as tax preparation services. Tax preparation is the act of filing your tax return, but tax planning is centered on developing strategies to minimize taxes you will owe in the future. Most taxpayers are unable to deduct tax planning fees under the present tax law.
If you seek advice from a tax professional regarding financial arrangements to pay less tax over the next few years, those fees are not deductible. Even though the fees for tax planning are not deductible, the strategy may still prove useful in the future.
Deducting Tax Preparation Fees for Business or Rental Property
When you own a business or have rental property and are qualified to deduct tax preparation expenses, consider these steps:
- Reporting on Schedule C
Individuals who run their own businesses are required to include all business expenses on Schedule C (Profit or Loss from Business). When preparing your tax return, place tax preparation fees with other business expenses such as office supplies and travel costs.
- Reporting on Schedule E
If you own rental property, you may add tax preparation fees to your rental expenses. Remember to record these expenses in the rental property section when you complete Schedule E.
Special Considerations for Higher-Income Earners
Taxes for those with higher incomes can be more complicated, leading some to want to claim more expenses, including those for tax preparation. The TCJA generally disallows tax preparation fee deductions, but there are some special exceptions to note.
Itemizing Deductions vs. Standard Deduction
Although the majority of taxpayers can no longer deduct tax preparation fees, itemizing deductions may still be beneficial for a few. The TCJA raised the standard deduction to a higher level, so fewer taxpayers now find it profitable to itemize. If the amount of your itemized deductions (such as mortgage interest, charitable donations, and medical costs) goes past the standard deduction for your tax filing status, it may still be worthwhile to itemize.
Itemized Deductions: When you itemize and your deductible expenses go above the standard deduction, itemizing might be rewarding, even without the deduction for tax preparation fees.
Standard Deductions: High-income earners who own businesses or rental properties may be able to deduct tax preparation fees related to those ventures, as described earlier. Regardless of your total income, as long as the expenses are related to business activities.
What to Do If You Can’t Deduct Your Tax Preparation Fees
If you cannot deduct your tax preparation fees under the current tax laws, there are a few things you can do to minimize your tax costs:
Choose a Tax Professional Wisely: Look around for tax preparation services and find a professional who offers good value for your money. While fees may not be deductible, investing in a qualified tax preparer can help you reduce your tax liability through strategic tax planning.
Save for Next Year: If you anticipate needing professional services in the future, start setting aside money in a tax savings fund to cover the cost of tax preparation.
