Recently I moved to southern California to attend law school and classes began this week. The first week of law school, there is a heavy emphasis on tax research, reading, and writing. In fact a recent study showed that what makes a good law student is not their intellect, but their ability to read. To read effectively and critically. What tax payers may not know about their tax preparer is that we do not know every line of tax law just because we work in it every day. When you ask a tax question, it usually requires your preparer to do some research to come up with the best answer. And that is why, there is no such thing as “quick question” when it comes to taxes and our legal code at large.
Notice before I specifically said “best” answer and not “correct” answer. Law is a labyrinth of regulations, exceptions, and interpretations that vary depending on your business structure, location, industry, and even the specific transaction. For example, asking about the tax implications of a new investment isn't just about a single tax rate—it's about understanding depreciation rules, potential deductions, capital gains treatment, and more. Furthermore, tax laws have many different jurisdictions to consider when researching a tax question. There is the federal law, the tax laws at the state level, and in most cases city tax laws and sometimes even county tax laws. Most government's main source of income is taxes, so each state, city, and county has a unique tax code to generate income based on the habits of their residents.
Every tax situation is unique, so it’s hard to determine how each tax law should be applied to each problem. No two businesses are alike and no two individuals are the same. Have you ever found yourself wondering why your refund amount is different from your coworkers? Your siblings? Your neighbors? Your friends? It’s not because they have a different tax preparer, it’s because their tax situation is different than yours and that makes them eligible for certain tax credits you may or may not qualify for. A “simple” question like “is this deductible?” can have a different answer depending on various factors, such as the nature of the expense, how it's documented, and how it aligns with IRS rules. A quick answer might overlook critical details that could lead to costly mistakes or missed opportunities.
Then you must consider the Ripple effect. Every change in your tax situation can affect many other parts of your return, especially if you are a business owner. For example, many states are now offering and SALT tax credit that allows pass-through entities to pay and deduct state taxes on the business return that would normally be paid on the business owner's personal return. Under the Tax Cuts and Jobs Act, state and local taxes are only deductible as an itemized deduction and that deduction is currently capped at $10,000, so for high earners, the state and local taxes may not be fully deductible. Sounds great, right? But then you have to consider how this affects the Qualified Business Income Deduction or if it prevents the taxpayer from itemizing their deductions. It really depends on their individual circumstances and requires careful consideration.
Referring back to the SALT example, the Tax Cuts and Jobs Act is set to sunset soon and some people aren’t utilizing the SALT credit because they don’t think it’s worth the trouble if the benefit may be going away soon anyway. This brings me to my next point: our tax laws are constantly changing, especially since the pandemic. There was a moment during the pandemic that I felt like my clients were more abreast of the changing tax laws than I was because they were changing so rapidly. This evolution has slowed a little since then, but it makes answering a tax question tricky. A tax question I answer one week, may have a completely different answer one week later because a new tax law has passed.
And finally, there is always the risk of misinterpretation. Tax law is full of nuances, and it's easy to misinterpret regulations or guidance without the proper context. A question might seem straightforward, but without a deep dive into the relevant rules and your specific situation, the answer could be misleading. This is why tax planning is so important. If your tax preparer is meeting with you throughout the year, they can be familiar with your particular tax situation and it will make it easier for them to know what tax laws are applicable to you. It also allows your preparer time to do the careful research necessary to give the best response.
In the world of tax law, there are no shortcuts. What might seem like a "quick question" often requires a detailed and thoughtful response. But taking the time to consult with a tax professional ensures that you’re not just getting an answer to your question, but the whole picture of how certain taxable events will affect you and your business.
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