What’s The Difference Between an EA and a CPA?
We’ve been working hard for years on our integrated wealth management experience. A major component of the experience is tax planning and advice, and we even assist with tax filing to help lift the burden of financial management as a whole off the shoulders of our clients.
The integrated experience we offer allows our clients to have peace of mind and not worry about their taxes unless they want to. We can take care of it all in-house.
Last year, we hired Taylor Wolverton to be part of our team. She’s a certified financial planner and has just finished every requirement to become an enrolled agent (EA). We thought in this week’s episode (or blog post), we would explain a little bit about the differences between a CPA and an EA.
Even if you have a simple tax return and think, “I don’t really need tax planning,” you would be surprised by how much a CPA and EA can offer you.
Difference Between an EA and a CPA
First, before going any further, it’s crucial to explain what a CPA and EA are so that you have a clear understanding of the two and the requirements for these designations.
What is a CPA?
A CPA, or certified public accountant, must have a bachelor’s degree and may need quite a bit of education beyond that. CPAs are required to pass the uniform CPA examination, which we believe requires multi-layer testing in four areas.
You’ll also need to meet state-specific requirements, such as:
- Educational
- Work experience
- Ethical standards
CPAs must meet license and state-specific requirements.
What is an EA?
An EA, or enrolled agent, does not need the same level of education as a CPA. You will not need a bachelor’s degree for this designation, but you will need to pass a licensing exam. The exam to become an EA requires passing three tests that specialize primarily in taxation, covering:
- Personal
- Business
- Ethics
CPAs must understand aspects of tax planning, business planning and a variety of other things. Of course, the CPA can become a specialist and focus on one of these main areas of practice. On the other hand, an EA focuses on taxation and isn’t a “jack of all trades.”
Scope of Practice
The scope of practice between a CPA and an EA is much different.
CPA Scope of Practice
A CPA covers a wide range of duties and can handle:
- Financial statements
- Audits
- Reviews
- Financial planning and business services
They can also represent clients in front of the IRS with limitations.
EA Scope of Practice
The EA’s scope of practice is taxation. These individuals can represent a person in front of the IRS on all administrative levels. However, they cannot prepare financial statements or review financial audits.
Continuing Education
Continuing education is something both a CPA and EA will need to undergo to maintain their designations. Either of these professionals have the expectation to stay current on:
- Accounting
- Taxes
- Taxation
CPAs must meet state-specific continued education requirements that they must fulfill. Traditionally, these professionals will need to complete a certain number of hours of continued education.
An EA must complete:
- 72 hours of continuing education every three years
These requirements are across the board.
Since the EA focuses on the ever-changing world of taxes, you want them to have the most updated education possible.
Geographic Limitations
Since CPAs have to meet state requirements, they do have some limitations in their practice. However, they can obtain licensing in multiple states if they want to serve a wider range of clients.
EAs are licensed on the federal level, so they can operate in any US jurisdiction.
Ethical Standards
As a client, ethical standards are crucial to ensure that your best interests are followed. A CPA must adhere to the ethical standards that are established by the American Institute of Public Accountants and the State Board.
EAs must meet the requirements of the Treasury Department.
How We Utilize EAs in Our Practices
You may be wondering: What does an EA have to do with my retirement planning? And it’s something that we certainly want to cover because an EA is a vital cog in the integrated wealth management experience that we have created.
EAs help us create a tax strategy to:
- Look ahead to make filing better
- Reduce taxes
Taylor will review tax returns to see what our clients need to be doing to work through a favorable tax strategy.
Let’s examine this in great detail:
- During the tax strategy meeting, we’ll look through a person’s current tax situation. This may seem simple, but the EA needs to consider everything: IRA accounts, pensions, Social Security and other forms of income. The EA will look at debt and other aspects, too.
- Retirement plan. The EA will look through your retirement plan to see if they’re leveraging the tax advantages of these accounts. Your withdrawal strategy will also be reviewed. We want to make sure that you have the appropriate amount of money coming in.
- RMD planning. As a taxable, forced withdrawal, the EA will also look through this to help you reduce or eliminate this tax whenever possible.
Once all of the information is gathered during the meeting, we can begin working on strategic tax deductions.
Tax Deductions
When you secure your retirement, the last thing that you want to do is pay more money in taxes than necessary. If you have a simple tax plan and just take the standard deduction, you may be missing out on savings.
We may be able to strategize to make it make sense to itemize your deductions.
QCDs are one of the topics that we’ve covered a lot, and they reduce your taxable income by contributing to charity directly from your IRA.
Tax Loss Harvesting
Tax loss harvesting may be an option for you to save on taxes, too. If you have brokerage accounts that have appreciated assets, we may be able to sell some of the assets in the account that are at a loss to offset some of the gains that you have.
Typically, we’ll look at tax loss harvesting in the fourth quarter of the year.
Changes in Tax Law
If you know a tax law is changing, we may be able to strategize around this change. We can also do the same thing when you hit certain age milestones.
Timing
Multi-year planning is also part of the overall plan that an EA assists with because you often need to make key changes for the future. We want to look forward to reducing taxes in the year ahead. We can often do things this year to make taxes lower next year.
For example, we may be able to do Roth conversions, which will keep you in a favorable tax bracket.
We may also spread out your withdrawals or blend multiple income sources to prevent overloading your tax return this year.
Life Changes
Unfortunately, you’ll also need to consider life changes. You may lose a spouse or get divorced, and these are major changes that will affect your life and finances.
If you’re listening to this and don’t have tax planning or strategies in your plan, it’s certainly something to consider as part of your retirement plan.
Want to learn more about securing your retirement?
Click here to read our latest book, Secure Your Retirement.