DIY is all the rage. All across America, people are canning their own vegetables, crocheting their own throw pillows and 3-D-printing their own action figures. But is there a limit to what you feel comfortable doing yourself -- changing the oil in your car, painting the living room walls -- and what you would absolutely call a professional to handle? Like your taxes, for instance?
Are you comfortable filling out your own 1040, or do you worry that you'll miss out on lucrative deductions -- or worse, catch the unwanted attention of an IRS auditor?
With the popularity of tax preparation software, more Americans are doing their taxes themselves. According to 2014 IRS numbers, 47.9 million American taxpayers self-prepared their 2013 income tax returns on their home computers. That represents 38 percent of all electronic tax filings. The lion's share of all electronic filings -- 77.8 million -- are still done by tax professionals [source: IRS].
How do you decide if it's worth the risk doing your own taxes or if you're better off shelling out a couple hundred bucks for a professional? First, you have to answer three important questions:
- How complex is your tax situation? The IRS offers three flavors of the 1040 income tax form, each designed for different tax situations. If you meet the criteria for the 1040EZ or 1040A -- income under $100,000, no itemized deductions, no self-employment income or Schedule C -- then you should have no problem preparing your own taxes on your computer [source: IRS]. More complex situations, which require the regular 1040 -- itemizing deductions, claiming business expenses, paying self-employment tax -- might require professional help.
- How much time and money do you want to spend on taxes? The IRS estimates that the average non-business taxpayer will spend seven hours and $120 per year on income taxes. That includes planning, recordkeeping and filling out the forms. The estimate increases to 24 hours and $430 for business owners. Are you the kind of detail-oriented person who loves carefully tracking expenses and staring at spreadsheets? Or would it be much more satisfying to pay a little extra for someone else to dig through your receipts?
- What's your stress level? To do your own taxes, you need to be comfortable with a certain level of uncertainty. Will the highly unlikely prospect of an audit keep you up at night? Or do you trust the good people at TaxACT or TurboTax to have your back? Your stress level over taxes will help decide if software or a tax pro is right for you.
Up next, we'll go over the best reasons to choose tax preparation software and then explore the benefits of hiring a professional.
When to Use Tax Preparation Software
First, it's important to recognize that all major tax preparation software is now available online, which greatly simplifies the process. You don't need to purchase CDs or even download software. All you have to do is visit the tax preparation website and enter information into your browser using easy, step-by-step instructions. You can even fill out tax forms using your smartphone or tablet.
One of the best reasons to use tax preparation software is to save money. The IRS partners with 14 tax preparation websites to offer free online federal tax return preparation and free e-filing for taxpayers with income below $60,000. Visit the IRS Free File website to learn more.
Other commercial tax preparation websites also advertise free federal tax returns, but be sure to read the fine print. Some services let you start your federal return for free, but charge a fee to print or e-file. Free federal returns are often limited to 1040EZ and 1040A returns, since those are simpler to prepare. If you want to itemize deductions or file a Schedule C for a small business, expect to pay between $13 and $75 for the federal return.
What about state income tax returns? In some cases, you will end up paying a small fee to prepare and file state tax returns online. However, in other states, you may qualify for a free state return if you make below certain income thresholds.
Next to price, the second-best reason to use tax preparation software is convenience and speed. As with online shopping, it's simply easier and faster to complete tax forms online. Tax software is designed for tax beginners. The programs will tell you what forms you need to assemble, or even transfer them straight from your employer. You don't need to know what percentage of health care expenses are deductible or the latest changes to the tax code. The online programs walk you through each step -- income, deductions, credits, -- and do all of the calculations for you.
Bottom line: If your tax situation is relatively simple -- you meet the criteria for filing a 1040EZ or a 1040A -- and you're comfortable online, it makes perfect sense to use a tax preparation website.
Now let's look at the costs and benefits of going with a professional tax preparer.
When to Hire a Tax Professional
The tax code can get very complicated very fast. If you run a small business, for example, you can significantly lower your taxable income by deducting qualified business expenses. But some of those deductions -- like the home office deduction or depreciation on business equipment -- are way over the head of the novice taxpayer.
While it's true that tax preparation software can handle even the most complex tax situations, not everyone is comfortable with trusting their valuable deductions to a computer.
How do you know if you're a good candidate for a tax professional? Here are a few tax situations that automatically disqualify you from the simplest tax returns (the 1040EZ or 1040A) [source: IRS]:
- You want to itemize deductions instead of taking the standard deduction
- You run your own business and have to file a Schedule C
- You earn self-employment income, which means that no income taxes or FICA (Social Security and Medicare contributions) have been withheld during the tax year
- You own rental property
- You earn more than $100,000
Do you need hire a CPA to do your taxes? Certified public accountant (CPAs) are great, but they can also be expensive. You really don't need a full-service accountant to prepare your taxes. Other types of tax professionals, including IRS Enrolled Agents and Accredited Tax Preparers, are more than up to the task. You can find tax professionals at all of the national tax chains -- H&R Block, Liberty Tax Service -- and at local tax and accountancy firms.
The chief benefit of a tax professional is experience. No matter how complex your tax situation, the pros have likely seen it many times before. A tax professional can answer your personal questions and alert you to deductions and credits you never thought about. Even better, a tax professional can help you plan for your tax future by identifying ways to lower your taxable income moving forward.
All of that expertise comes at a cost, of course. According to a 2014 survey from the National Society of Accountants, the average price of having a tax pro prepare a 1040 with no itemized deductions was $159; with itemized deductions (Schedule A) and a state return, it was $273.
If you're curious about what a tax professional can offer, make an appointment for a free consultation in the tax off-season (anything after June). The tax preparer can look over last year's return and let you know whether there is room to save more money. If you feel like you're paying way too much in taxes -- and who doesn't? -- it might be worth your time.
Author's Note: What is the ideal tax situation for you?
In the 14 years that I've been paying income taxes, I've only used an accountant once. In my early earning years, I was a lock-in for the 1040EZ. No dependents, no mortgage, no reason to make things complicated. I did my taxes online and never looked back. Then life intervened. I went freelance, which meant self-employment taxes and business deductions. Then I added another side business, which meant another Schedule C and even more expenses to track. When we bought our house, suddenly it made sense to itemize. When we couldn't sell that house, we decided to rent it.
Now we had two mortgages, rental income, two businesses, three kids, and an overflowing envelope of receipts. Nervous that we were inviting an audit by doing our taxes ourselves, we hired an accountant. He was expensive and didn't really do anything differently than the online services, but he did catch one mistake: we had neglected to pay local income tax for the past five years. Oops!
- IRS. "2014 Filing Season Statistics." Nov. 21, 2014 (Dec. 12, 2014) http://www.irs.gov/uac/Newsroom/Nov-21-2014
- IRS. "Instructions for the 1040." 2013 (Dec. 12, 2014) http://www.irs.gov/pub/irs-pdf/i1040.pdf
- IRS. "Topic 352 – Which Form – 1040, 1040A or 1040EZ?" (Dec. 12, 2014) http://www.irs.gov/taxtopics/tc352.html
- Saunders, Laura. "What Tax Preparers Really Charge." The Wall Street Journal. Jan. 24, 2013 (Dec. 12, 2014) http://blogs.wsj.com/totalreturn/2013/01/24/what-tax-preparers-really-charge/