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/