Taxes. They’re one of those unavoidable facts of life. When it comes to preparing your taxes I believe the key is striking a balance between keeping it simple—not spending more time or money than necessary—and being smart about getting all the deductions and savings you are entitled to. So, how do you get the job done right and walk that line? It depends on your particular situation.
Do It Yourself
If, like the majority of people, your tax return is pretty simple—you don’t itemize tax deductions, don’t own a business, earn less than $1,500 a year in interest income, and your taxable income is less than $100,000—you can quickly and easily do your own taxes. Go online to www.irs.gov and fill in and file form 1040EZ or 1040A, and then file a simple version of your state return. Better yet, if your income is less than $57,000 you may be eligible to file your federal taxes online for free using either the forms or software programs available from the Free File Service at www.irs.gov.
Use Tax Preparation Software
If you are not in the above group, but still have a fairly straightforward financial picture, you definitely still have the option of doing your tax return yourself. If you do, I’d suggest using one of the major tax return systems such as TurboTax or TaxACT that includes both federal and state forms. I would, however, have a tax professional check your return the first time you do this and also once every three to four years. The likelihood is that they will catch some things that will more than pay for what they charge you.
As I see it, here are the pros and cons involved in choosing to use one of the major do-it-yourself tax return systems:
Pros:
- They do a good job of explaining your options and guiding you though the process.
- Your return preparation cost is likely to be lower than hiring a professional.
- You are likely to develop a better understanding of how to minimize your tax bill going forward.
- Such systems automatically save all previous years’ data. This makes doing the next year’s returns a lot easier and it also helps remind you of every deduction you took last time, so nothing much slips through the cracks.
- If you try to go this route and it’s not working for you, you always have the option to turn to a professional. You can also start by trying a do-it-yourself option for free online with a service like Turbo Tax or Tax ACT. If you like how it’s going you can then pay for the service and file your return.
Cons:
- It won’t work well if you are someone who has trouble following detailed instructions and explanations or feel you have weak analytical skills.
- It may take more of your time than using a preparer and you will, at times, have to do a little homework on your own. This isn’t that big a factor, however, as the overwhelming majority of the work involved is in the gathering and maintaining of the information and records needed, regardless of whether you do your return yourself or not.
Hire a Tax Professional
If you have a somewhat complicated financial picture, I believe you are best off hiring a professional to prepare your taxes. Your choices are a national tax return franchise (like H & R Block), an online service, or an individual local tax professional such as a CPA or an Enrolled Agent (tested and background checked by the IRS). My advice is to go with an individual local tax professional.
Here’s why:
- The difference in fees between them and a large company is likely to be fairly small.
- The return preparers provided by large companies are usually part-timers and likely not as well trained and knowledgeable as the average CPA or Enrolled Agent.
- Franchise and online preparers are less likely to be available for any questions that might arise during the year.
- The turnover of franchise and online preparers is quite high, thereby reducing the chances you will have someone familiar with your tax situation on an ongoing basis.
Should you choose to go the route of using a local individual tax professional here are a few additional suggestions to make the most of the situation.
Despite the similarity of fees you will encounter, it will still pay to negotiate for the best price. Also, once you have someone you use regularly, here’s a good tip for after your taxes are done. Tell the preparer you need to know the price for the next year. You’ll often get a committed price and at the same amount you just paid. If you don’t do this, there is a 50/50 chance that you’ll find the price bumped a little come next year. A good approach is to acknowledge that the first year you use someone it’s more work than it will be in future years. Use that situation to try to negotiate a lower price for the next year by saying something like, “I can appreciate that it’s more work the first time you do someone’s return, but then somewhat less time consuming after that. What will it cost me next year?”
Seriously consider using tax preparation software first by yourself before you turn over your information to your tax preparer. Many find this to be a very valuable extra step as now there are two sets of eyes looking at the data from every angle to maximize deductions and minimize the hit. Also, you’ll end up with a better understanding of how to minimize your tax bill going forward.
Even if you don’t also use software, do take the time to understand your return as no one but you could possibly know the complete ins and outs of your financial situation. Start with last year’s return. Look at the different sections (income, deductions, itemized deductions and exemptions, credits, and tax payments) and understand how they work. Unless your financial situation is a very complicated one, you’ll usually be surprised to learn that the whole thing isn’t as difficult as it looks.
To get your money’s worth, give everything to your tax preparer in early February, as soon as you’ve received all the necessary documents. Any later and you enter a period of greater stress and a higher probability for both error and lost opportunity. Don’t risk filing late. If you do, you’re almost certain to pay more taxes due to rushing errors and not having the time to get supporting documentation—and that’s before adding in the late filing penalties involved of about 4.5% per month.
Finally, it’s possible that you might run into someone who sets their fee as a percentage of the amount of your refund, who claims the ability to obtain larger refunds than other preparers, or who asks you to sign blank forms to be filled in later. All three of these things are red flags warning you to never to use that person. Remember that regardless of who prepares your return, you are the one responsible for paying the taxes actually owed. If someone improperly does a lowball return, you will not only end up having to pay the correct taxes, you’ll also end up paying a penalty.
Regardless of how you decide to prepare your taxes, be thorough and keep an eye to streamlining the process for the next year. It’s a great time to set up some simple systems to use throughout the year to help you track the information you will need at the end of the year.
Nobody really likes preparing (or paying) taxes, but as with the rest of your finances, it’s important to give it the attention it deserves because the payoff can be high.