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Whether you’re excited all your tax statements finally arrived for last year or you’re dreading pulling all of your financial information and tax paperwork together, it’s time to do your taxes.
Aside from wondering if you’ll owe the United States Internal Revenue Service, IRS, or get a refund this year, you might also wonder if it’s worth the money to have someone else prepare your income taxes.
Either way, you need to schedule a time to get your taxes done.
If you’ve organized all your tax and important documents and are anticipating a refund, filing early in the tax season makes sense. But those who think they’ll owe the IRS (and/or state taxes), probably shouldn’t delay preparing them either.
For the millions of people who had too little money withheld from paychecks, early tax preparation gives you time to make plans to pay the taxes you might owe.
If you can’t pay your tax bill when it’s due, the IRS will add interest and penalties to your outstanding tax debt.
No matter when you decide to begin, you still may have one important question – Is it worth the money to have my taxes done by a professional?
Preparing Your Own Taxes
According to a CBS report, close to 50% of all people who file do their own taxes.
With free electronic filing for some, and tax preparation software available at reasonable prices, many who formerly paid a certified public accountant (CPA) or another professional tax preparer now choose to do their own returns.
What Does It Cost To Do Your Own Taxes?
If your adjusted gross income (AGI) is less than $72,000, you can file a federal return for free using a number of different tax software companies. Some also offer free state income tax filing.
As you research different companies on the IRS website, make sure you choose one meeting your filing needs. You can also try the Free File Software Lookup Tool for suggestions.
If your AGI is more than $69,000, you can still use free fillable forms available on the IRS website (although state tax preparation forms are not available.)
Understanding your tax preparation needs and the complexity of your tax situation before you choose software will help you make a better decision on which product to use.
Benefits of Do-It-Yourself Tax Preparation
There is a great deal of information available online to help you prepare your own return.
If you can file for free or pay for low-cost tax software rather than paying for tax preparation services, you may save a lot of money.
If you’ve not done your own taxes in previous years or if this is the first year you’ll be filing, you may not realize how much you can learn by preparing your own return.
Working through an online (or paper) return forces you to look at your income and some of your key expenses. You’ll learn more about tax credits, deductions, and your effective tax rate.
Drawbacks To DIY’ing Your Tax Return
If you have a simple tax return, it makes sense to do them on your own. Just make sure you read the directions carefully, avoid these frequent mistakes, and choose a tax software program meeting your needs (including free state tax returns if that applies.)
If your return is complicated, and this is the first tax year you’re doing your taxes, you could make errors or miss deductions or credits applying to you.
Have questions as you work through your taxes? You might find it difficult (and frustrating) to get answers from customer support.
Your tax planning software probably won’t give you the planning advice a CPA or tax preparer would either. Is your hobby really a business? You may be stuck figuring that out on your own.
When you have significant business income or business expenses, rental property, income from different states, or an otherwise complex financial situation, you may wish to have a professional help you – at least for your first time tax return.
Another thing to consider is your time and the value you put on it.
In 2014, an IRS Publication 1040 reported an average time burden of 13 hours to do the record-keeping, planning, filing, and submission of tax forms.
Those who filed a 1040EZ averaged 5 hours, but filing form 1040 took the average taxpayer 16 hours. Reported time can vary significantly for individual taxpayers. But it’s still important to consider your tax time burden when you consider paying someone to do the preparation for you.
Tax Software vs CPA / Tax Professional
Many people who pay a professional tax preparer are more than happy to hand over their documents and skip the work involved in completing a federal and state return.
It can be difficult for individuals to keep up with tax law changes and their impact on complicated tax situations.
Most tax preparers take continuing education coursework to stay current on the latest tax laws. Be sure you understand the credentials of any tax professional you consider hiring to do your return.
The level of education and expertise of people who prepare tax returns can vary greatly. Do you want the representation rights of an Enrolled Agent or a CPA? Check out this IRS page to learn more.
Cost For Professional Tax Preparation
Costs varied depending on whether returns included Schedule A (itemizing deductions) or not. The simplest of federal returns cost $100 and up.
It makes sense the more complicated a return gets, the more expensive it will get.
Adding more forms or schedules can increase the cost of tax preparation by hundreds of dollars for a good accountant. The more complex and costly returns are probably the most important to have done by a professional.
Fees for tax preparation vary greatly. Some tax preparers charge a flat fee and others charge by the form. Depending on your tax situation, your tax professional may charge an hourly rate to prepare your return.
Keep in mind just like many other expenses, if you live in a high cost of living area – you’ll probably pay more to have your taxes done too.
You may be able to reduce your costs by having all of your documents organized and your questions prepared.
If your tax professional has to chase you for missing documents, incomplete information, or contact you for questions on incomplete paperwork, you may end up paying more.
It’s helpful to get an estimate from your tax professional before you agree to their services. Give as much information as you can and show the preparer your past return to get the best estimate possible.
Pros and Cons of Hiring Out Tax Preparation
Many of the pros and cons of paying someone to do your taxes are the opposite of the benefits and drawbacks of doing them yourself.
Even if you understand the basics of tax preparation hiring out the job makes sense if you don’t have the time or interest in completing your return.
For complex tax situations, such as having your own business, managing multiple rental properties, or having significant capital gains, using an expert may be the best way to save you both time and money – and it might reduce your risk of an audit.
Hiring out tax preparation doesn’t mean you should totally skip being involved with the process.
You’ll still want to review your taxes and work closely with your tax professional to determine any changes you need to optimize your tax situation in current and future tax years.
Prepare Your Taxes First, Then Pay Someone To Do Them
Perhaps a better option is to consider preparing your own return and then hiring a professional tax preparer to also do your return or review your self-prepared return.
You’ll get all of the benefits of preparing them yourself (even though TurboTax, H&R Block, or other tax software may cost you some money) and you can then compare it to the return completed by the tax professional.
You may find your DIY return matches the one you pay to have done. If it doesn’t, you can talk with your tax preparer about discrepancies and see if hiring someone to do your taxes is worth the money.
Don’t forget to talk with your CPA/tax preparer about any planning you can do to help reduce your tax liability in the future too.
You may still have time to make decisions about doing your own taxes or hiring a CPA or professional tax preparer to do them – or doing both. But putting your taxes off once you have all of your tax documents organized usually doesn’t make sense.
Tax time is stressful for some people and waiting to do them can cause even more anxiety.
For most Americans, federal tax returns are due on April 15th – better known as Tax Day.
But, remember filing early will help you get your refund faster and cut down on identity fraud. And if you find out you owe money after your taxes are completed, you can wait until Tax Day to file and pay the taxes due.
Knowing what you owe will allow you to take control of your finances, develop a plan to pay your taxes, and hopefully avoid taking on debt to pay the tax bill.