Don’t Dread Tax Time
Tax time is here again. Will you owe money to the IRS, or will they owe you a refund? With the U.S. tax code spanning 74,000 pages and new changes made every year, it can be difficult to find the answer, not to mention file your return on time.
There are plenty of individuals and firms vying to help you complete your taxes: The tax preparation industry represents more than $10 billion each year. And while their expertise can certainly help some filers, people who have easy, straightforward returns may not need the help and could save their money.
This guide will help you determine whether to file your taxes on your own or seek help, as well as how to find the right help if you need it.
[Editor's note: This was originally published February 2, 2015.]
When to Do It Yourself
If you work for a company and get a W-2 pay stub at the end of the year, as opposed to owning a business or being self-employed, you may be a good candidate for do-it-yourself tax preparation. If your employer provides you with a W-2, “taxes have already been taken out of your paycheck and going the DIY route is fairly simple,” says Shannah Compton, a certified financial planner in California.
Even if you’ve recently married, moved, switched careers, or had a child, if all your income is reported on a W-2, filing on your own is doable. "The software that is out there now makes it very simple and intuitive to account for life changes," Compton says. "You can easily select if you are adding a dependent or if you are filing jointly with your spouse. I would still encourage a W-2 employee without a separate business and deductions to file on their own."
If you don’t itemize deductions, filing on your own will likely be easy enough. "Two-thirds of the country takes the standard deduction, so odds are you will too," says Bill Hendricks, CEO and co-founder of Common Form, a tax software company in San Diego. Unless you have more than $6,300 in deductions to itemize, or $12,600 if you’re married, you will likely need to take the standard deduction.
"The most common big-ticket deductions are mortgage interest and property taxes, so if you don't own an expensive home it is extremely likely that the standard deduction is best for you. Donations to charity by themselves are usually not enough to itemize unless you are very generous. If you take the standard deduction, your taxes will be very simple and you should give DIY a try."
How to Do It Yourself
If you decide to do your taxes on your own, you can fill out the paper forms available from the IRS, but "the IRS is rapidly phasing this out, so it only accounts for 5 percent of the market and dropping," Hendricks says.
If your household adjusted gross income is $62,000 or less, you may be eligible to prepare and file your federal income tax return through the IRS’s FreeFile program, says Brooke Balducci, senior manager at CBIZ MHM, a national accounting and professional services provider. "The FreeFile Alliance is a group of tax preparation software companies that have partnered with the IRS to allow individuals to prepare and electronically file their federal tax returns for free," Balducci says. "The software only includes the most commonly used forms, so if you have a more complex return or are required to file a state income tax return, there may be additional fees."
Even if you don’t qualify for the FreeFile program, using a tax software program such as Turbo Tax, TaxAct, or Common Form can be a good option. Many software packages have tiered pricing based on the complexity of your taxes, Hendricks says.
While using software may not be free (the average cost is around $50), it can make the filing process less tedious. "Today’s tax software does a very good job shielding users from the complexity underneath it," Hendricks says. "Instead of having to deal with forms, line numbers, and math, they ask you a series of questions and answers and do most of the work for you."
To be doubly sure you're doing it right, Hendricks recommends partially completing your taxes with two different software packages and seeing whether the results match. Because most online software programs allow you to try for free and pay when you file, this option won't cost you any extra money, just a little extra time. Some software programs offer an option to pay extra for an "audit" option, but it’s not worth the money, Hendricks says. "They don't actually review your return if you buy it; rather, it's just an insurance policy,” he says. "If you get audited, a tax professional will speak to the IRS on your behalf. But it doesn't reduce your chance of getting audited."
Taxpayers have additional reporting requirements related to the Affordable Care Act, Balducci says. "Taxpayers may be subject to additional taxes, called the Shared Responsibility Payment, if adequate health coverage was not maintained for themselves and their dependents during [the tax year]. Additionally, some taxpayers may qualify for health insurance premium credits. These new ACA forms should be reviewed carefully to ensure they are properly reported."
When to Hire an Expert
If you buy and sell stock outside of a retirement account like an IRA or a 401(k), you’ll likely need to pay capital gains taxes, which are "one of the trickiest things to calculate taxes on, with esoteric concepts like wash sales and short-term versus long-term gains," Hendricks says. In that case, or if you have stock options, restricted stock units (RSUs), or employee stock purchase plans, he recommends going to a Certified Public Accountant (CPA) — an accounting professional who has passed a rigorous exam and is licensed by a state — or another tax professional, "unless you know this part of the tax code well and are willing to put in a lot of time preparing this part of your return."
Also, if you’re an entrepreneur or small-business owner who uses a corporate or a Schedule C return, "you should hire it out," Compton says. "A CPA knows all the latest tax rules and can offer you solid advice on what you can and can't write off."
If you’re a freelancer or operate a business as a sole proprietor, you’re likely to have a number of 1099 forms to deal with, as well as a need to itemize deductions. While you may feel confident enough to do that on your own, it can be a good idea to seek guidance from an expert, even if you’re not paying a tax preparer to do your returns, says Maggie Mayer, CPA, owner of Mayer & Associates in Madison, Conn. For freelancers and small-business owners who choose not to hire a tax preparer, Mayer recommends seeking advice from SCORE (a nonprofit organization dedicated to entrepreneur education), the U.S. Small Business Administration, a government agency that provides support to small businesses, or their local society of CPAs.
How to Select a Provider
When selecting a provider, ask for recommendations from friends or relatives, or check your state society of CPAs and the Better Business Bureau, says Emily Sanders, CPA and managing director at United Capital’s Atlanta office. Most CPAs will ask you to sign an engagement letter, or a contract stating both parties’ understanding of the professional relationship, before proceeding with your tax return, “so expect that to happen,” Sanders says. “And make sure that if they transmit your tax return electronically, the data is password protected or encrypted.”
The IRS certifies enrolled agents (EAs) to file taxes on behalf of customers, as well as CPAs. EAs must pass a stringent three-part exam and complete 72 hours every three years of IRS-approved continuing education, according to Gigi Thompson Jarvis, senior director of communications and marketing at the National Association of Enrolled Agents. EAs are trained only in taxation, while CPAs are educated in accounting and other financial issues besides taxation. For that reason, a CPA is usually more expensive.
The price you’ll pay can fall in a wide range depending on your location and the tax preparer, with prices for fairly simple returns ranging from $150 to $600, Compton says. But “there is always room for negotiation, even with a CPA,” she adds. “Make sure to tell them [if] you are just starting out, had a rough year, or even need a payment plan. Most CPAs will work with you. Send them a few referrals throughout the year and you might even get a certain percentage off your return the next year.”
In addition, most CPAs will also reduce their fee if you come “return ready,” Compton says. “This means that those who have itemized or business deductions have already gone through their statements and receipts and categorized everything with total amounts noted. It makes the job super easy for the CPA and saves them a lot of time.” While not all CPAs will reduce their fees, Compton says some will reduce fees up to 25 or 30 percent. If you’re hoping for such a reduction, ask the CPA up front if he or she will offer it.
In the unlikely instance that you’re audited by the IRS, “having a professional tax preparer on your side is always a good thing,” Compton says. “I wouldn’t go to court without an attorney, so if I have a business or complex write-offs, it is best to use a CPA for their knowledge and skills.”