Every year when tax season rolls around, a lot of us ask the same question: How hard is it to do your own taxes?
After all, there are a lot of DIY tax software packages on the market that can make income tax preparation seem easy.
So is it time to “fire” your accountant and go the DIY route? Read on to find out when you should hire an accountant and when it’s OK to do your taxes yourself.
When You Should DIY Your Taxes
Preparing your own taxes can save you hundreds of dollars that it would cost you to hire a professional tax preparer. So when are the best situations for preparing your own taxes?
When your tax situation is fairly simple. If you’re a W-2 employee, with interest and dividend income and the usual deductions (mortgage interest, property taxes, charitable contributions and the like), doing your own taxes is usually the right thing to do. There’s no need to pay for an accountant when your taxes are straightforward.
When you have a solid general understanding of income taxes. You may be one of those people who’s fairly well versed in all things income tax, and if you are, you can probably do your own taxes. Just be sure you don’t start flirting with tax situations that exceed your knowledge base.
When you have access to technical answers. Do you know a tax expert — someone whom you can call and ask for guidance on a tough issue? If you do, you may be better off doing your own taxes. Although you may not have all the knowledge you need, you know where to get it, and that’s nearly as good.
When your income is fairly low. The lower your income, the less chance you have of facing an IRS audit. If you make less than $50,000, your chances of being audited are very low, at least if you avoid taking excessive deductions.
If you are fairly detail-oriented. If you have an eye for detail, you’re a better candidate for income tax DIY. Tax preparation is not something you can afford to “blow through.” You need to recognize that everything you put on your tax return means something, and have a willingness to be accurate and to check your work after the fact. Some people don’t have this kind of mindset and are better off not doing their own taxes.
If you have the time. Income tax preparation takes time and patience. If you have both, you can prepare your own return. If not, don’t even bother! It’s not just that income tax preparation is fairly complicated by its very nature, but also the fact that you only prepare one return, once every 12 months. That’s not enough frequency to become fluid at it. You can compensate by spending the necessary time to do the job right, to investigate gray areas, and to check your work.
When It’s Time to Hire an Accountant
There are circumstances in which DIY can set you up for an income tax nightmare, and that’s when it’s time to hire an accountant. What are these situations?
When your tax situation is complicated. If you have a complicated tax situation, you should hire an accountant and not give it another thought. Complicated includes any tax issue you don’t understand. But more specifically, it may involve large capital transactions (particularly investment real estate), K-1s from S-corporations or partnerships, gifts of appreciated assets, net operating losses — and that’s a short list. Even worse is going DIY thinking you understand the tax regulations. This can invite trouble later on.
If you have any weird tax situations. It may be that you normally have a simple tax situation and do your own taxes. But if you have a complication arise, it’s time to call in an accountant. Such a complication could come from just about any direction — a Roth IRA conversion, an early pension distribution, the sale of a property, or inheriting assets.
When you’re self-employed. If you’re self-employed, you need an accountant to do your taxes. No further discussion on the subject is necessary.
When you know nothing about taxes. You wouldn’t try to fix your own car if you knew nothing about auto repair, would you? Why would you try to prepare your own taxes if you know nothing about it? If you do, you might invite closer scrutiny by the IRS, and that’s an opponent you don’t need to take on.
When you have better things to do. Preparing your own taxes requires time. If you don’t have any, or if your time is more valuable spent doing other things, you’re better off hiring an accountant to prepare your tax return.
When you have a high income. As noted above, you’re a better candidate for an IRS audit as your income rises. The risk begins to increase at about $100,000 per year, and rises rapidly at higher levels. Even if your situation is simple, you might want to hire an accountant just to have independent representation in the event of an audit. It could be money well spent, especially if your income is into the several hundred thousand dollar range.
Do you prepare your own income taxes, or do you use an accountant? What factors caused you to choose the preparation method you’re using?