Doing your own taxes vs. using a tax professional

One struggle many people experience at tax time is deciding whether to do their own taxes or hire a tax professional. To arrive at the right decision, and to make this tax time a less stressful experience, it’s important to understand the different types of tax professionals and the pros and cons each brings to tax preparation. We’ll explore when it might make sense to do your own taxes, and then look at situations where you should seriously consider hiring a professional. Making an informed decision simply makes financial sense.

Convenience, time, cost, and the degree of complexity in a person’s tax situation are the main factors to consider when choosing whether to do your own taxes or hire a professional. The lowest cost option, of course, is always to do it yourself, either with pen and paper or by using a tax preparation software product. The downside is that you will end up spending several hours of your time on the task. Also, dealing with today’s complex tax code on your own means you risk making a mistake that could negatively affect the amount of tax you’ll end up paying. Equally important, you may also not recognize a beneficial tax savings or financial opportunity. On the other side of the coin, a good tax professional, for a fee, almost always saves a person time and effort and can potentially offer advice and expertise that can reduce one’s tax obligations.

Types of tax professionals
Tax professionals, broadly speaking, can be grouped into four main categories: retail tax preparers (such as H&R Block), certified public accounts, enrolled agents, and tax attorneys. An enrolled agent is someone who is federally licensed to prepare taxes and is considered an expert in the tax field. Tax lawyers, being the most expensive of the professionals, are commonly used in situations where taxes are very complex, such as tax havens. Retail tax preparers can be an enrolled agent or a CPA, or (as is more common) neither. Statistics show that 60% of all Americans have their taxes done by a professional.

Hiring a Tax Professional: The Argument for
The greatest value of using a tax professional is in their experience. Navigating through all the complex tax rules and regulations requires knowledge and skill that most people simply do not possess. A good tax advisor will ask the right questions, dig into your financial picture, and come up with the optimal result for your tax situation. Additionally, tax experts must be able to provide sound financial advice, especially in the areas of IRAs, capital gains, and tax shelters. For some of us, using a tax professional is appealing, if only for the time savings and not having to endure the headache of preparing the forms ourselves. But a warning to always keep in mind: not all tax advisors are the same. Hire a bad tax advisor and you can expect bad things to happen. Be sure to actively engage a potential tax advisor with questions, ask friends or family for references, and always double-check calculations to ensure a correct tax return. Whether using a tax professional or doing your own taxes, you are ultimately responsible for what is reported on your tax returns.

Examples of when it is highly recommended to use a tax professional:

1. You have or have sold a business
2. You have investment gains and losses
3. You work in one state and live in another
4. You have income (including dividends) from foreign countries
5. You have investment rental properties
6. You have a tax-free property exchange
7. You may be exposed to the alternative minimum tax
8. Your marital status changed

Use a tax professional

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save time
Convenience: you don’t have to deal with forms
Usually a quick process. E-Filing Means You Get Tax Refunds Faster
In the event of an IRS audit, a tax professional will provide assistance in working with the IRS.
Document organization: easily accessible historical files
Advice and information – both fiscal and financial
Experience in tax laws and regulations that the average layman does not possess

Cons

Cost: A recent survey by the National Society of Accountants revealed that the average tax preparation cost of a federal 1040 form with itemized deductions and state taxes is $229. The tax preparation fee without itemizing deductions was $129. With more forms and more complex taxes, the fee only goes up from there. Not all tax professionals are the same, keep in mind that they can also make mistakes.

Do Your Own Taxes: The Argument For
Paying good money to a tax consultant just to input numbers into a computer doesn’t make much sense. We can all agree on that. So for some people, filing their own tax returns is certainly a viable option. Most experts agree that for single people with a job and limited assets, doing your taxes on your own (with just pen and paper) is a viable option. But as the level of complexity increases, the chances that you’ll make a mistake or possibly miss out on tax-saving opportunities increase. Tax preparation software, which fulfills the role of a tax professional to some extent, certainly helps to minimize errors. Leading software products like TurboTax or H&R Block’s At Home are fairly easy to use and inexpensive. They play the role of an impassive tax preparer in that as you use the software, you are asked questions and presented with helpful advice and guidance. However, if you enter the wrong information, such as if it might be confused with a certain question, it could end up costing you some money or at least losing an opportunity to save money. Even if you decide to do your own taxes, consider having a tax preparation expert do your taxes every 4-5 years to see if you’re missing out on any savings opportunities.

Doing your own taxes

professionals