If you’re the handy, do-it-yourself type, you probably prefer to prepare your own taxes every year. You might even enjoy it. But considering the recent sweeping changes to our tax code and the fact that many taxpayers are missing refunds this year, you might be wondering if now is the time to consult a professional.
We don’t blame you for hesitating over the choice. After all, the cost to do your own taxes is relatively low: Expect to spend around $20 to $50 using basic software. If your tax situation is simple, it’s even possible to file for free using services such as TurboTax Free Edition and Credit Karma Tax.
On the other hand, hiring a professional tax preparer to fill out your basic 1040 form and corresponding state return costs $176 on average. That number jumps to an average of $273 if your tax situation is a bit more complicated. And you could spent up to $1,000 or more on tax preparation if your situation is particularly complex, according to Logan Allec, a certified financial planner and owner of the personal finance site Money Done Right.
Of course, if that means avoiding costly mistakes or an audit, it could be well worth it.
Not sure which option is right for you? Here’s how to decide.
When To DIY Your Taxes
For those who have fairly simple financial situations, preparing your own tax return is usually no problem. But how do you know if your situation counts as simple?
In general, if preparing your taxes simply requires a data dump, meaning you need to pull information from a handful of documents prepared by others, then you’re probably OK to do your own taxes, according to Allec.
If all you must do is input the info from your W-2 and maybe a couple of 1099 forms from your bank or broker, sticking with basic tax software is fine.
However, if you’re at all uncertain or uncomfortable handling a certain aspect of your taxes, it might be a good idea to work with a professional.
When To Hire An Accountant
You don’t necessarily need to hire an accountant in any of these scenarios, but it might help ease confusion and avoid mistakes.
1. Your marital status changed.
If you recently got married, you might need help determining which tax filing status to use. According to Allec, a tax filing status of “married filing jointly” is often the most advantageous ― but not always.
There are certain situations where it could make sense for a married couple to file separately, even if there are some potentially negative tax consequences.
One of those situations is when you’re in the process of getting a divorce. “Here’s the thing about filing taxes jointly as a married couple: You’re both on the hook for any taxes owed,” Allec said. It doesn’t matter if Spouse A earned $500,000 and Spouse B earned $50,000 for the year. When it comes to filing taxes, “both spouses are jointly and severally liable for all taxes owed on the return.”
Clearly, that can turn into a dicey situation for couples who are planning to end their marriages. Soon-to-be-divorced spouses may want to file separate tax returns so that each person is only responsible for their own taxes.
2. You experienced another major life change.
Other life milestones such as graduating from college, having a child, moving, getting a new job or losing a job could all impact your tax return and potential refund.
A tax professional can help you learn about any new benefits or strategies to minimize your tax liability, according to Kathy Pickering, the executive director of the Tax Institute at H&R Block. Then next year, if you don’t experience any other life changes and you feel more comfortable with your tax situation, you could go back to doing your own taxes.
3. You started a business.
If you started a business last year, which in the eyes of the Internal Revenue Service includes everything from launching a startup to mowing lawns on weekends, you should probably consider hiring a professional to prepare your tax return, Allec said.
One of the major concerns in this case is accuracy when it comes to reporting your income and expenses. “So is maximizing your tax deductions,” Allec said. “A qualified tax preparer will not only know about certain deductions that you may or may not have heard of before, but he or she will also know how to take them correctly on your tax return to reduce your chances of an IRS audit.”
4. You bought rental real estate.
If you bought a rental property during the year, it’s probably best for you to hire a professional tax preparer. Not only are there similar tax concerns related to purchasing real estate and starting a business ― namely, reporting tax items accurately and maximizing deductions ― but with rental property, there is also the issue of depreciation.
“In my experience as a CPA, I would say that over 60 percent of the DIY tax returns prepared by newbie real estate investors get depreciation wrong,” Allec said. “Depreciation calculations can be a costly mistake to fix down the line.” So you’ll want to get it right from the first tax return.
5. You sold complicated investments or traded cryptocurrency.
Usually when you want to invest, you go to a brokerage such as Vanguard or Fidelity, or use an investment app such as Acorns or Robinhood, and buy some stock. Then, at the end of the year, both you and the IRS will receive a 1099 form showing all of the dividends you earned and any sales you made. This is the information you use to prepare your tax return.
But what if you sold assets and nobody is legally required to send you a tidy document detailing exactly what you should report to the IRS?
One example is if you traded cryptocurrency. “Although the IRS and one of the cryptocurrency exchanges, Coinbase, have worked out some kind of tax reporting system for cryptocurrency traders, it’s far from perfect,” Allec said. “If you traded cryptocurrency during the year, I definitely recommend hiring a tax preparer, and particularly one that has extensive experience working with cryptocurrency transactions.”
Another example is flipping property ― that is, buying a house, fixing it up and selling it quickly. “If you flip a house during the year, you will receive a Form 1099-S from the escrow company showing your proceeds from the sale of your house,” Allec said. “But beyond this number, you’re on your own to figure out how to report your home flip. ... There are a lot of moving parts to a flip transaction.”
In these situations, Allec said, you would probably be well-served by going to a professional tax preparer.
6. You’re on an income-driven repayment plan for your student loans.
If you have federal student loans, you might have enrolled in an income-driven repayment plan, which reduces your payments to a small percentage of your discretionary income.
Aside from smaller payments, another perk of IDR plans is that your remaining balance will be forgiven once you reach the end of the payment term (if there’s anything left to forgive, that is). However, forgiven debt will be considered taxable income for that year.
“Under this type of plan, your monthly payment is determined based on the income reported on your tax return,” Allec explained. “So naturally, if you want to reduce your monthly payment, and thereby increase your potential loan forgiveness amount, you would want to reduce the income reported on your tax return.”
A tax professional can help you figure out the best tax filing status for your situation, how to report your income most advantageously and how to plan for an eventual tax bill if you expect a portion of your loan to be forgiven.
7. You’re dealing with a tax problem.
Working with a qualified tax expert can come in handy even when it’s not tax season. Whether you’re responding to an IRS audit or notice, catching up on back taxes or making a payment agreement, an accountant can help you navigate a potentially confusing and time-consuming situation.
“Credentialed tax professionals such as enrolled agents can help taxpayers understand the issue, organize the documents needed to respond and represent the taxpayer before the IRS,” Pickering said. So if you feel like you might be in over your head when dealing with the IRS, don’t hesitate to enlist some professional help.
8. You just don’t have the time.
It’s estimated that the average taxpayer spends 13 hours on tax preparation, which includes gathering receipts, reviewing the rules and actually filling out tax forms.
For some, this might seem like a simple weekend project. For others, not so much.
“Taxpayers who don’t like doing their taxes might consider leaving it in the hands of a tax professional,” Pickering said. “Or taxpayers who don’t have time to prepare their own returns could also consider using a professional tax preparer.”
Sometimes it makes more financial sense to pay someone else to do a job when your time is better spent elsewhere. And if it means one less mind-numbing task off your plate, even better.
No comments:
Post a Comment