Should I Do My Own Taxes (DIY) or Hire a Tax Professional?
How comfortable am I doing my own taxes? Is my tax situation complex? How well do I know the new tax law?
For some people, tax season poses little worry, and the process occurs painlessly. Simply populate the requisite fields on your 1040 with info from your W-2, claim the standard deduction, sign on the dotted line and e-file. After that, the refund is deposited in your bank account or you received your check in the mail, so to speak. When debating which path you should follow, the most common decision point boils down to how comfortable you feel doing your own taxes. However, if your tax situation is complex, or you don't have the mental fortitude to go it alone, consider hiring a tax pro to handle your return. To understand when it makes sense to DIY your tax return vs. hiring a tax professional, the following represent some common scenarios where DIYing could be prudent, followed by times where hiring a tax preparer could be wise.
Times it Makes Sense to DIY Your Taxes
If you're the handy, DIY-type, you probably prefer to prepare your own taxes every year. You might even enjoy it. But considering the sweeping changes to our tax code, you might be wondering if it is time to consult a professional. Because tax software is so user-friendly and low cost, it makes sense to use it when you can. A few situations where filing taxes on your own makes sense:
All Your Income Is Reported On Standard Form - The most common type of income is job-related income which is reported on a W-2 form. Other income may be report on a 1099-NEC form. Every tax software makes it easy to report this type of income to the IRS. When your tax situation involves relatively little complexity, justifying the expense of hiring a professional might be difficult.
You Experienced No Change From Your Previous Tax Situation - If nothing major occurred to your tax situation this year, relying on your work form last year with numbers from this year might make sense. As your life becomes more complicated, your taxes can become more complicated. Each new challenge means that you might have a higher tax liability or qualify for a tax deduction.
If You Only Have A Few Deductions - If you are single with few or no deductions, then your income tax filing is uncomplicated. The more credits and deductions you take, the more complicated your taxes can become. Just like the standard deduction, itemized deductions are subtracted from the adjusted gross income to determine taxable income.
You Know About The Most Common Tax Savings Strategies - Most tax software uses an interview style interface to help users claim legitimate deductions and credits. If you know WHY the software wants to know about charitable giving, retirement savings, or student loan interest, and more, you are more likely to answer the questions correctly. People who have deductions or credits should feel confident in filing their won taxes. But it is easier to DIY your tax prep when you understand tax basics.
Times it Makes Sense to Hire a Tax Professional
A tax professional understands the ins and outs of taxes. If your taxes are complicated, hiring a tax professional will save you time, bring you peace of mind, and ensure your income tax filing is accurate. A few situations where filing taxes with a tax professional makes sense:
You Are Self-Employed Or Own a Small Business - The Tax Cuts & Jobs Act (TCJA, 2018) brought significant change to the tax code, especially for those who worked for themselves or owned a business. TCJA introduced the qualified business income deduction (QBI) allowing eligible self-employed people and small-business owners to deduct up to 20% of their QBI on their taxes. The complexity of business taxes makes it beneficial to hire a tax professional. Business taxes provide the biggest opportunity for tax planning, and future savings.
You Have Experienced A Major Life Change - Life changes such as marriage, divorce, having children, graduating from college, moving, getting or losing a job can all affect your tax situation. A tax professional can help you learn about any new benefits or strategies to minimize your tax liability.
You Bought Or Sold Real Estate - Tax professionals can help with taking valuable home mortgage deductions, deciding if you can use that home equity line of credit interest as a tax deduction, or even deductions on investment property. A tax professional will properly advise you on how to use home ownership deductions in your income tax filing.
You Sold Complicated Investments Or Traded Cryptocurrency - Usual when you want to invest money, you go to a brokerage or use an investment app and buy some stock. 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. What if you do not get that document? One example is trading cryptocurrency. If you traded cryptocurrency during the year, you may need a tax professional with experience in cryptocurrency to help with your taxes. another example is if you are flipping property. The escrow company will send you a 1099-S showing proceeds from the sale of your house. Beyond that number, you will be responsible to figure out how to report the home flip. This may be another situation to seek advice from a tax professional.
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. under this plan, your monthly payment is determine based on 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 bull if you expect a portion of your loan to be forgiven.
You Just Do Not Have Time - It is estimated that the average tax preparer spends hours on tax preparation, which includes gathering receipts, reviewing the rules, and actually filling out the tax forms. However, hiring a tax professional may not immediately result in a reduction of work on your part on account of the documentation requirement. You must still organize your file, receipts, and proofs of income as well as any other supporting evidence for positions you can claim on your tax return.
Benefits of Hiring A Tax Professional
Tax professionals understand complicated tax law. For example, healthcare reform continues to affect tax law each year. This continuing issue affect tax preparation, sometimes slightly different each year. Slight changes in the law could require new forms, new schedules or new worksheets. Tax laws also change on the state and local levels. Tax professionals do this for a living and are required to attend continuing education class each year. Tax professionals know how to make the ever-changing, complex tax laws work for you, not against you.
Tax professionals may help lower your tax liability. The tax code and tax regulations are tens of thousands of pages long. A tax professional may discover legal ways to reduce your tax burden. They routinely review the best deductions for their clients, providing information that will help you save money. Additionally, tax professional can help with future planning by offering financial projections and what-if analysis.
Tax professionals know how to handle an audit. An IRS audit of a tax return is not an ideal scenario for anyone, especially someone who prepared their own taxes without the help of a professional. If an audit occurs, a tax professional will work with to ensure you have all of the financial records needed. However, you are liable for any mistakes made in preparing your own tax returns. A tax professional will ensure your rights as a taxpayer are protected and will advise you during the process.
If you need help or are looking to hire a tax professional, please feel free to reach out to us at Tax C.A.T.S. We would love to assist with your needs.
Marla Holly Conner