Should you or a pro prepare your taxes?
For some people, tax season poses little worry, and the process occurs painlessly. For others, preparing taxes is a stressful situation.
Imagine handling numerous W-2s, 1099s, navigating new rules and tracking a laundry list of write-offs related to your business, side jobs, real estate holdings or other income sources.
While certainly not impossible to do it yourself (DIY) with the best tax software, this can still be a time-consuming activity. In some instances, it may make sense to outsource your tax preparation to a professional simply to avoid the headache or mistakes.
When debating which path you should follow, ask yourself how comfortable you feel doing your own taxes. Then, to help gauge when it makes sense to DIY your tax return versus hire a tax professional, consider the following circumstances.
Do it yourself if:
- You only have W-2 income and claim the standard deduction.
If you only claim Form W-2 income on your return and do not need to enter income information from multiple accounts, financially speaking, you would be best served by filing your own tax return. This is especially the case when you also only claim the standard deduction to reduce your taxable income.
Tax reform sought to reduce the complexity of preparing tax returns for individuals by doubling the standard deduction. In tax year 2019 (filing returns in 2020), the standard deduction amounts come to $12,200 for individual filers and $24,400 for those married filing jointly. To make it worth itemizing deductions now, you will need to have a lot of charitable contributions, mortgage interest or other deductible expenses to itemize.
- You experienced no changes from your previous tax situation.
If nothing major occurred regarding your tax situation this year, relying on your work from last year with numbers from this year might make sense. This is especially the case where hiring a tax professional doesn’t fit in your budget.
If nothing changed, in all likelihood you can roll forward most of the information and elections included on last year’s return. However, make sure to track any other sources of income or deductible expenses.
Hire a tax pro if:
- You were self-employed or owned a small business.
Tax reform brought significant change to the tax code, especially for those who worked for themselves or owned a business.
Of note, the Tax Cuts and Jobs Act introduced the qualified business income (QBI) deduction, allowing eligible self-employed people and small-business owners to deduct up to 20% of their QBI on their taxes.
This and other self-employment deductions can be difficult to calculate on your own, given the litany of expenses you need to track.
Handing off these responsibilities can seem tempting because so much paperwork is involved. However, even to do that you must still organize your files, receipts and proofs of income as well as any other supporting evidence for positions you claim on your return.
- You sold a business en route to retirement.
If you sell your business, hiring a tax professional becomes almost requisite. While preparing the forms yourself is certainly within the realm of possibility, none of the DIY tax software options offers support for preparing Form 8594, Asset Acquisition Statement.
As such, you will need to wade through the process of agreeing on a sales price with the seller, classifying your assets appropriately, and then ensuring the forms match on both the buyer’s and seller’s tax returns for the year.
Whether you file your taxes yourself or hire a professional, set aside time to review your tax return for accuracy. While a professional certifies accuracy, your return is only as good as the information you provide. In other words: garbage in, garbage out.
Therefore, pay close attention to the details on your return, whether you handle it yourself or not. Keep a copy of it and any supporting documents for your records for at least three years in case of an audit.
This article was written by and presents the views of Riley Adams, CPA, owner of Young and the Invested. Check adviser records with the SEC or with FINRA.
© 2020 The Kiplinger Washington Editors, Inc. Distributed by Tribune Content Agency, LLC.
Ed. note: You can also receive help from the IRS with two programs: TCA (Tax Counseling for Elderly) and AARP Tax Aide and VITA (Volunteer Income Tax Assistance. There are income limits for VITA. Help for contractors and self-employed persons with employees, along with rental properties, are out of scope for the IRS programs.