Do You Do Your Own Taxes? Should You?

Now that tax season is over, I'm starting to be able to write about the topic without steam coming from my ears. ;-)

Seriously, here's a good article from MSN Money that gives thoughts on whether or not you should do your own taxes. They offer three questions designed to help you decide if hiring a tax professional is for you or if you're better off doing your taxes yourself. Their questions:

1. Are you prepared to give your taxes your time?
2. Are you prepared to put up cash to hire a preparer?
3. Are you prepared to deal with the complexity of the federal code?

My personal answers are:

1. No.
2. Yes.
3. No.

This is why I hire a CPA to do my taxes.

And I was surprised that the majority of Americans do use tax professionals:

Because the tax code is so complicated, more than 60% of Americans have professionals do their tax returns. That's more than 80 million out of the 134 million individual returns filed in fiscal 2006.

By the way, just because I use a CPA doesn't mean I stop studying the tax code. I know it fairly well and am a vital part of making sure my CPA has a complete picture of my income, deductions, etc. so we can minimize the amount of taxes I owe.

The piece also lists what a good tax preparer should do including:

A good tax preparer starts by asking a lot of questions. The only way you'll get your money's worth is if the preparer understands what you do and how you do it -- and then scours for every legitimate deduction.

A good tax preparer is a teacher who educates you not only on what's allowable as a deduction but also on how to structure your activities to minimize your tax exposure.

The good preparer should focus not only on your 2007 transactions, but also on how you can reduce your 2008 taxes.

I would say that my CPA is "ok" in these areas. She'll certainly answer any questions I have (and I have many each year because I'm pretty up-to-speed on the general rules, but not well-versed on how they apply to my specific case), but she's not very pro-active. That said, the firm does have a three-page questionnaire I fill out every year that's meant to identify new deductions/potential tax issues, so perhaps that's the "pro-active" part of the service.

For me, here's the bottom line:

Clearly, a tax attorney is going to be more expensive than an enrolled agent or a storefront tax preparer. But if your income justifies it, the more sophisticated advice and direction should more than offset the additional cost.

Yes, it's expensive to hire a good tax professional. But as they say above, "the more sophisticated advice and direction should more than offset the additional cost." I have certainly found this to be true.

Comments

[Paul]

We do our own taxes using Turbo Tax. Our tax situation is fairly simple (no home business and a small amount of taxable investments to report) and my wife is a genius and very organized, so I know it's getting done right.

(This gets back to the earlier post about the value of one spouse staying home. This is yet another way that my wife makes herself invaluable to our family by staying home.)

[Kevin]

I do my own, but I'm a CPA that does a lot of tax work anyway, so it takes me about 10-15 minutes to actually do my return.

By the way, FMF, if you want your preparer to be more pro-active, maybe set up a meeting in the summer time when we are usually not as busy. Also, for some people there is only so much you can do, at some point the new ideas just aren't there unless something has changed tax-wise in your life (start a business, have a kid, etc). I had a client at my previous CPA firm complain about this, and I basically told him we already were getting him all the deductions he could get and showed him how much that was saving him and it made him happy. I would also send him emails on some updates I got if I thought they applied to him.

[cory]

Far too many people use a professional to do their taxes. A lot of people out there have pretty simple taxes and can file with either a 1040EZ or a 1040 and *maybe* a Schedule A, which takes 1-3 hours of time to gather up your docs and fill out all the paperwork. But they're afraid of their taxes and would rather hoist the burden on to someone else.

This is where firms like Jackson Hewitt and H&R Block make the bulk of their money. (That, and those sketchy refund anticipation loans)

My taxes are still pretty simple (1040, Schedule A, a handful of other forms for incidentals), so I do them myself. Once they get trickier and I have to worry about funky forms of income and expenses like capital gains/losses, business revenue streams, rental income, etc, THAT is when I'll hire a professional.

[Katrina W]

I do my own taxes but only because for now they are fairly straightforward since I do not itemize deductions. I do keep a fairly in depth understanding of the code (as much as I can understand) so that I can determine if I get any other refunds or incentives as my situation changes. I expect I will file my own tax returns using TurboTax or equivalent for the next 2-3 years until it gets too complicated or time consuming. Although as of now I can't think of what life event makes it too complicated.

[Angie]

I agree that too many people hire someone to do their taxes. I hired someone for years, then I finally decided to do my own taxes this year and you know what? It wasn't nearly as complicated as I thought. Given I don't have a business to run or anything really complicated...but I own a house and earn taxable dividends and things so I do itemize...but you get all that stuff in the mail and the tax forms and instructions were user-friendly and very specific in that it told me exactly where to enter in the information on each form.

So when I got tax forms in the mail, I simply stuck them in a big envelope in a drawer until I had them all, then I took a couple hours of a Saturday morning to begin filling out the 1040 form. It was daunting at first, because I'd never done them myself before...but armed with a pencil and the 1040 instructions, I was surprised that it wasn't so hard.

I've heard great things about Turbo Tax but just decided to do everything manually and mail it in. And my state has a free i-file program so it took 10 minutes to enter in some information online and that was it.

[tom]

If you don't mind saying... how much does your CPA charge? We've always used TurboTax, but this year we moved to a new state, bought a house, got a new job, started school. So, now it's time to hire a CPA and I was just wondering what it would cost.

[Jim]

I do my own taxes by hand. I itemize and file schedule D & E. I've always done it myself cause I dont have a problem figuring it out and it saves me the cost of paying someone or buying software. But my taxes have gotten more complex in recent years and maybe a professional could help save me some money. I'm just not sure what more they could really do.

Jim

[rwh]

My mom was an accountant and she taught me to do my taxes 30 years ago. I continued to use paper returns until about 3 years ago when I tried Turbo Tax. I discovered right away the software was worth the money as it asked many questions and found many more deductions than I was aware of.

We too have just the usual tax return. We itemize and have in the past had child care expenses, but the kids are now too old.

What I've found helps is I use a yellow highlighter in my checkbook ledger for any expense that is deductible. In addition, I'll write a deduction in the checkbook ledger if I use my credit card. I clip to last year's return all the donation receipts and any interesting articles that discuss new deductions. We get many small deductions off our state return for school expenses, such as track shoes, musical instruments, school fees etc. They add up.

It takes me an hour or so every year to write on one sheet of paper all the charitible deductions, deductible expenses and income from all the 1099s, W2s etc. Then I go to the Turbo Tax site and enter it all in. That takes maybe another hour for federal and state. I pay $79 for both returns and the refunds come within a week or so.

I think it's great and see no reason to hire someone. It just takes minimal organizational skills. Maybe I'm unusual, but I have every tax return filed chrologically in my files going back 35 years. They take up maybe a foot of space in a file drawer. Not that big of a deal.

[Suze]

I've posted this over and over but I think it's worth noting that it's good to do your own taxes and familiarize yourself with theprocess if you have relatively straightforward taxes.

We've done so for years. Ninety-nine percent of our income is reported on our W2s, we have minimal dividend and income assets from investments and a substantial amount donated to charity. It's all logged when it happens during the year so at tax time I just plug it into Turbo Tax.

I know a lot of people who go to tax professionals who could easily do their own taxes but who have been scared away from it. That's fine, it's their decision as to how to spend their own money, but I do think some people are just frightened of taxes.

[No Debt Plan]

Our taxes are relatively simple so we do them online. Haven't had an issue yet (knock on wood).