Three Questions to Ask Yourself about Preparing Your Own Taxes

MSN Money gives you three questions you should ask yourself to determine whether or not you should do your own taxes. Their list:

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?

Here's my take on these three questions:

Time

The article says that the IRS estimates the average taxpayer needed 23 hours to do his 2010 tax return -- 32 hours if a Schedule C for business or a Schedule E for rental properties was filed. This assumes you have a fairly simple return with a limited number of deductions.

I don't have a simple return and I have a lot of deductions. So I'm way past the 32 hours estimate.

That said, even if you hire someone to do your taxes, there's still a lot of work to do. I have to get all my files and paperwork together to give to my CPA. I then summarize everything (Quicken helps tremendously with this) and type out specific thoughts for him to consider as he does the taxes. I'm guessing this takes 20 hours. Assuming completing my taxes from start to finish takes 40 hours, I'm saving 20 hours by having a CPA handle them. At $20 per hour (plug value of my personal time), that's $400 in time-savings alone by hiring a CPA.

Cost

Paying a preparer isn't really an issue for me. It's not like we're talking $10,000 or something here. It's a few hundred dollars and can be deducted as a business expense.

Complexity

I am NOT prepared to deal with the complexity of the federal code (not to mention our ever-changing state tax code). In addition to the time noted above, there's the frustration factor. 20 hours lying on a beach, watching TV, enjoying your family, playing video games, etc. is one thing. But 20 hours sorting through the tax code, trying to decipher what number goes where, is more akin to 20 hours of water dripping on your head. Or 20 hours of screaming endlessly into a pillow. Or 20 hours of holding your breath. You get the idea. Those 20 hours I get rid of are very unpleasant hours.

Yes, tax software can help. And I've tried it in the past. But sometime software makes assumptions to make things "easier" for you -- and those assumptions aren't always true. So I found myself checking and re-checking what the software was putting in each box. This, of course, added more time to the entire process.

Other Considerations

Then there's the planning/advice/feedback part of tax planning that you don't get unless you have a preparer. And you have to have the right kind of preparer at that.  My former CPA didn't offer any sort of help, but my new CPA does, and without charging me any extra.

In the end, it all comes down to the same thing every purchase comes down to: is it worth the cost? For me, the time savings, frustration factor, accuracy of the return, knowledge of the code (which can lead to extra savings), and planning issues make using a CPA to do my taxes a no-brainer.

How about you? How do you prepare your taxes and why?

Comments

[KJ]

Our return is very simple and I file it myself using free internet software. We are residents in a state that does not have state income tax so no state filing to complicate anything. Once I received my paperwork (only 3-4 sources for that paperwork,) it takes me maybe an hour to file. For our current situation, it would cost me more in time and money to hire someone.

[Jason]

I used to do my own but due to a business interest, my taxes got substantially more complicated about 4 years ago, so now I use a CPA. As soon as the standard TurboTax wizard process could not handle all the issues, I knew it was time to bring in the pro's.

That said, if I didn't have multiple state and foreign tax issues to deal with on my return, I would still be doing my own.

[SB @ One Cent At A Time]

I did my own so far. I am planning to continue the same this year. Mine is farely simple return with standard deduction. I don't itemize.

But, you have a point here, I don't know what I am missing.

[Kris @ Everyday Tips]

I have always used Turbo Tax pretty successfully, although I have no idea if I am overpaying by doing it myself.

One thing that prevents me from having someone else do the taxes is the collection of data. For me, that is the hardest part almost, and so I might as well just do it myself once I have all the paperwork together.

[[email protected]]

I've always wondered if I could do my own taxes but I don't want to risk messing it up so I never do. While it's very time consuming, it also saves so much money if I can do it myself. Thanks for this post, I will be asking myself these questions when trying to decide which road to take!

[SB]

I just did my taxes yesterday. Took me 2 hours. However, I just graduated and only had a real job for half the year and a relatively simple situation. I was also very motivated because I knew I would be getting a big return.

As I went through it though, I kept thinking to myself that next year I will probably hire someone. This year I was able to answer 'No' to a lot of questions about various accounts and I was also a dependent last year so I was not able to claim a lot of my deductions anyways. Next year, I will have more accounts (HSA, possibly more retirement accounts, etc) and am no longer a dependent, so we'll see.

[Jon]

It usually takes me about 2-3 hours to file all my taxes, that included itemizing, state taxes, and local taxes. This included collecting all documents needed. I have yet to come across any tax concept that I don't understand, but if I do I might consider a CPA.

[jim]

I think that the estimates of how long it takes to do taxes are very exaggerated. I really don't think it takes 23 hours for the average person to do their taxes.
Most people have W2 wages and standard deduction and tons of people can do a 1040EZ. I can do a 1040EZ in 10 minutes or less start to finish. I understand you have to add some time for collecting your receipts and adding all the numbers. etc. But again most people have little more than a W2 and some 1099's and maybe a few charity receipts. It doesn't take all day for most people.

Does anyone here spend 20+ solid hours doing taxes??

I've never spent that much even doing it myself with schedule E for rentals and stock sales to account for. AT most I spent 10-15 hours, and it was probably more like 8 hours max.
I don't think I'm too unusual, two other people already commented above that they spend 2-3 hours.

[Tim]

I think it's probably closer to 2-3 for most people. I use Turbo Tax Deluxe and I pay attention to any tax related news articles to see how they might effect me. I'd say it takes me 2-3 hours total fed and state to do. I don't find it that complex, 2 W-2's some 1099's mortgage interest, property tax and some charitable deductions are about it. Even last year when we were able to deduct IVF costs under medical it didn't seem that complex.

Like Jon while I have yet to come accross a tax concept I don't understand if I do it'll be time to consult a CPA. Also where I might want to consult a CPA is now that we are able to do more investing beyond retirement funds I might want some advice on tax efficent investing.

[SteveD]

I've always done my own taxes with TurboTax. Last year was the hardest (I bought and ran three rental properties for the first time), but it was definitely worth my time to learn the process (so I know what I can deduct and depreciate in the future). I'm much more mathematically inclined than the average American, and I kind of enjoy the pain :-D

I have a friend who also has rentals and pays a CPA to do his taxes. I did a quick review of his last year and found five obvious and significant mistakes, so I don't think he's any better off.

[Jclimber]

I do my own taxes using the Excel 1040 forms at www.excel1040.com

Pretty easy to enter the data and you can print them out to send in or copy the data into the IRS FreeFillableForms. Took me < 1 hr to enter in W-2's, interest, and deductions. Way less than 23 hours! Still need brokerage data to finish. I usually double-check with the free website forms (TurboTax, etc.).

[crashdamage1957]

I have always rolled my own. I don't think it ever took 23 hours, even back in the day prior to the availability of tax software when i did them manually using the IRS instructions. Over the years, the tax filing process has become more and more automated, and even tho the return is fairly complicated, requiring a schedule C for self employment income, schedule D for investment income, as well as reporting early distributions from an IRA,it takes me 2 or 3 hours tops to file using a free web based version of Turbo Tax. As others have noted, the biggest part of the job is gathering all the info. But, most of the needed financial data can be downloaded into the program directly , automatically, and the stuff that comes on paper only i just toss into a file folder kept on my desk until I file the returns electronically. I usually target Presidents Day as my day to get it done, just so I don't get caught up in one of those infamous April 14th internet tax filing log jams we've all read about. I think that for most people, paying a tax preparer is silly, since you are doing 80% of the work already in order to that person to file it all using the same online tax software that is available for free.

[Pop]

"One thing that prevents me from having someone else do the taxes is the collection of data. For me, that is the hardest part almost, and so I might as well just do it myself once I have all the paperwork together."

I was going to write the same thing, just because someone else does them for you doesn't mean you spend zero hours. Collecting the paperwork, reviewing the documents before filing, etc.: at that point I might as well do them myself.

And for all those things you're "missing" and that the CPA identified, as I can say is enjoy the audit!

[Pop]

"as I can say is enjoy the audit!"

Meant to write "all I can say is enjoy the audit."

[Mark]

I have done my own from the day I earned my first dollar. In some years when I was on foreign assignment and also triggered AMT, my tax return was close to 100 pages. It can indeed take 23 hours or more.

My employer paid a big accounting firm to do my taxes for me in some years, and I paralleled them with TurboTax. (Yes I am weird like that!)

Here's my experience:
1. Entering the data is very time-consuming. This does not go away when you use a paid preparer.
2. At least twice, I had to correct the tax preparer, based on how TurboT did them.
3. I don't buy this "know the Federal code" statement. I actually did look up the Federal code once when I disagreed with TT and guess what? TurboTax was already doing it right without my assistance.
4. Only by doing them yourself do you fully understand the effect of changes of various types. For example, did you know that even though the cap gains tax rate is 15%, the phaseout of exemptions under AMT makes the effective rate 22% on part of your income, and that the bigger the exemption Congress enacts, the more income is taxed at 22%? I only know that because I used Turbo and tested by adding/subtracting different amounts of tehoretical incoime and wondering why the taxes didn't do what I thought they should have. That enabled me to plan for future years. Maybe your tax preparer is the one genius that knows this particular detail, buut mimne wasn't.

[lincmercguy]

I've been doing my own taxes since I was 13. Back then, it was just the 1040EZ. Funny to think I went to the library to pick up the forms and booklets instead of printing them off of the internet. I started doing that once we had full blown internet service.

I kept doing that until 2003 when I did an internship as a contractor. I started buying Turbotax then. I've bought the level of TurboTax that I've needed depending on what I did that year. In 2007, I bought a house and got married, so it became a bit more complicated (although, I did my wife's taxes for her for several years before we were married). I used to print the forms up from TurboTax and mail them before E-file was included with the software.

Now, I'm a W-2 employee, my wife contracts, I have a son (just a couple more items to fill out for that), I run a farm in a different state, have had oil and gas leases for a couple of years in that state, and do a bit of contract work myself. Even with all of that, I still get by with TurboTax Home and Business.

In reality, when I was dealing with my Dad's estate, I had to correct several items for the lawyer and several items for the CPA that did the tax return for the estate. I may have just had bad ones, but I don't think I trust other people to do my taxes as this point.

I also suffer from a genetic disorder that doesn't allow me to pay people for things I'm capable of doing myself. My wife will attest to that.

I do have a couple of family members that are CPA's. I could have one of them do our taxes, but I know they would never accept payment from me. I think I also take a certain amount of pride in having control and knowledge of my finances, bookkeeping, and taxes.

I used to spend about 6 hours a year with taxes after they got complicated, but I've reduced it to about three this year. I used to use the supporting details for Schedule F to enter every last receipt. Obviously, this was very time consuming. I upgraded financial software last year to Quicken and keep categories based on the lines in Schedule F. While a direct import didn't work that well, I was able to make a few reports for these items and just take the totals into TurboTax. A little more diligence throughout the year pays off. I also use Quicken's vehicle mileage tracker.

I do have to buy a second state every year, so I end up spending about $120 in software. Sam's Club seems to be about the cheapest place to get it, and they did the $10 off promotion this year.

The only year TurboTax really irritated me was when I moved to Colorado. For whatever reason, it didn't handle the partial-year resident thing very well for either state. I had to do some things manually. Though my multi-state returns are easy now, so they've fixed the issues.

Now that I've been doing them for so long, I'm not sure I'd pay anyone to do them. I know them fairly well by now, plus TurboTax gathers data from the previous year's return so there's less information to enter.

I also make a hard copy of the returns and supporting documents each year, and burn the file to a CD. (All of my documents are copied to four different hard drives as well).

I've never had an audit, but I try to be honest and keep everything fairly organized. The schedule F definitions can be a bit vague, so I suppose they could ding me for miscategorizing on a few items if they got really picky. It wouldn't change any amounts though.