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 check is in the mail, so to speak.
For others, preparing taxes presents a stressful situation. Imagine handling numerous W-2s, 1099s, navigating the new qualified business income (QBI) rules and tracking a laundry list of write-offs related to your business, side hustles, real estate holdings or other income sources. While certainly not impossible to DIY (do-it-yourself) with the best tax software, this can still serve as 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, the most common decision point boils down to how comfortable you feel doing your own taxes. If you are a seasoned tax DIYer who digested tax reform well and knows what to expect on your return, proceed on your own by downloading your forms for free or purchasing a copy of tax software from TurboTax or the like. 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. hire 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.
Two Times When You Should DIY Your Tax Return
1. You Only Have W-2 Income and Claim the Standard Deduction
When your tax situation involves relatively little complexity, justifying the expense of hiring a professional might be difficult. 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 DIYing your tax return. This is especially the case when you also only claim the standard deduction as a means for reducing your taxable income.
Tax reform sought to reduce the complexity of preparing tax returns for individuals by doubling the standard deduction. This blunt tool made itemizing deductions that much harder with a higher threshold to cross. 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 overcome these high amounts, you will need to have a considerable amount of charitable contributions, mortgage interest or other deductible expenses to itemize.
If you find yourself in a tax situation earning an adjustable gross income (AGI) of $69,000 or lower, consider DIYing your return with free software made available through the Free File Alliance. Over 70% of Americans qualify for the program through this partnership with the IRS. Consider using this program or purchasing some reasonably priced tax software from TurboTax or H&R Block, both of which sometimes have free software options for simple tax circumstances.
2. You Experienced No Changes from Your Previous Tax Situation
If nothing major occurred to your tax situation this year, relying on your work from last year with numbers from this year might make sense. This is, of course, if your situation was easy to handle last year.
In the event you didn’t experience anything material changing in your life (e.g., you didn’t get married, divorced, have a child, become unemployed, etc.), and the time requirement doesn’t present a challenge, DIYing your taxes 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 you may have experienced.
2 Times It Makes Sense to Hire a Tax Pro
1. 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 tax 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, hiring a tax professional might not immediately result in a reduction of work on your part on account of this documentation requirement. 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.
2. You Sold a Business En Route to Retirement
Closely related to the first instance of when hiring a tax professional makes sense, should you have reached a point in your career where you want to avoid any retirement mistakes and 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 either 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.
The Bottom Line on DIYing Your Taxes or Hiring a Professional
When it comes to choosing between DIYing your taxes or hiring a professional to handle your return, the choice ultimately comes down to the complexity of your tax situation, comfort level, effort you are willing to put forward and cost.
For those who have fairly simple financial situations, preparing your own tax return generally poses little problem. But the question remains about whether your situation qualifies as simple. How would you know, relatively speaking?
In general, if preparing your taxes simply requires pulling data from various sources (e.g., bank accounts, brokerages, W-2, a handful of 1099s, and other documents), then you probably qualify for doing your own taxes. In this case, you can easily rely on basic tax software or the free forms found on the IRS’ website.
However, if you find yourself uncertain or even uncomfortable handling any aspect of your own taxes, consulting a professional might serve as your best course of action. While costlier than DIYing your taxes, the added peace of mind becomes worthwhile, especially if it avoids IRS penalties and fines.
Regardless of which choice you make, you will also want to set aside time to review your tax return for accuracy. While a professional certifies accuracy and will be needed to help down the road in the case of a tax audit, 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 outsource it to a professional. After you file, keep a copy of it and any supporting documents for your records for at least three years in case you become the subject of an audit. Happy filing!
Riley Adams, CPA, is originally from New Orleans but now lives in the San Francisco Bay Area, where he works as a senior financial analyst at Google. He also runs the personal finance site called Young and the Invested, a website dedicated to helping young adults invest, manage and plan their money with confidence.
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