Most young people are perfectly capable filing the Form 1040 EZ, or even using the longer Form 1040 or 1040 A. As personal finances grow more complex, becoming eligible for more and more tax credits, or needing to report common tax additions, filing your own taxes can be a greater burden, with more tax credits overlooked and higher possibilities for penalties.
What is the choice?
People generally have very mixed attitudes towards hiring a tax professional to file their taxes. Some people believe it is a waste of money, and will always work through all the tax worksheets by hand themselves. Others purchase tax preparation software or use online tax preparation services, like TurboTax or TaxSlayer, which simplifies most of the worksheets and forms. Still others prefer meeting with an accountant face-to-face, explaining their tax situation and letting the professional do all the leg work.
There is a constant balance between choosing the method that will yield your highest return versus how much you want to spend for that service. Use these guidelines when you make your decision on how to file your taxes for this year.
Filing taxes yourself means actually obtaining or printing the required forms, filling out the worksheets included in the instructions to calculate your tax, deductions, and credits, and mailing it personally to the IRS. In the past, this was the way nearly all Americans filed their taxes each year.
Filing taxes yourself costs nothing but time.
When To Use This Method
If you have no dependents and no dependents, tax credits, or additional income to report, filing your taxes using the Form 1040 EZ can take as little as 5 minutes, and you can expect a direct deposit to your bank account soon after. The simpler your tax situation, the more sense it makes to file yourself.
When To Use Something Else
As your personal finances become more complex (usually after having children, purchasing a house, or having a significant amount of investments), the time cost of filing taxes grows exponentially, as does the margin for error. The most common mistakes are simple calculation errors (which can trigger an audit, or at least cause significant delays to your return), or missing out entirely for tax breaks you might qualify for, but may not have realized.
The IRS holds about $1 billion each year in unclaimed refundable tax credits, from a combination of people simply failing to file a return and others missing out on credits they are eligible for (most commonly the Earned Income Tax Credit).
Even if you are confident you can file your taxes yourself every year, it is a good idea to file with a qualified tax professional at least once every few years to ensure you have not missed anything. You can even use a tax professional to review previously filed returns to make sure nothing was missed, and file a 1040 X correction form to get any returns you may have missed.
Tax Preparation Software
Tax preparation software has taken a huge amount of market share in recent years. There are dozens of software companies and even apps to help you get filed on-time, and with good reason – all of the calculations are handled automatically, so there is no margin for error with arithmetic mistakes, and the simple form structure helps make you aware of everything you can claim.
When to use this method
The strongest point of tax preparation software is the ability to quickly and efficiently identify and apply some of the biggest tax deductions, credits, and additions. This makes tax prep software very popular with everyone from part-time workers looking to claim their EITC without necessarily knowing which forms they need to families with children looking to claim various common tax credits.
When to use something else
Tax prep software is not free, which is the most common reason why people with simple returns still prefer to file on their own. Tax prep software is also not a “cheat code” – you can still miss out on some deductions or credits that may not be very well explained by the software, and it may be very difficult to report certain types of extra income (like if you have tips or cash earnings not reported on your W-2). Investment income and capital gains from sale of stock may still be fairly complicated to file with some versions of tax prep software.
Filing your taxes through a professional accountant is traditionally the most reliable way to get the highest returns. Professional accountants are trained to know the ins and outs of the tax code, plus are generally aware of new tax changes that may take affect from year to year. One reason so many people choose to file with an accountant in person each year is very human – it is helpful to actually sit down with someone and discuss finances over the last year to help identify tax breaks, credits, and any other claims you may need to make.
When to use this method
Generally speaking, the more complex your tax filing, the more you will benefit by using a professional accountant. This is doubly true if you have any income without a normal W-2 or 1099, such as contract work or side jobs, where an accountant can help you get your entire tax situation organized and filed correctly. There is a lot of benefit in the experience that a tax professional can bring to your filing.
Professional tax firms also usually offer assistance in case of an audit, which can remove a huge amount of stress and hassle by having a pro in your corner.
When to use something else
This expertise does come at a cost – filing with a professional in person is typically the most expensive way to file, since it requires dedicated one-on-one time with a highly-trained expert. If you believe you have very few tax credits or deductions, it will be cheaper to simply file your own.
Many large accountancy firms extensively market to get more people in their doors, typically by offering a low advertised rate for a basic return, with higher charges added if you have any complexities (like interest to report or stock dividends), so before booking your appointment you may want to ask about the charges for certain types of filing.