Most people tend to file their income taxes electronically by using tax preparation software or by hiring a tax professional. Only a brave 10% of taxpayers fill out and file paper forms, presumably without much assistance. Like most decisions related to money, it's important to carefully consider your filing options since a simple error could result in a costly mistake.
As you gather your W-2s, 1099s, or other tax documents, consider the pros and cons of the DIY approach versus hiring a tax professional.
When You Might Consider Doing Your Own Taxes
- Your tax situation remains unchanged. If you can barely distinguish between your 2020 and 2019 finances, you might have an easy time filling out your return. A simple or unchanged financial situation makes transferring many of the same line items from one return to the next a quick and painless experience.
- Your finances are straightforward. If tax prep consists of locating a single W-2 and you have no plans to itemize deductions or claim tax credits, then hiring a professional might be overkill. Even several W-2s and an intention to claim only the standard deduction could make paying for assistance unnecessary.
- You'll save money. Depending on your circumstances, hiring a tax professional isn't cheap. The average cost of $273 for an itemized IRS Form 1040 (with Schedule A and a state tax return) could take a serious bite out of your expected refund. Instead of paying someone to file your return when little has changed year-over-year, save the cash and bank more of your potential refund by doing it yourself.
- You'll pay more attention to your finances. Filing your own taxes forces you to get a firm grasp on your overall financial situation. An annual snapshot of your income and major spending can alert you to changes you need to make to achieve long-term financial goals. For example, you might find that you're spending more on unreimbursed medical care expenses than you thought. This could result in a qualified deduction, while also nudging you to re-evaluate your health insurance plan.
Why You Should Hire a Tax Professional
- Your income or assets changed significantly. Last year many lives were turned upside down due to COVID-19. A record number of people lost jobs and received unemployment benefits. Some also withdrew retirement benefits early to pay for living expenses. Tapping into either benefit could result in tax consequences that might best be teased out by a tax professional. Even if your work life remained stable, other life events could affect your return. Examples include marriage, divorce, or the birth or adoption of a child.
- You could save money. If your refund exceeds the cost to pay a tax professional, you could still come out ahead financially. Their experience might lead them to uncover a tax deduction or credit you would have overlooked if you filed the form without expert help.
- You'll save time. Unless you have a simple tax return, you'll likely spend more than a few hours figuring out the latest tax code and whether you can or should claim a specific tax deduction or credit. This doesn't include the time to gather all of your forms, fill in each line item, review it for accuracy, and submit the return. If you hand off your tax documents to a professional, you could instead use that time to relax with family and friends.
- Your risk tolerance is low. Even simple tax returns can contain filing errors. Maybe you misunderstood the question, made a math error, or overlooked an eligible tax break. Filing errors could result in a tax audit, financial penalty, or both. You can reduce the risk of costly mistakes and gain peace of mind by relying on a tax professional for assistance.
- You might have access to year-round tax assistance. You can call on your tax professional throughout the year. They can help you plan for the tax consequences of such things as buying or selling a home or other large asset. An experienced tax professional might even share steps you can take now to reduce next year's tax liability.
The more complicated your tax situation, the more beneficial a professional tax preparer might be to your finances. Remember that regardless of who prepares the return, you are responsible for the information submitted to the Internal Revenue Service.
*Logix Federal Credit Union is not affiliated with the IRS or nsacct.org, and is a separate entity. Please contact Logix at (800) 328-5328 or visit www.lfcu.com if you have any questions about this topic or would like to consider opening an account. This blog is intended for informational purposes only and is not provided as tax advice. Please consult with a tax professional or attorney for specific tax related questions. Logix is Federally Insured by NCUA and is an Equal Housing Lender.