In 2016, 42% of American taxpayers filed taxes without the assistance of a professional, up 1% from the previous year. Growing confidence comes from an increased comfort with technology and software companies, which deliver a step by step guide to tax filings. It is no longer necessary to have an in-depth knowledge of the tax code to navigate the average return, giving consumers enough self-confidence to do it themselves.
However, filing taxes on your own comes with certain risks and is not for everyone.
The following guide will help you decide whether you should file yourself or hire a professional.
File Your Own Taxes If…
Tax Situation Is Simple or Unchanged:
Tax software walks you through the most common tax credits and deductions through a series of questions. You answer the prompts, and the software enters the necessary data, in the correct boxes, on the tax form.
Stability makes it easier to file taxes yourself. Staying at the same job and residence allows you to compare returns across the years. Most software companies also allow you to import the previous year’s tax data for increased accuracy.
If you have kept the same job all year, do not have dependents, or significant investment income, it is relatively simple to file a return yourself without much room for error.
Good with Numbers:
Organized individuals who keep track of transactions, receipts and records for available deductions can file taxes accurately while minimizing your tax liability.
Do Not Own Multiple Properties or Unusual Investments:
Real estate and non-traditional investments increase the number of forms required to file. The more deductions and income streams you have, the more room for mistakes.
Understand Tax Laws:
Tax laws change annually, and self-preparing taxes requires you to keep up with these changes. Missing available credits and deductions could leave you paying more in taxes than a tax preparer would charge. There is also the issue of liability. When you file taxes yourself, you are responsible for any errors. Hiring a tax Preparer, share the liability and they can provide assistance in the event of an audit.
When you understand the tax laws, you know which expenses you can deduct and what does not qualify, giving you an edge during the year. You can make sound financial decisions with tax consequences, save the appropriate receipts, and document as needed to qualify for the highest number of credits and deductions.
Want to Save Money:
In some cases, you can file taxes free of charge through the IRS website. Most tax software available through the IRS comes with income limits to qualify. For instance, families with household income below $60,000 can use free versions of popular tax software such as Turbo Tax, and often cover both state and federal filings.
Those who buy software can pay as little as $20 for an individual return to around $160 for businesses. Much less than you would pay to hire a professional, which averages $261.
Hire A Professional If…
Need Help Handling Money:
If you have difficulty following a personal budget and making a financial decision, then getting help could save more than the cost of hiring a pro. Failing to maintain records or input the correct information for deductions can lower your refund or increase the amount you owe the IRS. Many terms on IRS forms are not self-explanatory and can lead to confusion and mistakes.
Had a Major Life Change, Which Might Include a Marriage, Divorce, or Child:
Most major life changes have a significant impact on your tax return. Hiring a pro will ensure that you navigate your tax obligations correctly. The more changes, the more important it is to understand the ramifications. Many rules have age limits, income limits, and other qualifications, which can lead to mistakes.
Small Business Owner:
Many tax filers have second jobs or receive freelance income resulting in 1099 income, in addition to traditional small businesses. These returns require a different set of forms and rules, which can include paying social security taxes, work qualifies as a business versus a hobby, and the process of deducting losses.
In many cases, you should file quarterly returns to ensure you do not underpay the IRS. The higher level of complexity and the more time-consuming nature of business returns will often benefit from a professional tax preparer who can guide you through the process.
Earn Over $200,000:
Once income exceeds $200,000, the likelihood of an audit increases and taxes due to investment income can become more complex.
If you are an individual facing high out of pocket medical costs, mortgage interest, or donated large contributions to charity, you may save money by itemizing deductions, rather than taking the standard deduction. The process of itemizing taxes complicates the tax return. A professional can walk you through each item to ensure you receive the maximum deductions.
Need Expert Advice:
Professionals receive continuing education on tax laws each year and understand the intricacies of taxes much better than the average person. They can answer questions and create strategies to minimize taxes due each year.
The more complicated the taxes are, the more you will benefit from the expertise of a professional.
Tax Guidance Throughout the Year:
Hiring a professional not only helps with annual tax filings. They can file quarterly returns, when needed, create tax strategies, and provide advice on large purchases and decisions which impact both immediate and long-term tax obligations.
Other Factors to Consider:
Hiring a professional does not guarantee a refund.
The IRS estimates filing taxes will take around 16 hours to complete the basic 1040 form.
Minimize your tax bill by keeping receipts and maintaining accurate records. Proving you qualify for a deduction or credit is your responsibility, whether you prepare your own taxes or hire someone else.
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