Should you do your own tax return or pay a professional to help you? The answer varies for everyone. If you have an easy tax situation, you can save money by handling your own return, but in other cases, a professional is well worth the investment because they can help reduce your tax liability, increase your refund, or save you money in other ways. Here’s what you need to consider while making this decision:
Do You Itemize?
On individual tax returns, you have a choice between claiming the standard deduction and itemizing your deductions. You can itemize deductions for mortgage interest, charitable contributions, state and local income tax up to $10,000, medical and dental expenses over 10% of your adjusted gross income, gambling losses, etc.. If the total of these deductions exceeds the standard amount, you should itemize, and if you itemize, you may want to work with a professional to ensure you don’t overlook any deductions.
Keep in mind that fewer people itemize now. By increasing the standard deduction to $12,000 for individuals and to $24,000 for couples, the Tax Cuts and Jobs Act (TCJA) reduced the number of people who need to itemize. Before the TCJA, about 30% of tax filers itemized, but that number has fallen to around 12%.
Theoretically, anyone can itemize if they have enough deductions, but as a general rule of thumb, high-income earners are much more likely to itemize than low wage earners. For example, in the tax year 2016, 90% of people who earned over $500,000 itemized, while only 7% of people who earned under $30,000 itemized.
Do You Have a Complicated Tax Situation?
The more complex your taxes are, the more a professional can help you. If you have complicated investments, run your own business or own rental property, a professional can help to ensure that you fill out your return correctly, have the lowest tax liability possible, and meet tax compliance requirements for your business.
You should also consider contacting a tax professional if any of the following apply:
- You have residency or employment in multiple states.
- You’ve found mistakes on previous years tax returns, or the IRS has amended previous years’ returns for errors.
- You don’t understand the questions on tax prep software.
- You’ve received tax documents you don’t understand.
- You have foreign assets — even if you don’t earn money from these assets, you still have to report foreign assets with a cumulative value of over $10,000.
- You are adopting a child — as of 2019, you can claim up to $14,080 in adoption tax credits, but you need to document your qualifying expenses correctly.
- You’ve Inherited assets — if you sell these assets down the road, you may have to report a capital gain, but you don’t want to use the value of the assets when your loved one purchased them. Instead, you need to use a step-up basis, and an accountant can help you figure out the specifics.
- Your spouse died during the tax year.
- You’re caring for elderly parents — You may be eligible to claim them as dependents and claim a deduction for their medical bills.
- You’re paying for grandchildren’s college tuition — you can claim a special deduction, but only if you meet certain criteria.
Can You Easily Use Tax Software?
If you have a fairly straightforward tax situation, you can easily use tax software to complete your return. Quality tax prep software guides you through the process by asking you questions. For instance, the software asks if you have any children, if they lived with you during the year, and what their Social Security Numbers are. Then, the software automatically populates your return based on your answers.
The software can even guide you through filing returns for your business. However, if your tax situation is more complicated than being self-employed, you should probably hire a professional. For example, tax software can be very effective for reporting freelance income and claiming a few business deductions, but if you run an incorporated business with multiple employees, inventory, and other financial complexities, you almost certainly want to reach out to a professional.
How Much Does Tax Prep Software Cost?
While deciding if you want to use tax software, you should consider the cost compared to hiring a professional. The fees vary, but typically, the more complicated your situation is, the more you should expect to pay. For instance, in 2018, TurboTax offered free filing for basic returns but charged $119.99 for self-employed returns.
Additionally, TurboTax, H&R Block, and a few other companies now offer you the chance to have an accountant look over your return, and you should expect to pay between $80 and $100 for those services. Depending on the software you choose and your situation, state returns cost between $30 and $45, but some companies offer free state returns if you qualify to use the free version of their software.
If you have self-employment income, need to file a state return, and want to have a professional look over your return, you should expect to pay between $235 and $250 for tax prep software. Ultimately, you need to consider whether or not you’d be better off putting those funds toward a professional.
What Is the Average Cost of Hiring an Accountant?
According to the National Society of Accountants, accountants charge an average of $176 for a state and federal return with no itemized deductions, and they charge about $273 for itemized returns. If you own your own business and submit a Schedule C, you should expect to see fees around $457. Note that these costs vary widely by location.
Accountants can potentially save you a lot of money by helping you take advantage of credits or deductions your tax software is missing. To get a sense of the potential, consider booking a consultation with an accountant. Many firms offer this service for free, and during the meeting, the accountant can ask you questions to help you determine if you might be missing anything valuable with your current tax prep strategy.
But accountants can also help you save money in other ways. If you own a business, they can steer you toward the best tax planning strategies or the optimal business structure to reduce your tax liability. For instance, if you convert your sole proprietorship into an S-corporation, you may save money by reducing your self-employment tax.
Do You Qualify to File for Free?
If you qualify to file for free, you don’t usually need to hire a professional, and you should take advantage of the free options. The IRS offers a free tax return filing service in conjunction with The Free File Alliance. To find out if you’re eligible, answer a few questions about your situation on the free file site, and then, the IRS will tell you which tax software companies can handle your return for free. If you qualify for free file, you can also use the IRS 2 Go App.
In most cases, you need to earn under a certain threshold to qualify for free filing, but you may have to meet additional criteria as well. For instance, even if you’re under the income threshold, some software companies may not offer you the chance to file for free if you have rental income or own your own business. However, according to the IRS, as of 2018, as long as you earn under $66,000, you can find at least one option for free filing, and if you’re an active-duty military personnel, you can file for free with any of the partner software companies as long as you’re under the income threshold, regardless of other specifics.
Most major tax-prep software companies also offer a free version of their software which you can access directly on their websites. Generally, to use the free version, you can only have W2 income and interest or dividend income. If you own your own business or receive 1099-MISC for self-employment income, you cannot use the free versions. Additionally, with the free versions of most tax software, you can claim the following credits:
- Child tax credit
- Earned Income tax credit
- Education credits
- Credit for elderly or disabled
If you want help in person, the Volunteer Income Tax Assistance (VITA) program offers free tax assistance to qualifying people at libraries, community centers, and other locations around the country. To get help, you usually need to be over 60 years old, earn under $56,000 per year, suffer from a disability, or have limited English language skills. To find a location near you, use the online locator tool, or call 800-906-9887.
The Final Decision — DIY or Call in the Pros?
Complicated forms and constantly changing tax laws make filing your own return challenging, but at the same time, tax software companies are constantly refining their processes and making their products easier to use even if you have a slightly complicated tax situation. However, with a truly complex situation, the right tax professional can help you lower your tax liability and save you money in the long run.
