During the pandemic, we all turned into do-it-yourselfers for everything from home renovations to portfolio management. We even learned how to bake bread and cut hair.
Is it, however, a good idea to do your own taxes?
It’s complicated, as is almost everything related to taxes. It depends on how messed up your finances are, how much you despise doing taxes, and whether or not you’ve recently experienced a life change.
DIY taxpayers are typically young, just entering adulthood, and have few assets. According to an IRS study, 53% of all taxpayers in 2021 will use a paid tax professional, but Gen Z will be significantly less likely than any other age group. People aged 18 to 24 used a tax professional at a rate of 33%, compared to more than 50% in every other age group.
Meanwhile, the IRS reported that middle-income earners earning $75,000 to $90,000 were the most likely (59%) to seek the assistance of a tax professional.
There are advantages and disadvantages to going it alone or enlisting assistance. We’ll unpack them for you here so you can make an informed decision. After all, making the wrong decision can cost you money or, worse, lead to an audit.
When is it appropriate to DIY?
If you have a limited number of income sources, such as a W-2, bank accounts, and 1099s, and intend to take the standard deduction, filing your own taxes may be the best option. You can save money and complete your tax return quickly if you use basic tax software or the free forms available on the IRS website.
If your taxable income is below certain thresholds, you have a disability, speak limited English, or are over the age of 65, you may be eligible for one of the IRS’ free filing programmes. You can find out if you qualify by visiting the IRS website.
The standard deduction for single filers and married couples filing separately is $12,950 this year; $19,400 for head-of-household filers; and $25,900 for married couples filing jointly.
If your deductions exceed those limits, you should probably itemise them in order to reduce your tax liability.
According to Mark Steber, chief tax information officer at tax preparer Jackson Hewitt, the transition to itemised deductions typically occurs after a major life change.
For example, “if you bought a home, you had one of the most significant life changes that will fundamentally change your taxes,” according to Steber.
Itemizing deductions takes more time and paperwork, but it does not always necessitate the use of a professional. It’s doable for the average taxpayer if your list of deductions is simple and well-organized.
Accountants advise that if you are uncomfortable with this process, you should consider hiring a professional.
When should you hire a tax professional?
When your tax situation is complicated.
Hiring a professional is a wise decision following a major life change such as marriage or divorce, having a baby, buying or selling a home or business, experiencing a major health issue, or retiring. Paying a tax professional is also prudent if you now receive income from multiple sources, have investment losses that require assistance, received an inheritance, or settled an estate.
And, because tax laws change all the time and total more than 2,652 pages (or well over 1 million words compared to the King James Bible’s 788,280 words or War and Peace’s 560,000 words), knowing them all can make anyone’s head spin.
Tax accountants, tax lawyers, and tax preparers are paid to understand these laws and assist you in navigating them in order to minimise your taxes.
How do I choose a tax professional if I decide to hire one?
It is critical to select the right tax professional. They have access to your most personal financial information, and you must trust that they will file your income tax return correctly. Regardless of who prepares your tax return, you are ultimately responsible for it.
The IRS provides some pointers for locating a reputable professional:
Examine the qualifications of the preparer. The IRS Directory of Federal Tax Return Preparers with Credentials and Select Qualifications, which is searchable and sortable, assists taxpayers in locating a tax return preparer with specific qualifications.
Examine the preparer’s track record. Taxpayers can inquire about the preparer with their local Better Business Bureau, including disciplinary actions and licence status. Check the State Board of Accountancy for any certified public accountants, the State Bar Association for tax attorneys, and the IRS’ enrolled agent status page for specific types of preparers.
Inquire about service fees. Avoid preparers who charge a percentage of the refund or who claim to have higher refunds than their competitors.
Ensure that the preparer is available to you even after the tax deadline has passed.
Keep all records and receipts. A good preparer will ask to see a taxpayer’s records and receipts, as well as ask questions to determine things like total income, tax deductions, and credits.
A blank return should never be signed. You should never be asked to sign a blank tax form by a tax preparer.
Examine before signing. If something isn’t clear, ask questions. Before signing your return, you should be confident in its accuracy.
Examine the refund information. Confirm the routing and bank account number on the completed return for a direct deposit or refund details if it is in another form.
Ensure that the preparer signs the return and that their Preparer Tax Identification Number is included (PTIN). The filed return must be signed by the preparers and include their PTIN. The PTIN is not required to appear on the taxpayer’s copy of the return.