By now, most of you should have received your 1099s or W2s from your employer to start your taxes. According to a recent survey, 49 percent of respondents said they would pay someone to do their taxes, 38 percent would do it themselves with tax preparation software, 10 percent would do it themselves by hand, and 3 percent will have a friend or family member do it for free.
How do you know the best way to prepare your taxes? The choice could either save or cost a large sum of money. Taxes are likely to continue to rise and become more complicated. Tax preparation fees can cost several hundred dollars, paying unnecessary taxes can run into the thousands, and the cost can be greater if you file a false return. This is why your choice can be one of the most important financial decisions you make!
There are three basic options when filing taxes:
- Preparing it yourself using tax software. Prices range from $9.99 to $49.99 for online programs such as TurboTax, TaxAct, etc. Some offer free versions if you have simple tax needs. You also can go to the IRS site to file for free.
- Hiring a tax professional. Those who are qualified to help are Certified Public Accountants (CPAs), tax lawyers, and enrolled IRS agents. They charge either a fixed rate or hourly service fee. According to the National Society of Accountants, federal and state tax preparation with itemized deductions costs an average of $261.
- Using a tax storefront service. By now you have probably seen commercials from H&R Block or the person dressed as the Statue of Liberty waving a sign for Liberty Tax. These companies help you fill out tax forms but are not CPAs or accountants. The average cost is $147 for H&R and $191 for Liberty.
Which one should you do? There is no one-size-fits-all answer, but here are some rules of thumb that can help. Click here for a comparison chart and breakdown of costs for online tax options.
Prepare your own taxes if:
- You have a simple tax return with few or no deductions, investments, dependents and don’t own a business.
- You have patience and time to do it. According to the IRS, the estimated time to complete a return is 16 hours.
- You are comfortable doing your own research. You will have to navigate the tax software or forms, and fix errors as they pop up.
Hire a tax professional if:
- You have a complicated tax return with many and large deductions, investments, dependents and own a business. If you plan on itemizing your deductions, it may be best to get professional advice to maximize them. You make more than $200,000 a year. Studies show that when you hit this income level, your chances of being audited are much higher.
- You had a major life change. If you got married, had kids, bought a house or started a business, then you want to document it the right way to avoid getting audited.
- You don’t have the time, patience or knowledge to do it!
Hire a tax storefront service if:
- You have a simple tax return but want to outsource filling out the tax forms and filing.
- You want the convenience of dropping by to see a tax preparer without an appointment.
- You want it done as quickly as possible without going online.