The last week or so I have been focusing on producing the Full Time Finance Households taxes. Our taxes our fairly complex so it takes a while. That being said I am a strong proponent of doing your own taxes. As such today I’m going to write about doing your own taxes.
Why You Should Do Your Own Taxes
First let me start off by saying some tax laws are not the most intuitive. I get why many people pay someone to do their taxes for them. That being said paying someone can cost 100s of dollars, while doing your own can be considerably less.
Online Tax Prep
A note on the online tax prep options before I continue the post. Most of them provide free versions for uncomplicated taxes or lower income filers. Taking advantage of this may mean you pay nothing in tax prep. To those starting out that can be a significant financial impact.
Doing Your Own Taxes Provides an Opportunity
Add to that the opportunity doing your taxes provides. There is no better time to take stock of your financial situation and make adjustments than during a time when you must analyze all your accounts. The sad truth is most people just pay their tax preparer a one time fee for their tax documents and do not give it a second thought. That’s doing yourself a disservice. Quite frankly most people’s tax returns are busy work. While a tax preparer can bring short term value to you in the form of knowledge of the busy work of filling out the forms, that is not their real long term value.
I would argue a tax preparer only brings one true long term value to the table. That is a experienced set of eyes to consult with you on next years tax moves. If you are not using your tax preparer as such a consultant then you are most definitely better off doing your own taxes.
How to get Started Doing Your Own Taxes
The best way to get started doing your own taxes is to pay a tax preparer to do your taxes. Say What? Well, it’s a little more complicated then that, but that is the general idea. If you have never done your own taxes before then you should get someone who knows what they are doing to do them for you.
Utilize Tools To Replicate Tax Preparer Results
Simultaneously open an online account at one of the online tax programs like Tax Act, My Free Taxes, or Turbo Tax. Simple tax forms usually have no charge with these systems. Even if your situation requires a pay version, unless you submit your taxes to the IRS these online versions generally do not charge. The thing is in this case we’re not going to do that. Instead your going to take your completed return from your tax preparer and your supporting documentation. Then you are going to work through your return answering the questions until you’ve determined how to replicate your preparers results.
Once you’ve replicated those results, save them. Now you know how to do your taxes and next year you do not need the preparer, even if you might need the tax consultation. I know your saying, but tax laws change year to year so don’t I need a retraining ever year? Well, not really.
Tax Preparation Does Not Change Much From Year To Year
Even the 2018 Tax Law Changes while significantly changing caps and rates, do little for the type of questions you need to answer in one of these tax programs. You still need to know your dependents with their ages, your w-2 or 1099 income, and any expenses it may ask about. The results may change somewhat, but the entries do not change much from year to year.
Higher Income Still May Need A Tax Consultation
If you are still reading to this point you’ll note I’ve left a bit of a hole in this post around the Tax Consultation. Doing your own taxes has solved the filing aspect but what about future tax moves? Well for that I recommend doing a consultation with a tax preparer at least each time your situation significantly changes. Say you have kids, buy a house, or initially start investing. Those are good times to consult a tax preparer. Taxes shouldn’t guide your ultimate decisions, but they should be a factor in your implementation. Your tax advisor can help you with that implementation.
For example the Full Time Finance household holds one 0 coupon Treasury. These are a real pain to do taxes on. Had I consulted with a prepare before buying them I probably never would have purchased them. Instead I would have just bought CDs or normal treasuries. Both would serve the same goal, the low risk portion of my portfolio, but the devil is in the implementation.
The above is an example of saving you difficulty on tax forms, but other situations can save you significant money. You’d be foolish to save yourself 300 dollars on a tax preparer only to throw it away paying an extra 2000 dollars in taxes. And yet I see this all the time at my work. I talk to newer parents and they are not aware of the dependent care FSA at my employer. They are throwing away a 5000 tax deduction each year. It’s a tax preparers job to consult and steer you towards these type of tax savings implementations.
Choosing a Good Tax Preparer
For those years where you have a major life change, or you are just starting out, you need to find a good preparer. So how to find one? Well the first thing to note is your first time through provide a great option to vet a preparer for future use. A good preparer should be wiling to help you understand why your taxes turned out the way they are. If you can not make your tax forms match their results, then you should ask your preparer about specific areas of your return. If they can not explain it, perhaps it’s time to get a new preparer.
Besides this vetting I also suggest you consider non chain tax preparers. My experience to date with the large chains is they collect any old body off the street, give them a 3 hour tax preparation course, and release them on the public. If that is all a good tax preparation consultation took I’d be recommending a course rather than the occasional consultation. You want someone who has been doing taxes for a long time, knows what to look for and has a vested interest in keeping their understanding current. I also would recommend searching someone out with a CPA. Finally I would recommend taking suggestions from those in your community. Choosing a good preparer is critical.
Beware Tax Preparers Selling Investments
One final warning on your choice of tax preparers. Some preparers brand themselves as both financial advisors and tax preparers. There is nothing wrong with this on the face of it. But, if they try to push you towards and investment they are selling, run away fast.
Do you do your own taxes? Have you ever considered doing so?