Did you know that a majority of U.S. taxpayers hire someone else to prepare their tax return, instead of doing it themselves? This has always baffled me. And it’s not just the super wealthy taxpayers with complicated business and investment income that hire tax preparers, either. There are plenty of people packed inside H&R Block and Liberty Tax who are at or below the median income and who have nothing more than a W-2 and maybe a mortgage and a handful of other deductible expenses to report. In fact, 68.5% of filers don’t even claim itemized deductions! As a person who prepares her own tax returns, along with several of the family businesses’ returns, I’m going to give you 5 reasons why you should do your own taxes.
#1: The Tax “Pros” Are Usually Not Professionals At All
Every year, tens of thousands of people are employed as tax preparers. The exact number is unclear, with the Bureau of Labor Statistics reporting that approximately 68,000 people are employed as tax preparers, and H&R Block boasting of hiring 80,000 people each year. Some of them are CPAs, attorneys, or enrolled agents, but many of them are students, stay-at-home parents, or people who are primarily employed in other areas who take on tax preparation work to supplement their income. These non-financial professionals flock in droves to H&R Block, Jackson Hewitt, Liberty Tax, or local independent tax shops to work on a seasonal basis for those companies.
How much training do those seasonal tax preparers have? Often not much. While some of them are supposed to tax their employer’s tax course prior to beginning work, some of those individuals report that they were not rigorously graded, and some of them were freely given the answers to the tests by their instructors. Do you want your tax return to be prepared by someone who couldn’t pass the course on his own?
The big tax preparation firms don’t pay all that much, which drives away the real professionals. H&R Block, for example, pays roughly minimum wage, and then gives bonuses for the amount of tax returns prepared and the number of additional services sold to customers, such as the “peace of mind” protection against errors and tax audits, and high-interest/high fee refund advances.
While it’s true that there are some legitimate finance professionals working at the main tax preparation firms, they are in the minority. The median wage is $17.30 per hour for tax preparers, which translates to a salary of $35,990 per year. By contrast, the salary threshold for professional workers to be classified as “exempt” employees under overtime laws is $41,600 in California, and the Department of Labor’s proposed rules would raise the federal limit to $50,440. That means that more than half of the tax preparers tracked by the BLS aren’t classified as professionals under the labor code.
#2: The Tax “Pros” Use Software. So Can You.
Listen, I get it. I’ve seen title 26 of the United States Code, and I haven’t exactly felt compelled to read the entire thing, cover to cover. Nobody has time for that. And that’s just the federal code; it doesn’t include your state’s tax code. Here’s the secret, though: your tax preparer hasn’t read all of it, either.
When you bring your documentation in to have a tax preparer do your return, they don’t start with a series of blank forms and a calculator. They start with a computer. You have a computer, right? You’re reading this blog, so you must have one. There are loads of companies out there that have tax preparation software, similar to the ones used by the tax “pros”, that can easily walk you through all of the necessary steps to prepare your own return.
TurboTax is the most popular tax preparation software out there. It has multiple versions, which range from about $40 for the simplest individual tax returns to $65 for individuals who have sole proprietor income or income from a rental property. TurboTax also offers software for businesses to prepare their tax returns, including corporations, LLCs, and trusts, at a cost of about $105.
If you don’t like TurboTax, there are plenty of other options. TaxAct is one option, which provides federal tax preparation for $0–$20, with an additional charge for state returns. You can even prepare and file your tax return directly at the IRS website, and it’s free if your AGI is below $62,000.
All of these software programs walk you through the input of your W-2, 1099, and other income and expenses, so you don’t need any tax expertise at all to prepare your return. You don’t even have to do any math, since the software will calculate it all for you. Since it’s all driven by the software, the question you have to ask yourself is whether you would pay a random person off the street to enter all of your tax data into a program for you. Maybe they have training, and maybe they don’t. As for me, I’d rather enter in the numbers myself.
#3: If You Want Something Done Right, Do It Yourself
The third reason to do your own taxes is that you will probably be a whole lot more careful and accurate with your return than someone at one of the bigger seasonal firms. Remember that they’re not getting paid all that much, and they get a bonus for getting more returns done. That means that the faster they can scramble through your tax return, the more they will be paid.
You don’t have to look very far online to find a host of complaints from people about tax preparers who got it wrong. My former neighbor (we’ll call her Shelly) was divorcing her deadbeat husband, Dick. They were separated and waiting for papers to be final. Dick had run into some trouble with back child support owed to a previous wife. Dick had recently “changed jobs” (his primary source of income was from illegal drugs), so his former wife was never really able to collect from him. The problem is that Shelly, who was a hard-working dental hygienist with two kids, was getting screwed out of her several thousand dollar refund because the IRS was attempting to collect the back child support that Dick owed by seizing Shelly’s refund. Shelly had gone to H&R Block, where several employees told her that she was out of luck. I told her to call the IRS directly and ask. The very helpful IRS agent told her that she could file an innocent spouse petition, and after a couple of months of processing time, she was able to get her full refund back.
Another advantage to doing your own taxes is that you know your taxes were complete and submitted on time. The IRS and Franchise Tax Board are not perfect, and sometimes they make mistakes. One year the Franchise Tax Board told me that it didn’t receive Form 8825 for one of our business tax returns. I looked in my file to see what was sent in. Whenever I prepare a tax return, I print two identical copies, and keep one in a file and mail the other one in. Sure enough, in my file there was a Form 8825 attached to the return. I wrote the FTB a letter saying that the form was included in my file copy, and so it must have been in the original return that was submitted, and enclosed another copy. I said that the file must have been separated at the FTB offices and that form must have been misplaced. The FTB accepted my explanation and didn’t impose a penalty. If someone else had filed for me, I wouldn’t have known if they had sent the form in or not, so I wouldn’t have known whether to blame the tax preparer or the FTB.
#4: Do Your Own Taxes and You Can Save a Lot of Money
According to the National Society of Accountants, the average cost to prepare a 2014 tax return was $273, and that included only a Form 1040, Schedule A, and a state return. The fees varied by region, with the far west states (California, Oregon, Washington, Alaska, and Hawaii) coming in at the highest rate, $348. Tack on to that additional fees for preparing a Schedule C (+$174), for reporting capital gains on Schedule D (+$115), and for reporting rental income and expenses on Schedule E (+$126). If your tax return includes all of these forms, like mine does, you can expect to pay $763, and that’s just for the federal return. There may be additional tack-on expenses for state forms. By contrast, on Turbo Tax, you can expect to pay a maximum of $65 for individuals, even with all of those schedules, and that includes a state return for one state. Take the opportunity to save yourself $700 by doing your own return.[amazon template=iframe image&asin=B01617VPUY] [amazon template=iframe image&asin=B01617VQJ4][amazon template=iframe image&asin=B01617VNVK][amazon template=iframe image&asin=B01617VO2S]
For partnership or LLC returns, the average fee was $634. For corporations, $817. For S Corporations, $778. For trusts and estates (estate income tax returns, not the Form 706 estate tax return), expect to pay $457. Again, in TurboTax, you could do any of these returns (or even several of these returns) all for a flat cost of about $105. The more corporations, LLCs, and trusts you have, the more you save.
#5: You Get Smarter About Your Tax Picture
The last reason to do your own taxes is one of the best, in my opinion. It’s that by preparing your own tax return, you get smarter about your overall tax picture, and you can see firsthand areas where you can improve. Only by plugging in your own numbers and monkeying around with them can you see the effect of increasing your charitable contributions, or maintaining your health insurance, or what the tax effect would be of buying an investment property and taking depreciation on it.
Do you do your tax returns yourself? Have you ever had a bad experience with a paid tax preparer?