When to Hire a Tax Professional

Most young people are perfectly capable filing their own taxes using the IRS Form 1040. However, as your personal finances grow more complex and you become eligible for tax credits, have multiple sources of income, or need to report common tax additions, filing your own taxes becomes more complicated.  At the point where completing your own tax return becomes a burden, you may want to consider hiring a tax professional for help. 

What Choices Are Available When Completing Your Tax Return?

tax papers

People generally have very mixed attitudes towards hiring a tax professional to assist with fileing their taxes. Some people believe it is a waste of money, choosing instead to work through the tax worksheets by themselves. Others purchase tax preparation software or use online tax preparation services, like TurboTax or TaxSlayer, which simplifies most of the worksheets and forms. Still others prefer meeting with an accountant face-to-face, explaining their tax situation and letting the professional do all the leg work.

You will need to decide which method is best for you by considering your cost and benefits.  Use the following guidelines when making your decision on how to file your taxes for this year.

Filing Yourself

Filing taxes yourself means obtaining and printing the required forms, gathering the necessary income, expense, and taxes paid documents, and following the form instructions to fill in the specific numbers.  You will then calculate your tax, deductions, and credits to determine if you owe additional taxes for the year or will be receiving a refund.  Once the calculations have been made and the form has been signed, you are responsible for mailing the tax form and the required supporting documents to the IRS. In the past, this was the way nearly all Americans filed their taxes each year.

Cost

Filing taxes yourself costs nothing but time and a postage stamp.

When To Use This Method

If you have no dependents, tax credits, or additional income to report, filing your taxes using Form 1040 can take as little as 5 minutes, and if you are receiving a tax refund, you can expect a direct deposit to your bank account soon after. The simpler your tax situation, the more sense it makes to file yourself.

When to use a different method

tax girl

As your personal finances become more complex (usually after having children, purchasing a house, or having a significant amount of investments), the time needed to file your taxes grows exponentially, as does the margin for error. So your “cost” has increased.  Simple calculation errors can trigger an audit, create delays in the processing of your tax return, or cause you to miss out entirely on tax breaks you might qualify for but didn’t realize.

The IRS holds about $1 billion each year in unclaimed refundable tax credits, simply because people failed to file a tax return or they failed to claim credits they were eligible for (most commonly the Earned Income Tax Credit for low income individuals).

Even if you are confident you can file your taxes yourself every year, it is a good idea to file with a qualified tax professional at least once every few years to ensure you have not missed any new tax credits or deductions you were eligible for. You can even use a tax professional to review previously filed returns to make sure nothing was missed, and then file a 1040X correction form to receive any refunds you may have missed.

Tax Preparation Software

Tax preparation software has gained enormous popularity in recent years. There are dozens of software programs and apps to help you file your taxes on-time, and with good reason.  When using the software, all of the calculations are handled automatically, so there is no margin for error with arithmetic mistakes you might make, and the step-by-step instructions make you aware of everything you can claim.

When to use this method

software

The strongest benefit of using tax preparation software is the ability to quickly and efficiently identify and apply some of the biggest tax deductions, credits, and additions you may be eligible for. This makes tax preparation software very popular with everyone from part-time workers looking to claim their EITC (earned income tax credit) to families with children looking to claim various common tax credits.

When to use a different method

Tax preparation software is not free for most individuals.  This monetary cost is the most common reason why people with simple returns still prefer to file on their own. Tax preparation software is not necessarily easier.  You can still miss out on deductions or credits that may not be very well explained by the software, and it may be difficult to report certain types of extra income (e.g. if you have tips or cash earnings not reported by your employer on your W-2). Reporting investment income and capital gains from the sale of stock may also be fairly complicated when using some versions of tax preparation software.  So if your financial situation seems to be too complicated for you to understand, you probably want to choose to work with a professional.

Professional Accountant

Filing your taxes through a professional accountant is traditionally the most reliable way to get the highest tax refund.  Professional accountants are trained to know the ins and outs of the tax code. Plus they are generally aware of new tax changes that may take affect from year to year. One reason so many people choose to meet with an accountant in person each year is for the human touch. It is educational to actually sit down with someone and review your finances from the past year who can help identify tax breaks, credits, and any other claims you may need to make.

When to use this method

accountant

Generally speaking, the more complex your tax filing, the more you will benefit by using a professional accountant. This is certainly true if you have any income not reported on a W-2 or a 1099 form, such as contract work or side jobs.  An accountant can help you get your entire tax situation organized and filed correctly. There is also a benefit in working with an experienced tax professional who has helped thousands of individuals in the past.

Professional tax firms usually offer assistance in case you are audited.  This can remove a huge amount of stress and hassle knowing you have a professional in your corner.

When to use a different method

This expertise does come at a cost.  Filing your taxes through a professional is typically the most expensive way to file since it requires dedicated one-on-one time with a highly-trained expert. If you believe you have very few tax credits or deductions and your financial situation is fairly simple, it will be cheaper to simply file yourself.

During tax season, you may see large accountancy firms advertising a low cost to help you file your income taxes.  However, this low costs generally applies only to a basic return, and you will be charged more if you have any complexities such as interest income or stock dividends to report.  So before booking your appointment, take the time to ask how you will be charged.  Knowing that cost up front will help you make an informed decision about how to file your income tax paperwork this year.

Pop Quiz

If reading this article was an Assignment, get all 3 of these questions right to get credit!

Click "Next Question" to start the quiz!

1 of 3) If you only earn what is reported on your W-2, with no significant credits or deductions, you probably should…
2 of 3) Which of the following people would have the most trouble with tax prep software packages?
3 of 3) Which method is most likely to ensure you get the highest return?

We have received your answers, click "Submit" below to get your score!



Challenge Questions

  1. Why do taxes exist?
  2. In your opinion, what are the advantages and disadvantages of hiring a tax professional?
  3. List 3 tax forms mentioned in this article.
  4. The IRS holds about $1 billion each year in unclaimed refundable tax credits. What does this mean?