02 Mar Should I file my own taxes? Step by step rules to help you decide
Now that tax season is in full swing and we are all scrambling to round up our tax forms to file, it’s worthwhile to discuss whether one should use an accountant or just file taxes yourself. Essentially the purpose of tax season is to ensure that you are paying a fair amount of your income back to the government. The government provides infrastructure, safety, and rules in exchange for a share of our earnings.
Most professionals I know actually hire accountants to file their taxes. While each person has their own reasons for hiring an accountant, the most common excuses include:
- Too busy
- Too complex
- Don’t want to be audited
- Time could be used to earn more money
I asked ten of my colleagues whether or not they have ever filed taxes on their own, and none of them have. Not in residency, not in fellowship, and certainly not while they are holding a full-time job. Interesting.
Why you should file your own taxes.
While our tax system has only gotten more complex, access to technology has only allowed us to file more easily. You can file everything electronically through third-party vendors at a fraction of the cost of an accountant. This can be done through software you purchase offline or even completely within the cloud. If you have any ability to search online, you can find most answers to everything that you will encounter. It really doesn’t get much easier.
- Self-filing is cheaper. The up-front cost of filing your own taxes will definitely be lower than filing through an accountant. Third-party software ranges from FREE for 1040EZ forms to around a hundred bucks for more bells and whistles. Some vendors will charge an additional nominal fee for state filing, but typically that is also less than $50. Out the door, you will likely spend less than $150 if you self-file. I believe that I spent $70 through TurboTax last year even after (unnecessarily) upgrading (being tricked) to a fancier package.
- You will understand the tax system more thoroughly if you file yourself. If you have to go through the steps of tax filing yourself, you will understand more about the federal and your state’s tax laws. You’ll probably understand more than the majority of your peers even if you file your taxes only once.
- Self-filing is a no brainer if you are a resident or have limited income. If you earn $44,000 a year on a fixed income and your spouse stays at home, you’d better learn to file your own taxes, or have your spouse learn. Your accountant might charge you upwards of $500 to $1000 even if the simplest returns. If your accountant charges you $1000 to file a return on $44,000 of gross income, you are paying over 2% of your income to your accountant!
- If you are on a fixed salary, self-filing will be easier. If the majority of your income comes from a W2, then it is likely that your tax return will be easy to file. You may not benefit too much from advanced help from an accountant.
When should you hire an accountant
In general, hiring an accountant is worthwhile if you are likely going to save more taxes by having professional help.
- You have multiple income streams. Suppose that both you and your spouse have incomes. You have multiple investments that kick out dividends and distributions. Some of them are foreign investments. Maybe you own some land that is used for hunting or oil drilling. You are getting paid through many means of passive income. Lucky you.
- You have a complex income structure. If you are self-employed, you have a slew of options to reduce your tax burden. Let’s say that your company employs you, and pays you a salary and distribution every month. What is the right ratio to justify your job? You might not understand or have the time to consider what expenditures are considered necessary for your business. An accountant may be able to help with that.
- You just don’t care to learn about taxes. Okay, this is the most common reason my colleagues are relatively uninformed about their money. Chances are that if you fall into this category, you won’t make it on my website to learn either.
It might be helpful to do your own taxes AND hire an accountant
Look, having the option to outsource your tasks doesn’t mean that you have to stick with an accountant or vow to DIY on everything. It would be prudent to try doing your own taxes while you still have a simple financial arrangement, perhaps like in residency. You learn a lot about the U.S. Tax System simply by reading the help files in TurboTax or TaxACT (insert your favorite tax software). I sure did. Saved me a lot of money too.
One of my co-residents years ago told me that he paid his accountant $1,500 each year to do his taxes. His longstanding relationship with his accountant (repeat business) conferred him access to questions throughout the year if they arose (he did not consult with his accountant much outside of tax season). I was worth about $25 an hour during residency. The first year I did my taxes it took me maybe 3-5 hours to run through everything. I spent most of my time reading topics not directly pertaining to my tax situation, but I was curious. I saved $125 of post-tax or UNTAXED income by filing my own taxes. In contrast, my co-resident spent $1,500 of POST-TAX income on accounting fees while earning $52,000 of gross income. Assuming that he had little wealth from his parents, he probably spent 3% of his gross income paying his accountant! (I think that he was considerable more wealthy than I was or am even now). My tax situation did not really change during residency, and I breezed through subsequent returns in less than 2-3 hours each year.
While I still complete my own taxes (so far), it’s becoming more practical to consider hiring an accountant as I [hope to] grow my income in various ways. Unfortunately I am still in a salaried position that still pays out a W2, so my taxes are still a breeze. Consider reviewing what suggestions your accountant makes on your tax return to learn about his/her strategies. If you tax situation doesn’t change from year to year, you could consider filing the forms yourself in later years.