Here’s the second part of Money Under 30’s “No-Stress Guide to Filing Your Taxes”, a six-article series first published in 2012. We cover:
- Your tax document checklist: A guide to get you started
- Choosing the best method to file your return
- Tax software: When to use and how to choose
- Tax schedules (itemizing, capital gains, business income, etc.)
- Don’t miss…a credit and deduction checklist
- Special situations (audit avoidance, extentions, payment plans, and estimated payments)
Once you have gathered necessary tax documents and prepare to start your tax return, it’s time to decide how you are going to file. And these days, you have several choices.
- You can go old school and break out the pencil and paper.
- You can buy tax software to handle the heavy math for you.
- Or you can pay a professional to do it all.
It’s time to ask yourself a couple of important questions:
- Do you know a bit about tax laws?
- Is your tax situation fairly simple?
- Are you detail oriented and good at simple math?
If so, you can probably save some money and file by hand. Otherwise, tax prep software may help you avoid the math and researching tax laws.
- Do you have a new or complicated tax situation (like inheritance, capital gains, a new business, etc.)?
- Does the possibility of getting something wrong on your taxes keep you up at night?
If you answer “yes” to these questions, it might be a good idea to get in line at a local tax return preparation office—preferably sooner rather than waiting until April when every accountant in town is swamped.
Let’s take a closer look and compare your tax prep options:
FILING YOUR TAXES BY HAND
- It’s FREE.
- You learn about the tax code.
- May take more time.
- Higher chance of errors/miscalculations/typos.
- Longer wait for a refund.
I’ve been preparing my taxes by hand for more than 10 years. I think I’m in the minority with all the new tax prep software out there, but I much prefer this method over anything else. I tried to use tax software a couple of times and was always frustrated that I wasn’t in total control of my tax return. I like having it all out in front of me so I can see the whole picture.
Ten years ago, my taxes were simple. I was working one part-time job, so I just had one W-2 to worry about and could file the 1040 EZ form. If your taxes are simple—for example, you have one or two W-2 forms, claim the standard deduction instead of itemizing, and claim zero or few adjustments or credits—you, too, could probably file your taxes by hand.
Like I mentioned last week, each form walks you through the process step-by-step. If your tax return will be simple, start with the 1040 form that fits your situation and follow the directions from there. Simple forms can be completed in under an hour once you get the hang of it.
Of course, some tax returns are too complicated to do by yourself…and some of you may simply think that filing a return by hand is bananas. I get that. Fortunately, you have some other options.
- It’s relatively inexpensive ($50 or less).
- It does a lot of the work for you.
- You can deduct the cost if you itemize.
- It takes time to learn how to use.
- You don’t get the “big picture” and you may still miss out on deductions or credits if you don’t understand the software’s questions.
Tax software’s popularity continues to grow. The biggest advantage is that it’s inexpensive when compared to hiring a tax professional and it still involves you in the tax process without all the stress and confusion of doing it on your own.
In years past Money Under 30 has recommended TurboTax, but in a couple of weeks, we’ll break down the pros and cons of the most popular tax programs. Although they’re similar, some may be better suited for certain individual needs and price ranges.
HIRING A TAX PROFESSIONAL
- You don’t do any work.
- It takes the stress out of tax return preparation.
- You can deduct the fees if you itemize.
- It’s the most expensive option.
- You (probably) won’t understand your tax return or how taxes work.
The biggest disadvantage with hiring a tax professional is that you’ll have to pay them to do your taxes for you and you’re not very involved in the process (of course, some of you may prefer this).
With some large tax prep companies, you could get away with paying $100 or less (some companies are even advertising free tax return preparation for very simple taxes); however, if your finances are more complicated or if you have a lot of investments, property, and/or business information to include in your tax formula, you’ll be looking at paying several hundred dollars or more.
Still, choosing a respected Certified Public Accountant (CPA) is worth the peace of mind even if you have to shell out a bit more cash. You’ll know that an expert is working to find all the tax breaks for you they can and that your return is probably error-free.
Tax preparation may be stressful, but if you’re prepared and understand your particular situation, you can make the best decision on how to prepare your tax return. Just remember that if you want to enlist the help of a professional, don’t wait until April!
What about you? How will you prepare your taxes this year? What do you like about your chosen method? Let us know in a comment!
Next in the No-Stress Guide to Filing Your Taxes: Tax Software Compared.
Recommended Investing Partners
- Recommended M1 Finance gives you the benefits of a robo-advisor with the control of a traditional brokerage. M1 charges no commissions or management fees, and their minimum starting balance is just $100. Visit Site
- No Minimum Low-fee robo-advisor with no minimum investment. Creates fully-automated portfolios based upon your desired allocation. Visit Site
- $500 Minimum Wealthfront requires a $500 minimum investment and charges a very competitive fee of 0.25% per year on portfolios over $10,000. Visit Site