Tax season is upon us, and hopefully you've kept your finances organized throughout the year so that filing will be a streamlined and relatively painless process.
However, it's important not to rush things, and take advantage of every tax deduction and credit at your disposal. Furthermore, you'll need to decide whether to prepare your taxes on your own. Make no mistake, filing yourself can be advantageous--if you do it right. There are a number of positive and negative aspects to consider before you decide whether to do it yourself or use the services of a professional.
1. Save money. Hiring an accountant can be costly, and you can save a bundle if you choose to do your taxes yourself. Furthermore, anyone can file electronically for free via the IRS website. No matter how much your adjusted gross income (AGI) is, you can fill out and submit tax forms online, available via the IRS website. And if your AGI is $57,000 or less, the IRS will provide you a list of multiple companies that will guide you through the process. After your federal return is complete, they will transmit it electronically to the IRS for free. However, be aware that some of these companies will have additional restrictions beyond AGI and may charge you to file your state return.
Another option is to file using a 1040EZ. If you meet the requirements to file this form, some tax preparation companies, such as TurboTax, will complete your return for free.
2. Have peace of mind. I have always had a tough time trusting my tax return to an accountant. Not only are they overloaded this time of year, but you could make an error communicating pertinent information, such as neglecting to inform them of key deductions.
However, if you have a complicated return that requires you to fill out and file multiple forms, make sure you have a thorough understanding of the entire procedure. Otherwise, you are better off with the assistance of a professional.
3. Gain financial insight. An additional benefit to preparing your own taxes is that it will give you a closer look at your finances, and what effect certain saving options have on your return. For instance, I never realized the amount of money you can deduct by making tax-deductible donations until I started filing my taxes on my own. In fact, depending on your income tax bracket, donating unwanted items could be more beneficial than selling them.
I also learned to max out my IRA contributions each year to fully take advantage of that credit.
1. You will spend more time. By filing taxes on your own, you will need to commit a significantly larger amount of time than if you hire an accountant. The U.S. tax code can be complex and difficult to understand, and to accurately submit your return, you'll need to organize and prepare all relevant documents--among them, your W-2, any 1099s you may have, information on interest and dividends earned, as well as capital gains or losses, and what you paid in home mortgage interest and real estate taxes. However, once you know what you need, you can create a filing system to lessen the time needed to actually prepare and file.
2. Online help can be insufficient. Even when using tax preparation software, I still frequently find myself unsure as to whether I qualify for a deduction. For instance, health insurance premiums are an allowable deduction in some instances, but not all. If you qualify but don't take the deduction, you could miss out on additional savings. However, if you do take the deduction and it turns out to be incorrect, it could cost you in the way of audits, penalties, and interest charges.
3. There is a risk of error. By filing without assistance, you and you alone will be 100 percent accountable for your return. It is strongly advisable that if you self-prepare your taxes to fully complete the return, and then set it aside for several days before filing. Reflect on the previous year, and see if you can recall anything you've neglected to include. Once you've taken this breather, review your return, make any necessary changes, and then submit.
Final thoughts: Preparing your own tax return comes with a number of advantages, but keep in mind what you can do to maximize your savings throughout the year. For instance, if documented properly, donating your unused items can yield significant savings, and non-reimbursed medical expenses that exceed 7.5 percent of your AGI can qualify as deductions. Furthermore, certain job-related expenses, such as dry cleaning and uniform purchases, can often be written off. Ultimately, you should do whatever it takes to save money on your taxes, and if you're up to the challenge, the benefits of filing your own return are often well worth the effort.
Do you file your own taxes or use a professional? What tips do you have to successfully self-file tax returns?
David Bakke is a money management writer for the Money Crashers personal finance website. In addition to taxes, he covers topics like investing, saving strategies, and frugal living.