For many years I watched my dad spend hours in the evening after he got home from work preparing the taxes. I can still picture it. The dim light coming from the basement. The table, covered with IRS forms, instruction booklets, envelops and a stack of receipts. A calculator, paper clips and what looked like a year’s supply of razor-sharp #2 pencils.
I found that during tax season every year my dad’s vocabulary expanded, and included many adjectives and four letter words that you won’t find in any dictionary.
Upon completion, he would cram all the IRS forms and documents into a standard envelope. The bulging, puffed up envelops looked like small pillows. He would then seal them shut with two feet of masking tape. Then he would slap about 20 stamps on them and mail them before the tax deadline.
That Was Then This is Now
Today online applications and software have made the whole tax preparation process much easier. However, the IRS estimates that only about 40% of filers will prepare their own taxes. The remainder will use a tax professional.
If you currently use a tax professional to file your taxes, maybe it’s time you consider doing them yourself. Listed below are three reasons to do your own taxes. The first two are important, but the last one is the real reason you should prepare your own taxes.
#1 Tax Software Has Made Filing Your Taxes Super Easy
For most Americans, preparing your own taxes can seem like a pretty daunting task. The perspective is that you need to understand all the tax laws to successfully file your taxes. And if you don’t file them correctly, there is the potential for the dreaded IRS tax audit.
These days’ applications used to prepare your taxes have become so user-friendly that almost anyone can do their own taxes. If you have never filed your own taxes using a tax software application here are some things you should know.
- Simple Question and Answer Format. The most popular applications like TurboTax, H&R Block, and TaxAct use a question and answer format to gather your information. This method simplifies data entry and the need to understand IRS tax rules and regulations. The software will prompt you for what’s needed and then enter it on the correct IRS form.
- Very Smart. The applications take into consideration specific life events. Events like buying a house, marriage, a child, divorce or a new job. These questions allow the application to consider how each event may impact your taxes. And whether you can take advantage of new tax guidelines to improve your tax bill.
- Tax Planning. Based on the information you provide the application will allow you to anticipate future tax situations. The applications can provide insight into how future events may impact your taxes.
- Audit Protection. Most people don’t realize that companies like TurboTax, H&R Block, and TaxAct work directly with the IRS to help make tax preparation easy. This means that the application you’re using was created based on the most up-to-date IRS rules. In most cases, the application provider will guarantee that your taxes are correct. Some even provide free audit protection should you be audited by the IRS.
- Online Help. All applications provide online help via the Internet and via community discussion boards. Some providers even provide certified tax specialist to answer questions. You will never feel alone, getting help with your taxes is always available.
There are some reasons you may want to use a tax professional to complete your taxes. For example, if your income is over $200,000, or if you’re running your own business. However, if your situation is like many Americans that receive a W-2, have children, a home, and simple retirement plans like a 401k or IRA, then doing your own taxes with a tax software application is a breeze.
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#2 Why Split Your Tax Refund with Someone Else?
The average cost for hiring a tax professional to prepare your taxes in 2017 was $176 for a simple 1040 return. $273 if the return required itemized deductions. (National Society of Accountants)
If you have a simple return (W-2, Standard Deduction) TurboTax, H&R Block and TaxAct allow you to file your taxes for free. If you need to itemize deductions, all three providers charge around $39.99 for federal and $29.99 for the state.
The average tax refund in 2017 was $2,763. If you want to keep more of your refund, consider preparing your own taxes.
“There are only two things certain in life: death and taxes.”
#3 The Real Reason You Should Prepare Your Own Taxes
I have been preparing my own taxes since I was 16. The process has evolved from completing paper forms like my dad, to using online applications.
What I know today – after 37 tax filings, but didn’t understand back then, is that preparing your own taxes creates financial awareness. An awareness that not only benefits you during tax time but how you manage your money on a day-to-day basis.
Over the course of a lifetime, your finances will change. Your income, debt, your budget, and how you save. All of these things have an impact on how you are taxed and the amount of taxes you have to pay. Understanding how taxes impact your day-to-day finances can help you reduce your tax bill.
If your goal is to have a better handle on your money, consider some of these life events and how they could impact your finances.
- Marriage – Getting married has the potential to provide tax benefits for both you and your spouse.
- Buying a Home – Interest charges on a home loan, and some home equity loans can be deducted. In addition, real estate taxes can also provide a tax shelter.
- Job/Career – Additional expenses attributed to your job that are not paid by your employer may be tax deductible.
- Health Care – Expenses incurred for healthcare premiums or expenses not paid by your insurance company may be tax deductible.
- Children – Additional dependents means tax credits.
- Education – Expenses incurred by going back to school could result in education tax credits which could reduce your tax burden.
- Saving For Retirement – 401(k) and IRA contributions can provide pre-tax and post-tax benefits. Depending on your retirement plan and how you contribute you may be able to reduce your tax bill.
- Investing – Investing in securities, real estate or a business can have a significant impact on your taxes. Understanding the tax on short-term and long-term capital gains can help you manage your investments to minimize taxes.
- Home Based Business – Common household expenses like utility bills may provide a tax deduction if you operate a business out of your home.
Most consider taxes a one-time annual event. That’s true, but how you manage your day-to-day finances will have an effect when you file. The life events listed above are just some of the examples.
Meeting with a tax professional once a year to prepare your taxes has its benefits. You save time, there is less hassle and the responsibility for completing your taxes is on them. However, no tax professional will ever fully understand your day-to-day finances or the plans you have for the future.
Preparing your own taxes is another way of becoming financially aware of your own circumstances. It’s a means of controlling your own destiny as you manage your finances over the course of a lifetime.
Do you prepare your own taxes? Which tax software application do you use? Comment below.