Just as soon as New Year’s celebrations wind down, American taxpayers begin their annual scramble to track down receipts, W2 forms and 1099 forms in anticipation of the annual April 15 income tax filing deadline. While for some taxpayers it may be as simple as filing a 1040-EZ and getting a nice little refund, for others, the season evokes a certain amount of anxiety and confusion. For millions of Americans, tax season demands a big decision: Is it wiser to pay a professional to prepare your taxes, or can you make do with tax-prep software such as TurboTax or the IRS Free File Program?
If you own a business, pay employees, invest in the stock market and own multiple pieces of real estate, a CPA will likely make things easier for you. If, on the other hand, you’re a full-time employee who collects a solid salary, receives a W-2 every year and owns no investments outside of your tax-sheltered 401(k) or 403(b) retirement plan, tax software may be sufficient for your needs. For most taxpayers, reality lies somewhere in between the complexity of multiple income streams and investments and the typically streamlined finances of a salary earner.
Tax Preparation Costs
In early 2020, TurboTax marketed its software packages at prices ranging from $40 to $90, which doesn’t include a separate charge for filing state taxes or other add-ons. In 2018, tax preparers charged an average of $294 to prepare an itemized 1040 and a state return, according to the National Society of Accountants.
|IRS Free File||H&R Block DIY||TurboTax||H&R Block Preparer||Average Tax Preparer|
|Free for annual income below $69,000||$29.99 – $139.00 ($32.59 average)||$40 – $90||$217 – $233||$294 average|
H&R Block’s annual report provides some insight into the economics of tax preparation. In 2019, H&R Block handled nearly 24 million tax returns. The company charged customers an average of $32.59 for its DIY tax-prep software. Taxpayers who had H&R Block prepare their returns paid an average of $233 at company-owned offices and $217 at franchised locations.
Tax Software and Professional Tax Preparation at a Glance
Some taxpayers with complicated income situations are highly capable of doing their own taxes, while other taxpayers with simple finances still prefer to hire an accountant. While there’s no right or wrong answer, there are considerations that can help you decide which option is best for you. Consider the following situations when deciding between tax software or an accountant:
- Earn under $69,000 per year
- Earn over $69,000 per year, but the majority of earnings are reported on a W2 form
- No investments beyond 401(k) or IRA
- Independent contractor with no employees and income reported on a 1099 form
- Real estate transactions
- Stock market investments and transactions
- Own of a business with paid employees
- Major life event (marriage, birth, death, etc.)
- Forgiven debt
- Multiple income streams
Did You Have a Life Event This Year?
When life happens, all sorts of tax consequences can ensue. A divorce or a major health problem can wreak havoc on a once-simple tax picture. Financial windfalls and shortfalls can also dramatically change your tax outlook. If you got an inheritance from a late family member’s trust, you might not receive the required Form K-1 until months after the April 15 deadline, which means filing for an extension.
If you have a mortgage forgiven through a short sale, or if you have student debt retired after negotiating a financial-hardship reduction, you might receive an IRS Form 1099. In most cases, you’ll have to pay taxes on the forgiven amount, because the IRS considers it as income. If you’re older than 70 and have an Individual Retirement Account, you’ll need to start preparing for annual required minimum distributions.
A life event doesn’t necessarily need to send you straight to your CPA’s office, but it can raise the level of tax preparation difficulty and the chances that you’ll want to hire a professional.
Are You Self-Employed?
According to the Bureau of Labor Statistics (BLS), approximately 9.6 million workers in the U.S. were self-employed in 2016, and that number is projected to grow to 10.3 million by 2026. With the sharing economy taking off, more and more people are driving for Uber and Lyft, renting rooms through Airbnb, and delivering dinner via Uber Eats and GrubHub. Self-employed workers have their income reported via a Form 1099 rather than a W-2, and independent contractors are responsible for making estimated tax payments once a quarter
While a full-time employee has almost no wiggle room in terms of deducting work-related expenses, a self-employed worker faces a dizzying array of tax deduction possibilities and pitfalls. Would it be better to depreciate your business vehicle or claim the standard mileage deduction for business travel? Should you claim a home-office deduction? What about using a SEP-IRA or another tax-advantaged retirement account for self-employed workers?
TurboTax sells a version of its software designed for business owners, but for many taxpayers, being self-employed is the single most compelling reason to hire a tax professional, says April Walker, lead manager of taxation at the Association of International Certified Public Accountants. “A CPA can make sure you’ve performed the bookkeeping accurately,” Walker says.
Do You Have Dependents?
Kids yield a tax deduction, but they can also complicate your taxes. In their early years, you’re eligible to deduct the costs of qualified child care, up to certain limits. For parents of college-bound kids, the calculus grows more complicated. In the years leading up to college, a 529 plan allows money parents have set aside for tuition and related expenses to grow tax-free. Once Junior goes off to college, you may be able to use the Lifetime Learning tax credit or the education and fees deduction to lower your tax obligation. A tax professional can answer questions about getting education-related tax deductions and credits, and even a DIY tax prep program can coach you through making sure you get money back for qualified education expenses.
Did You Make Market Transactions or Sell Stocks?
Most taxpayers who own stocks and bonds have the bulk of their holdings in tax-advantaged accounts, such as 401(k) plans, 403(b) plans or Individual Retirement Accounts. The IRS allows the money to grow, with compounding interest, tax-free, and those accounts add little complexity to your taxes until you reach your 70s and must begin taking the money out. If, however, you own investments in taxable accounts, things get trickier.
Dividends are taxable, so you’ll need to gather any tax forms your brokerage sends to the IRS each winter. When you sell an investment, you must determine your cost basis —how much you paid for the shares before any splits — and whether the long-term or short-term rate for capital gains applies. If you’re culling a loser from your portfolio, the loss can offset other gains.
If you’ve invested in gold, bear in mind that securities tied to gold can create some thorny tax issues. The same can be applied to Bitcoin and other cryptocurrencies, and for complicated trading strategies such as options, the AICPA’s April Walker says. In other words, the more active your brokerage account, the more likely you’ll want to lean on a professional for guidance.
Do You Need to Make Itemized Deductions?
When President Donald Trump signed the Tax Cut and Jobs Act in late 2017, the standard deduction nearly doubled. For single taxpayers, the standard deduction jumped from $6,350 in 2017 to $12,000 in 2018. For married couples filing jointly, the limit went from $12,700 in 2017 to $24,000 in 2018.
For most taxpayers, the increase means no more itemized deductions for mortgage interest or charitable contributions. With mortgage rates still near historic lows, few homeowners pay enough in interest to claim the mortgage interest deduction. And giving a few hundred dollars a year to the United Way or your alma mater will no longer trigger a tax break. For the typical taxpayer, the itemized deduction has disappeared as a reason to seek professional help.
Does Your State Require State Income Tax?
Some states, including Florida, Nevada, Tennessee and Texas, impose no state income tax and therefore require no annual tax return. Others, such as California, Illinois and New York, charge an income tax to residents, which means filing a separate return. State tax returns are far less complicated than federal returns, but they add one more layer of complexity to the process. TurboTax charges an additional fee for state tax-prep software.
Is Your Income Below $69,000?
Some 100 million American taxpayers are eligible to file their taxes for free, according to the Free File Alliance. However, only a fraction of eligible taxpayers takes advantage of IRS Free File, perhaps because the program is marketed far less aggressively than paid tax preparation. H&R Block and its competitors advertise heavily during tax season. Anyone who makes less than $69,000 can use IRS Free File. As with everything about income taxes, however, some taxpayers might find the program to be complicated. In order to offer free tax filing, the IRS relies on the Free File Alliance, a consortium of private providers, including TurboTax and H&R Block, and income requirements vary by provider.
Choosing Tax Software
Taxpayers can choose from a variety of software packages. TaxSlayer, Jackson Hewitt, Credit Karma and, of course, H&R Block and TurboTax, all market to consumers. With competition stiff, most software providers have priced their basic packages at $30 to $40. Aside from the base price, factors to consider include: whether the software is online or a download; whether state returns are included; and whether electronic filing is part of the base price.
Why Use a Tax Professional?
An experienced tax preparer can spot deductions you don’t know about, steer you away from costly mistakes and help you create a long-term tax plan. Perhaps most importantly, says April Walker from the AICPA, a pro can put your mind at ease by dealing with all the details that go along with accurately filing your taxes.
How to Find a Tax Accountant
If you’re looking for a tax preparer, ask friends, family and coworkers for suggestions. Many tax preparers are certified public accountants, a designation that requires holders to pass a rigorous exam and to complete regular continuing education courses. Another category of tax preparer is the enrolled agent; professionals in this category have been vetted by the IRS. In either case, you’ll want to meet the practitioner to make sure you can work well together and to verify that the tax pro’s experience fits your needs.
Your Best Option for Filing Taxes
If you have a straightforward tax situation and make less than $69,000, consider taking advantage of IRS Free File, an often-overlooked program. If you’re above the Free File income threshold but not keen to pay a pro — and you have the time and inclination to do your own taxes — you can likely buy tax-prep software for less than $100. As an added benefit, imagine how accomplished you’ll feel when you successfully file your taxes on your own. And if you decide that you’d prefer the comfort of hiring a pro, or if you have a complex tax situation, then the $200 or more you’ll pay for that professional expertise is well worth the cost for your peace of mind. Either way, only you can decide which tax preparation method will work best for your situation.
Bureau of Labor Statistics. “Small-business options: Occupational outlook for self-employed workers.” Accessed February 1, 2020
IRS. “About the Free File Program.” Accessed January 30, 2020
National Society of Accountants, Main Street Practitioner. “2018-2019 Income & Fees of Accountants and Tax Preparers in Public Practice Survey Report.” Accessed January 30, 2020
TurboTax. “Personal Taxes.” Accessed January 30, 2020
United States Securities and Exchange Commission. “H&R Block 2019 Form 10-K and Annual Report.” Accessed January 30, 2020