Some people enjoy doing their own home improvement projects. Other people are quick to hire a professional to come in and fix the faucet.
The same is true when it comes to preparing your own tax return. Many people wonder if they can do it themselves and many do not dare to try.
I recommend that people prepare their own tax return at least once in their life. That’s the best way to figure out if doing-it-yourself is right for you. And if you get stuck, you will learn precisely what areas of the tax forms you don’t understand, and then you will be in a much better position to seek professional help.
To prepare your own tax return, start by downloading the relevant forms and instructions from the Internal Revenue Service and state tax department websites. For US citizens and resident aliens, grab a hold of Form 1040, the Instructions for Form 1040, and Publication 17 from the IRS website at IRS.gov. (All these links are to documents in the portable document format or PDF.)
Those three documents will get you started. If you get stuck and aren’t sure where to put something, check out the handy Where to Report Certain Items chart near the front of the 1040 instruction booklet.
You can look up various documents, such as Form W-2 or Form 1099-B. All of these documents can be find online by searching for the relevant forms and the chart tells you which forms and line numbers are relevant.
The nice thing about preparing a tax return manually: it’s free. Preparing a tax return takes time and patience.
The IRS estimates that Americans spent an average of 13 hours preparing a tax return. Of course, the amount of time it actually takes to prepare a tax return, from start to finish, varies dramatically based on the complexity of the person’s financial situation.
Using Tax Preparation Software
If filling out forms by hand doesn’t work for you, your next best option is to use tax preparation software. Using software opens a whole new window on the tax preparation experience. I can run scenarios: what if I contributed to an IRA, what if I gave more to charity, what if I made more money, what if I lost money in the stock market? You can see how putting numbers in different parts of the software made an impact on the tax calculations.
There are several options to choose from, including free and paid software. Well known software providers include TurboTax, H&R Block’s At Home, and TaxACT. And there are lesser known software products such as Excel 1040. Prices for tax preparation software range from free to $110 for premium versions of well-known software products. Free software is often reserved for lower-income individuals through the IRS Free File Alliance. For your reference, here is a list of tax preparation software programs.
The majority of Americans, however, opt to hire an accountant to prepare their tax returns. In 2014, 55.5% of individuals paid a tax professional to prepare and to file their personal tax returns. When I talk to my own clients about why they need help preparing their taxes, one phrase crops up over and over again: they want to get it right.
My friend Lou once said it best. She wants the comfort of knowing that a tax professional is signing the tax return right alongside her. It certainly is reassuring to know that both you and your accountant have reviewed the tax return.
Types of Tax Accountants
Be sure to find a tax professional with the level of experience and specialization suitable for your needs. Some tax professionals are general practitioners. Others specialize. For example, there are tax professionals who specialize in Americans who live overseas, others who specialize in taxicab drivers, and still others who specialize in day care providers.
In terms of credentials, the two most popular professional credentials are the certified public accountant (“CPA“) and the enrolled agent (“EA“). CPAs are trained in a wide range of accounting procedures, and some of them specialize in tax preparation. EAs are trained specifically in tax procedures.
When it comes to fees, tax professionals charge an average of $273 for a regular Form 1040 with itemized deductions on Schedule A, according to a fee survey conducted by the National Society of Accountants. This was a nationwide average based on a survey conducted in 2014 of over 8,000 tax professionals. Expect prices to be higher in regions with higher cost-of-living or if your tax return is particularly complex.
Free Tax Services
You can also find free tax preparation services through local non-profits. The Volunteer Income Tax Assistance program – or VITA for short – provides free tax preparation services to people earning $53,000 or less per year. People age 60 or older can find free tax preparation services through Tax Counseling for the Elderly and the AARP’s Tax-Aide programs. These programs set up space during the tax season at local community centers, colleges, or libraries. You can find local VITA, TCE or Tax-Aide sites through the IRS Web site at https://www.irs.gov/Individuals/Free-Tax-Return-Preparation-for-You-by-Volunteers.
Whichever option you choose, you will still need to do some of the work yourself. You will need to gather all your tax-related documents. You will also need to read over your tax return and review it carefully for accuracy and completeness. Finally, you will need to keep a copy of your tax return and the related documents for at least three years, just in case the tax agencies have any questions.