Should You Do Your Own Taxes or Hire a Professional?

Assessing Your Tax Situation

Deciding whether to prepare taxes independently or seek professional assistance requires understanding the factors that contribute to a tax situation’s complexity. Various elements can transform a seemingly simple tax return into a more involved undertaking, directly influencing the need for specialized knowledge.

Sources of income play a significant role in determining tax complexity. While a single W-2 form for wages indicates a straightforward income scenario, multiple income streams quickly add layers of complexity. This includes income reported on 1099 forms, such as earnings from independent contracting or gig economy work, investment income, rental income, or foreign income. Each additional source necessitates different forms and calculations, increasing error potential.

Beyond income, deductions and credits can also amplify tax complexity. Tax deductions reduce taxable income, while tax credits directly lower the tax bill. While many taxpayers opt for the standard deduction, those who itemize have a more complex tax situation, requiring detailed record-keeping for expenses like mortgage interest, state and local taxes, or charitable contributions. Various tax credits, such as the Child Tax Credit, education credits, or residential energy credits, provide savings but come with specific eligibility criteria.

Significant life events introduce new tax implications that can complicate filing. Marriage changes filing status and can affect tax brackets, potentially requiring adjustments to withholding. The arrival of a child can provide credits like the Child Tax Credit or the Child and Dependent Care Credit, and adds dependent-related information to the return. Other events like divorce, purchasing or selling a home, or even retirement, each carry distinct tax considerations that may alter deductions, credits, or reporting requirements.

Investment activity further contributes to the complexity of a tax return. Transactions involving stocks, bonds, or mutual funds generate capital gains or losses, which require specific reporting on tax forms. Cryptocurrency transactions also introduce unique reporting obligations, as these digital assets are treated as property for tax purposes. Inherited assets, such as retirement accounts or property, can have varying tax consequences depending on the asset type and how it is managed or distributed.

Navigating Do-It-Yourself Tax Preparation

For individuals with relatively straightforward tax situations, preparing taxes independently using readily available tools can be a practical option. The process begins with gathering all necessary financial documentation, essential for accurate filing. Organizing these documents before starting tax preparation can significantly streamline the experience.

A comprehensive collection of documents is essential for DIY tax preparation. This includes:
Personal identification details, such as Social Security numbers for all individuals on the return.
Bank account information for direct deposit of refunds or payment of taxes due.
Income statements like W-2 forms from employers and various 1099 forms (e.g., 1099-INT, 1099-DIV, 1099-NEC, 1099-K).
Records of any claimed deductions or credits, such as mortgage interest statements (1098), charitable contribution receipts, or educational expense forms (1098-T).

Software options and resources assist with DIY tax preparation. Popular commercial tax software, such as TurboTax, H&R Block, and TaxAct, guide users through the filing process with step-by-step instructions and automated calculations. Many programs offer different versions, ranging from basic options for simple returns to more advanced versions that accommodate complex income streams or deductions. These tools simplify data input and help identify potential deductions and credits.

The Internal Revenue Service (IRS) also offers the Free File program, which allows eligible taxpayers to prepare and e-file their federal income tax returns online through partner sites. Eligibility for Free File is based on adjusted gross income, with the threshold set at $84,000 or less for the 2024 tax year. This program provides access to industry-leading software for qualifying individuals, and some participating companies may even offer free state tax filing. For those with higher incomes, Free File Fillable Forms provide electronic versions of IRS paper forms, suitable for taxpayers familiar with tax instructions.

Completing and submitting a tax return using DIY software involves several procedural steps. After inputting all relevant financial data, the software performs a review process, checking for common errors and identifying potential missed deductions or credits. Taxpayers then review the summary of their return before proceeding to submission. Most DIY software facilitates e-filing, an electronic submission of the tax return directly to the IRS. Immediately after e-filing, taxpayers receive a confirmation that their return has been successfully transmitted, followed by an acceptance notification from the IRS once processed.

Engaging a Tax Professional

When a tax situation becomes complex or time is limited, engaging a tax professional offers an alternative to self-preparation. These professionals provide expertise and can navigate complex tax laws, ensuring accuracy and compliance. Understanding the different types of tax professionals available is a helpful first step in seeking assistance.

Several types of tax professionals can assist with tax preparation and planning, each with distinct qualifications and areas of expertise.

Certified Public Accountants (CPAs)

CPAs are licensed by state boards of accountancy and possess broad knowledge in accounting, auditing, and taxation. They pass a rigorous examination and fulfill continuing education requirements, making them well-suited for diverse financial situations.

Enrolled Agents (EAs)

EAs are federally licensed tax practitioners authorized by the IRS to represent taxpayers in all matters, including audits and appeals. Their expertise is primarily focused on taxation, and they must pass a comprehensive exam and complete continuing education specific to tax law.

Tax Attorneys

Tax attorneys, licensed by state courts, specialize in tax law and are often engaged for complex legal tax issues, such as IRS disputes or tax litigation.

Non-Credentialed Preparers

Non-credentialed preparers can handle basic tax returns, often at a lower cost, but may have limited representation rights.

Regardless of the professional chosen, clients will need to provide a comprehensive set of documents and information. This includes:
Prior year tax returns.
All income statements, such as W-2s and various 1099s.
Records supporting any claimed deductions or credits.
Details about dependents, childcare expenses, and any significant life events that occurred during the tax year.

The process of working with a tax professional begins with an initial consultation to discuss the taxpayer’s financial situation and needs. Following this, the professional will request all relevant documents and information. Once all necessary data is received, the professional prepares the tax return, utilizing their expertise to ensure compliance and identify all applicable deductions and credits. Before filing, the professional reviews the completed return with the client, explaining the outcomes and addressing any questions.

Choosing the right tax professional involves considering several factors beyond their credentials. Experience with specific tax situations, such as self-employment income, rental properties, or complex investments, can be valuable. It is also important to inquire about their fee structure, which can vary from hourly rates (ranging from $100 to $400) to flat fees, depending on the complexity of the return. For a basic individual return, costs might range from $100 to $500, while more complex situations or business returns can be higher. Transparency in communication, accessibility, and a clear understanding of what services are included are also important considerations when making a selection.