4 Times You Can DIY Your Taxes (and 4 Situations Where You Need a Pro)

A couple get their finances together in order to do their taxes.
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If you have a traditional office job and receive a W-2 with no other complicating circumstances, preparing your tax return isn’t hard — just a pain. You’ll populate a number of boxes in some tax software, review it for accuracy and send it off to the IRS. All told, it’s not necessarily time-intensive. It’s just something else for your to-do list. 

On the other hand, imagine having a W-2 from one job, receiving a collection of 1099s in the mail and then tracking a laundry list of write-offs related to your business or freelancing. For the uninitiated, this is daunting. 

How do you know when you need a professional’s help with taxes? Understandably, you don’t want to make any mistakes if you decide to do your own taxes.

Quite often, the question of “Should I do my own taxes using tax software or hire a professional?” comes down to how comfortable you feel doing your taxes yourself. 

These days, the best tax software programs do an excellent job of guiding you through preparing your tax return, often eliminating the need for a tax professional. And if you start down this path but find yourself needing extra assistance, some also provide access to professionals for a fee.

Last year’s tax season was the first with the new Tax Cuts and Jobs Act rules in effect. After learning how you fared under the changes, you may have a bit more certainty about your tax circumstances this year. Even so, maybe last year’s changes proved too much for you to handle on your own. Perhaps you’d still like to hire a professional to ensure the job is done correctly. 

While this represents another expense, it might result in a bigger refund in the end. By hiring a tax professional, you might find yourself with a bigger refund as a result of better handling your tax deductions and credits. 

4 Times You Should DIY Your Tax Return

To understand when it makes sense to DIY your tax return vs. hire a tax professional, consider some common scenarios described below.

1. You Only Have One Job

Have you ever heard the phase, “Keep it simple, stupid”, or K.I.S.S.? Basically, it means you shouldn’t add unneeded complexity to a situation. When you prepare your taxes and you only have one job with a single W-2 and no other income, seeking help from a tax professional may violate the K.I.S.S. ethos.

This situation probably doesn’t require a seasoned pro. It can usually be left to the likes of free tax software to prepare your form and submit it.

2. You Didn’t Experience a Life-Changing Event

If you didn’t have a major life change in 2019 (think wedding, divorce, birth of a child, etc.), you can likely roll forward most of the previous year’s information and elections. But make sure to update any new sources of income or deductible expenses. 

In years you do encounter significant life events, if they’re pretty straightforward, tax software still may be able to handle your needs. However, when several events stack up in the same year, things can get confusing. Seeking the help of a tax pro might be in your best interest.

3. You’re Claiming the Standard Deduction

Tax reform did a useful thing for many: It made itemizing your deductions more difficult. 

It essentially doubled the standard deduction, making it less worthwhile to itemize your deductions. So it’s less likely you’ll need to know about what does or doesn’t qualify as a deduction. Free tax software might handle your needs just fine.

While you don’t need to track your expenses to claim the standard deduction, you will still want to track and tally your deductions because these might prove useful on your state income tax return where applicable. 

If you understand and can easily insert these expenses into your state income tax return, tax software will handle your needs just fine.

4. You Didn’t Buy a Home

Before tax reform, buying a house was often the gateway into itemizing your deductions. Numerous expenses qualified for deduction including mortgage interest, real estate taxes and more.

These are still deductible, but the higher standard deduction, along with new caps on state and local taxes and the qualifying amount of interest associated with mortgage principal that you can deduct have hampered the cost-effectiveness of owning a home.

Fortunately, the new limit on qualified mortgage interest associated with principal only applies to mortgages originated on or after Dec. 14, 2017.

In the event you did nothing with real estate and did not buy a house, you won’t need to track such expenses. In that case, free tax software can be a better choice.

FROM THE TAXES FORUM

4 Times It Makes Sense to Hire a Tax Pro

Here are some common scenarios where you may benefit from hiring a tax pro.

1. You Had Multiple Sources of Income

The Tax Cuts and Jobs Act brought significant changes for those who work multiple jobs, freelance, have side hustles or own their own businesses. 

Those savvy enough to earn extra income and consider it as part of a trade or business will likely qualify for a 20% qualified business income (QBI) deduction on that income. However, the QBI rules are complicated, so it might make sense to hire a professional.

If you operate any of these activities as a sole proprietorship, you might miss numerous benefits by doing your own taxes. And when these activities scale enough, it could amount to significant tax liability — and potential missed deductions and credits.

While you might think a minor side hustle is not worth speaking with a tax professional about, it might still be a good idea. While software can serve as a great tool for uncomplicated tax situations, a CPA can help you find tax breaks by learning more about your unique circumstances.

2. You Own and Rent Out Property

Rental properties are a popular tool for building wealth because they can produce capital gains as the property appreciates in value, along with income from renters occupying the property. The numerous deductions associated with the property can go a long way toward shielding that precious rental income. 

A tax professional can help you manage the expenses related to maintaining your unit(s) and navigate the tricky depreciation, capitalization and expensing rules.  

The time may come to sell this property, and handling the disposition will prove especially tricky for the inexperienced. Don’t risk misstating your gains and potentially costing yourself thousands in taxes.

3. You Itemize Your Deductions

If you’re not claiming the standard deduction, you may have incurred a significant level of expenses during the year. Because some expenses exist in a gray area and there are numerous deductions to know, soliciting the help of a tax professional might prove a smart investment on your part.

Hiring a tax pro could result in claiming more tax deductions and, therefore, reduce your overall tax liability. In a sense, if you hire a tax pro who can uncover more expenses than you otherwise could yourself, the additional savings on your tax bill might end up paying for the tax advice. Not only would more money stay in your pocket (as opposed to going into Uncle Sam’s), but you’d also spend less time preparing your return.

4. You Experienced a Major Life Change

Life has many turns — suppose that in 2019, you made a cross-country move, had a change in family status or welcomed a new child. As a result, you want to make sure to prepare accordingly from a tax perspective.  

The number of events that can affect your filing status and claims are endless. Navigating these changes isn’t always straightforward, especially when your mind may not be up for the task. A professional will make any tax benefits work to your advantage, as well as use other strategies to minimize your tax liability.

Specifically regarding divorce: Married taxpayers who file jointly are both responsible for all taxes owed on their joint return. In other words, should Spouse A work as a lawyer earning $300,000 per year, and Spouse B work as a school teacher bringing home $30,000 per year, both spouses share equal liability in paying for the taxes owed on their joint tax return. 

In divorce, when these taxpayers file separately, they will only need to claim their earned income and should not include any potential child support or alimony paid/received.

Should I Do My Own Taxes or Hire a Pro?

When you weigh whether to hire a tax pro or prepare your own taxes using tax software, the choice ultimately comes down to the complexity of your tax situation, your comfort level, the effort you’re willing to invest and the cost.

Finding your unique balance between these elements should guide your decision and lead you to the lowest tax liability.

Riley Adams is a CPA who is originally from New Orleans and works as a senior financial analyst at Google in the San Francisco Bay Area. He also runs the personal finance website Young and the Invested, which is dedicated to helping young professionals explore financial independence and entrepreneurship.