A lot of people go into tax season thinking about this simple question: should I have my taxes done or save money by doing it myself?
It’s always good to be thinking and weighing the options, but for many people doing their own taxes does not equate to saving money. Here’s why.
The cost of a tax return
Exactly how much does it cost to have your taxes done for you? The average for an itemized 1040 Federal and State filing is $273 (CPA Practice Advisor). Additional forms will add to the fees, depending on whether you own a business, have extensive investments, etc.
The more complex your taxes, the more it typically costs for professional preparation. However, complexity also increases the time you’ll spend preparing your own taxes, and the risk of making costly mistakes. So, how much are you really saving?
One of the easiest ways to lose money preparing your own taxes is simply to miss deductions. Without a deep knowledge of the deductions that are out there and who qualifies for them, it’s very easy to leave money on the table. For many people, a single deduction can cover the cost of professional preparation.
Mistakes on your tax return can also be very costly. When you make an error (which is pretty easy to do with the increasing complexity of tax forms) you can incur fees and interest on the difference your mistake caused.
Not only that, but you may not find out about your mistake for several years, while accumulating interest behind the scenes. The IRS can wait several years to review and inform you of your error and this can be very expensive.
One of the most overlooked costs in doing your own taxes is the cost of your time and the value of what you could be doing instead. Very few people love doing their taxes and most would rather be doing something else.
For most taxpayers, it takes several hours to prepare their taxes. The IRS estimates 13 hours, but that includes record keeping tasks throughout the year (which would have to be done self-preparing or hiring a professional). If you don’t consider taxes “recreation” you’d likely make more money by working those extra hours, especially if you own your own business.
Another great use of that time would be planning and budgeting your finances for the coming year. The few hours saved on your tax return can save you far more with a wise financial plan for.
Who should do their own taxes?
Taxpayers who should stay far away from self-preparation are those who:
- Own a business
- Have multiple investments or rental properties
- Have extensive itemized deductions to claim
- Have children or adult dependents
- Are eligible for tax credits
So, who should consider doing their own taxes? Those who will file the simplest, quickest returns with the least to lose in terms of deductions and the least chance of mistakes. That includes anyone filing a simple 1040 for W2 income and a standard deduction.
College students and teens filing for the first couple of years can learn a lot about their finances and the tax system by going through the process. As their returns become more complex and their time more valuable, they’d be wise to consider working with a professional.
If you have questions about Do Your Really Save Money by Doing Your Own Taxes?, contact me for a consultation. I’m an Illinois licensed, Registered Certified Public Accountant with over 25 years of experience. I’m dedicated to providing outstanding tax and accounting services to individuals and small businesses in the Chicago area.
Disclaimer: Any accounting, business or tax advice contained in this article, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, I would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.