Ellen is a 29-year-old high-school English teacher and embarrassed to say that she’s never “done” her own taxes. She lives near her family in Austin, Texas, and has always relied on her cousin, an accountant, to manage her taxes for free. Even still, she could barely keep track of everything it entailed, and the process always makes her feel stupid.
Last year, her cousin retired. Is it worth it for her to find someone new to help her, or should she try to use one of those e-filing software systems? She does some freelance tutoring on weekends and occasional odd jobs during her summers off, so she has a few different income streams, and the paperwork seems like a nightmare. Can she justify paying someone else to do it for her? Or should she figure it out on her own? What will save her the most money?
Certain life skills don’t need to be mastered — they just need to be understood. And it’s my opinion that filing taxes is one of them, Ellen. It’ll save you anxiety (and money) if you comprehend the process, even if you never weather it on your own. Chances are, your taxes will only get weirder as you get older (kids and property will do that), so now is the best time to start asking questions. As terribly boring as taxes are, you need a basic level of knowledge about your own before you can determine whether it makes sense to pay someone else to manage them. So let’s start there.
First of all, find a tax “person.” Not someone you pay for — it should be a sympathetic and good-humored friend, parent, your accountant cousin, or some other kind human you can call for advice when looking at a 1040EZ form makes your brain shrivel. Think of him or her as your tax spirit guide. In my case, that tax angel is a college friend who earns extra cash by helping out at her uncle’s accounting firm and can translate deductions for people who majored in English.
Secondly, don’t feel stupid: Taxes are mind-boggling for the majority of Americans. According to a recent survey of over 2,000 adults in the U.S., taxpayers could only answer two out of eight basic tax questions correctly, on average — for example, 46 percent didn’t know which tax bracket they’re in, or what a tax bracket even means. That’s probably why a lot of them overpay for tax help (by hiring an accountant when they don’t need one) or miss out on deductions they don’t know about (every year, the IRS reports close to $1 billion in unclaimed refunds). So just by asking these questions — what will save you money, and what won’t — you’re already ahead of the game.
Next, set aside a couple of hours to go through your tax forms and consider your next move (with your “person” on standby). There’s no way around this — it will take time, even if your returns are relatively straightforward. This is when you’ll decide whether to hire professional help or use an e-filing software program, like TurboTax or another option listed on the IRS’s free-file site.
To Pay or Not to Pay
According to every tax expert I consulted, you shouldn’t pay for help if you have a “simple” return, like a 1040A or 1040EZ (that’s if you make less than $100K per year, and meet the other requirements listed here). If this describes you — as it does 60 million American taxpayers — then you should suck it up and try e-filing. “It’s hard to imagine a situation where you’d save money hiring a tax professional in this scenario, compared to using tax software,” says Liz Weston, who studies personal finance for NerdWallet. Leading programs (including TurboTax, H&R Block, and Credit Karma Tax) will handle these straightforward cases for free; they’re also getting more idiot-proof by the day, so don’t be intimidated. “All these services provide step-by-step questions that walk users through the filing process and provide additional support to answer questions on topic-areas like deductions for child care, credit, or how to account for mortgage interest,” explains John Gardner, the general manager of wealth-management company SoFi.
However, if your case is more complex (you’re a freelancer, for example), you should probably stick with professional help for now. Considering you have multiple income streams, Ellen, this may be your best bet. “With more complicated situations, the odds of saving money with professional help are higher,” says Weston. She would know: “I used to do our taxes eight to nine times every year to test tax software, and my enrolled agent always found deductions I’d missed. She paid for herself every year. Your mileage may vary, of course.”
While the primary objective is to save money (enough to cover the cost of the tax preparer, and then some), you’re also paying for peace of mind. “You want some assurance your return has been done correctly,” Weston continues. “It’s comforting to know that someone who lives and breathes taxes has prepared it, rather than someone who thinks about taxes once a year (that’s the rest of us). If you’re audited and you used a CPA or enrolled agent, you’ve got someone in your corner.” What’s more, you have someone to hold your hand, answer all your questions, and maybe even make you feel confident enough to e-file in the future.
How to Find the Right Tax Preparer
It’s worth shopping around for a tax preparer that you not only trust, but actually like — and one who won’t overcharge you. At the bare minimum, he or she should have a preparer tax identification number (PTIN); Weston recommends getting an enrolled agent (EA) or a certified public accountant (CPA). EAs are tax professionals who can represent you in front of the IRS (many are former IRS employees); they’re more focused on tax law and are particularly worthwhile if you file taxes in more than one state. Meanwhile, a CPA is trained to do taxes as well as provide more holistic guidance on getting your finances in order. You can read dozens of sleepy articles about the pros and cons of EAs versus CPAs, but for your purposes, they’re relatively interchangeable. You can find local CPAs on the AICPA website, and EAs on the National Association of Enrolled Agents. Better yet, ask co-workers if they work with anyone they like — you’ll want to find a tax professional who’s familiar with financial situations like yours.
You’ll also want to know how the tax preparer determines her fee. “It should NOT be a percentage of your refund,” says Weston. “Make sure she’s willing to sign the return, too. Not signing it is fraud.” Most tax professionals charge by the hour; according to a survey by the National Society of Accountants in 2015, the typical cost for preparing a 1040 with itemized deductions was $273. A complex return can run into the thousands, but you’re probably not in that camp.
Finally, don’t expect this person to do everything for you. You’ll still need to dedicate several hours to assembling the proper documents and filling out paperwork. Block off a Saturday, and think of it as paid time — because it’ll wind up saving you money down the road.