Do Your Own Taxes or Seek A Professional?

As the tax season kicks off, a fundamental question comes to mind – Should you do your own taxes or seek a professional?

Well, the answer depends on a variety of factors including:

  • How comfortable you are preparing your own tax returns?

  • How familiar you are with your tax situation and history?

  • How complex your tax situation is?

Generally, if you are comfortable preparing your own tax returns, are familiar with your tax situation and you don’t have a complex tax situation (ex: you only have income from W-2 wages, interest income from interest-bearing accounts, you don’t itemize your deductions or only itemize state & local taxes & charitable contributions), you should be able to prepare your own tax returns using either an online or desktop version of tax preparation software from companies like Intuit (TurboTax), H&R Block and TaxAct, just to name a few.

These companies have been developing tax preparation software for many years and have many customers who successfully use these products to prepare and file their tax returns annually. That said, you do need to have patience, be organized and dedicate a reasonable amount of time to go through the process. While the software will walk you through the process step-by-step, you do need to understand what information the tax preparation software is asking for then input the proper and correct information for your tax returns to be accurate. Keep in mind . . . Garbage in, Garbage out!

Even though these companies work to ensure their tax preparation software is accurate and apply computations and calculations based on the applicable tax laws, having a general understanding of your tax situation and history is extremely helpful so that you can raise a red flag if you notice that the tax preparation software is showing you too high of a tax refund or too much in taxes owed. Errors can occur due to incorrect user input or a software glitch.

If you are not at all comfortable preparing your own tax returns or have a more complex tax situation, consider seeking a professional tax preparer, Accountant or CPA firm. They should have a thorough understanding of the applicable tax laws and, provided you bring them all the necessary paperwork and documentation required, they should be able to properly and correctly prepare your tax returns, as well as identify and apply all applicable and available tax deductions to get you the optimal refund or try to minimize your tax bill/taxes owed. When looking for a professional tax preparer, Accountant or CPA firm, be sure to do your research, read reviews, get recommendations and compare service fees/rates.

In the case where you run/own a business, the tax situation can get even more complicated. There are different requirements on the federal, state and local level depending on the type of legal business entity you have created (ex: LLC: Single-member LLC, Partnership, LLC taxed as a sub-chapter S, Corporation: C-Corp or S-Corp) and the state in which your entity was established.

On the business side, you’ll probably want to have a tax professional, Accountant or CPA firm that you use on an ongoing basis. Except for the single-member LLC, all other entities are required to file a business tax return (separate from the personal return) even if the entities themselves do not pay income taxes (ex: pass-through entities). You also don’t want to reinvent the wheel dealing with a different tax professional, Accountant or CPA firm every year.

On the personal side, again, it depends on your comfort level and the complexity of the situation. For an individual with a single-member LLC, MAYBE you’ll consider doing your own tax return; but generally, it’s not a bad idea to consider hiring a tax professional, Accountant or CPA firm if you run/own a business especially as a member of a LLC Partnership, LLC taxed as a sub-chapter S, or you’re a shareholder of a corporation (C-Corp or S-Corp). There are a lot of requirements (not only income tax returns) that you may or may not be aware of at the federal, state and local level (ex: estimated quarterly tax payments) so having access to a good tax professional, Accountant or CPA firm can save you major headaches down the road. Yes, a good tax professional, Accountant or CPA firm will cost a bit more, but in the end, it will be well worth it!

Getting Ready for the Tax Season

With the holidays passed and the New Year upon us, it’s time to take some proactive steps in preparing for the upcoming tax season. That’s right! Now is a good time to start gathering and organizing all your 2018 financial/tax documents in preparation for the tax season. Don’t wait until it’s time to have your tax returns prepared to start hunting for all the crucial documents. Get a head start now by putting together a checklist of all the applicable documents you’ll need and start building a file if you haven’t already begun to do so.

Everyone has their own tax situation so first and foremost, if you have an Accountant, CPA Firm or Certified Tax Professional, get in touch with them to review 2018 and go over the documents that you’ll need to have ready to provide to them to prepare your tax returns. Due to changes in the tax law last year, you hopefully have been actively communicating with your Accountant, CPA Firm or Certified Tax Professional to discuss any applicable tax changes that could potentially affect you in the upcoming tax season. It’s also a good practice to reach out to your Accountant, CPA Firm or Certified Tax Professional in the fourth quarter of the year (if your Accountant, CPA Firm or Certified Tax Professional has not already done so), to discuss any applicable year-end tax matters and/or appropriate actions that need to be taken prior to year-end.

If you are a business owner, you’ll want to get in touch with your personal Accountant, CPA Firm or Certified Tax Professional to discuss any tax matters, issues or concerns applicable to your personal tax situation while also getting in touch with the company’s Accountant or CPA Firm to make sure the company is on the right track for year-end.

On a personal level, some of the financial/tax documents you should gather include:

  • Form W-2s from all employers that you worked for in 2018. Employers are required to furnish Form W-2s to their employees by January 31, 2019. A Form W-2 is considered “furnished” if it is postmarked by January 31, 2019. Most payroll companies also provide employee access to electronic copies of Form W-2s.

  • Form 1099-MISC from all companies/businesses for which you performed work or services as a non-employee/independent contractor in 2018. Companies/businesses must issue Form 1099-MISC if you were paid $600 or more during the year for work or services performed. Form 1099-MISC must be furnished by January 31, 2019. You are still required to report all applicable income even if you do not receive a Form 1099-MISC.

  • Form 1099-INT from all banks/financial institutions for which you earned interest income in 2018. Banks/financial institutions must issue a Form 1099-INT if you earned $10 or more in interest income during the tax year. You are still required to report all applicable interest income even if you do not receive a Form 1099-INT.

  • If you maintained health coverage through a Health Insurance Marketplace, you should receive a Form 1095-A. If you maintained health coverage through a health insurance provider or non-Applicable Large Employer (non-ALE), you should receive a Form 1095-B. If you maintained health coverage through an Applicable Large Employer (ALE), you should receive a Form 1095-C. These forms provide information regarding the health insurance coverage provided, to whom coverage was provided and when coverage was provided. Except for recipients of Form 1095-A, recipients of Form 1095-B and Form 1095-C generally do not need to wait for these forms to arrive to prepare their tax returns provided you have the information readily available including, who was covered and when, for tax preparation purposes. Keep in mind that for 2018, the Affordable Care Act’s Individual Mandate remains in full force. Individuals who fail to maintain proper health insurance coverage for all of 2018 may be subject to a penalty. You can get more information about these Health Insurance Information/Tax forms on the IRS website.

  • Form 1099-DIV from all financial institutions/brokerages for which you earned dividend income.

  • Form 1099-G if you itemized your deductions in the prior tax year and took advantage of the state/local tax deduction and received a state/local tax refund.

  • Form 1099-R if you received a distribution from a retirement plan, pension plan, profit sharing plan, etc.

  • Form 5498 if you made contributions to an Individual Retirement Account (IRA).

  • Schedule K-1 if you are a member of a multi-member LLC, LLC taxed as a sub-chapter S or a shareholder of a sub-chapter S.

  • Copies of donation confirmation/acknowledgment letters for tax-deductible donations made to qualified charitable organizations.

The list above is not intended to be a complete list of the financial/tax documents that you may need for the preparation of your tax returns nor does it necessarily reflect all the financial/tax documents that are applicable to your specific tax situation. Again, speak with your Accountant, CPA Firm or Certified Tax Professional to review the financial/tax documents that you should gather in preparation for the current tax season. If you prepare your own tax returns, look through the financial/tax documents you received last year while accounting for any applicable changes made in 2018 (ex: opening a new savings or brokerage account, working for more than one employer within the same tax year) as you put together your checklist and gather your financial/tax documents.

A little early preparation and staying proactive can go a long way in helping to make this tax season go smoother and be less stressful!