How to File Your Own Taxes: It May Be Simpler Than You Think
So many people freak out about taxes. I get it. There are lots of complicated-looking forms and words you probably never see except when reading a tax return. Other than tax professionals, most people have no clue what adjusted gross income (AGI) is.
Honestly, filling out the forms by hand can be pretty rough if you don’t know what you’re doing. However, most people have relatively simple tax situations that can be quickly completed using tax software rather than hiring a tax pro. While tax professionals do have benefits, if your tax return is super simple, you might be able to do it yourself and save money.
How People Prepare Their Taxes
In 2017, Harris Poll conducted a survey on behalf of NerdWallet asking how people prepared their taxes in 2016. The survey showed:
- 35 percent of people used commercial tax software
- 32 percent hired a professional such as a CPA, enrolled agent, or tax accountant
- 9 percent used Free File, the free IRS software
- 9 percent filled out a paper return and mailed it in
- 8 percent had someone else prepare their taxes, such as a significant other or the person’s parents
- 7 percent used a national company such as Liberty Tax
What Makes Tax Situations Simple
If you have a simple tax situation, you might not need to hire a CPA, enrolled agent, tax accountant, or national company. Instead, you might be able to use Free File or the free versions of tax software offered by various companies.
Tax software makes life much easier than if you fill out the forms yourself.
You won’t have to reference multiple forms and their respective instructions to figure out what the IRS wants. The tax software does that for you. It asks you targeted questions about your particular situation and uses those answers to fill out your tax forms.
You’ll need to make sure you input the information into the software correctly. That said, the software should make the right calculations.
Simple tax situations are when you only have income from a W-2, which means you’re an employee of a company. You may have some interest income from a bank account (1099-INT), but not much else. Even if you have investments, they’re usually not too difficult to take care of yourself with the tax software (1099-DIV and 1099-B).
“If your tax return is simply data entry, meaning you receive your W-2, you get your 1099, and someone else has prepared those forms, and all your tax return consists of is inputting those numbers into a tax software, then you probably don’t need to go to a tax preparer,” says Logan Allec, CPA and owner of the personal finance blog Money Done Right.
As far as your family situation, you may be single or married. You may have a couple of kids, too. You’ll have to answer questions to see if you qualify for child tax credits or other kid-related deductions and credits, but the tax software gives you plenty of guidance. Even if you’re divorced, as long as you understand who gets to claim the kids, you should be fine using tax software.
Tax pros, like CPAs, do the same thing as tax software. They just have better knowledge of tax laws than the average person. As a result, they can double-check to make sure that everything is flowing through the software as expected.
What Makes Tax Situations Complicated
Unfortunately, there are many things that can make a tax return complicated. You can often tell what makes returns complicated by looking at the different levels of tax software available and their increasing costs. For instance, below is TaxAct’s pricing scale:
Things like the child tax credit, earned income credit, and education expenses are more complicated than a simple W-2 tax return. That said, with software, they’re relatively straightforward as long as you carefully read and make the right selections in the software.
Your return gets even more complicated if you have to itemize your deductions. This will be even more rare with the larger standard deduction now in place. While student loan interest isn’t super complicated to input, it does add another layer of complexity. Other tax issues like health savings accounts, work-related moving expenses, and the adoption credit add even more paperwork to a tax return.
The biggest items that can really complicate a tax return are foreign bank accounts; owning a business; owning, buying, and selling complicated investments; and owning rental properties.
“If you have a business, no matter how small, where you’re responsible for coming up with those numbers yourself or if you have a rental property . . . then it’s a good idea to go to a preparer,” Allec says.
Professionals may be able to help you with these types of tax items by letting you know about deductions you aren’t aware of or by better structuring your taxes this year and going forward to save money. That’s a big part of the value of hiring a pro to prepare your taxes and advise you on tax matters.
How Do You Know You’ve Completed Your Tax Return Correctly?
Ultimately, the only way you can know your tax return is filled out correctly is to check it yourself. If you’ve input everything correctly into the software, your tax return should be right.
But some tax professionals will check your tax return for you for a smaller fee than if they prepared it.
If you’re really uncertain, you could try to find a tax preparer willing to do this. If not, you might be better off paying someone to prepare your taxes.
Additionally, most tax software programs don’t charge you until you complete your return and are ready to file. You could input your information into two different software programs and compare the results to make sure you’re getting the same tax refund or amount that you owe. Even so, this doesn’t necessarily mean you did it right. It just means you filled out the questions the same in both software programs.
Different Tax Software Providers to Consider
There are many tax preparation software programs out there. There are also plenty of organizations and software that may offer free tax preparation for certain groups.
It never hurts to see if you can find free software to file your taxes, but realize that free doesn’t mean better. Free software may be more difficult to use or may have restrictions that could result in missing out on a tax credit or deduction that would mean a much better tax return for you.
Some popular tax software programs to consider include:
The Bottom Line on Whether and How to File Your Own Taxes
Ultimately, you must consider your comfort with your taxes and the complexity of your situation to determine if you’re better off using tax software or hiring a pro to help you. You’re responsible for the tax return you file, no matter which option you use. So make sure you’re comfortable with the end product.