11 Situations Where It's Probably a Bad Idea to Do Your Own Taxes
There's no question that doing taxes yourself can save money. A 2016-2017 survey by the National Society of Accountants says tax pros charge an average of $273 to prepare a Form 1040, Schedule A, and a state return. That's no small chunk of change, especially when it’s so cheap (or for some filers, free) to use a guided tax-preparation program online. Unfortunately, going it alone can be extremely costly in the long run if it leads to avoidable errors or omissions that leave money on the table or pique the interest of the Internal Revenue Service. Read on for 11 potentially tricky situations where using a tax pro might make sense.
Why you need a pro: The only thing more stressful than watching Congress hammer out its new tax reform bill? The realization that it introduces new twists and turns to how you file. For instance, there are changes to important deductions like medical expenses, mortgage interest and work-related mileage. A pro will be well-versed on all the changes, as well as which ones take effect for this filing season (the 2017 tax year) as well as which will wait on the 2018 tax year.
If you go it alone anyway: Study up on the changes affecting this year’s filing with guides like this one. One of the most important considerations this year, according to TurboTax: A lower floor on deductions for medical costs.
Why you need a pro: Filers with incomes of more than $200,000 were audited at a rate of 1.7 percent for the 2016 tax year (and millionaires had a nearly 6 percent chance), Kiplinger reports. Compare that with the 0.65 percent rate for the less wealthy.
If you go it alone anyway: Lessen your audit risk with a few simple tips. Take advantage of e-filing -- it can cut the risk of silly errors that draw Uncle Sam's attention. Keep deductions as common and well-documented as possible. And above all else, don't omit any income, no matter how insignificant.
Why you need a pro: The IRS dedicates an entire online tax center to the self-employed, which should signal that things can get complex. Fledgling business owners seek help for at least the first couple of years, until they get the hang of their newly complicated situation.
If you go it alone anyway: Make sure what you have is a true business, not a hobby, which would mean no deduction of losses from your other income. And be sure to read up on the long list of deductions you may be able to tap -- they include a home office, business travel, educational expenses, and advertising costs.
Why you need a pro: SSure, itemizing may mean a fatter tax return. But itemizing is also time-consuming and requires extensive documentation. Higher earners may also run into limitations on itemized deductions, according to U.S. News & World Report.
If you go it alone anyway: Set aside ample time to organize records and fill out tax forms. Remember, itemizers can't use less-complicated forms such as 1040EZ or 1040A -- they're stuck with the 1040 and Schedule A -- and the IRS says the 1040 takes about 15 hours to complete.
Why you need a pro: Taxes can be complicated for small-business owners, who are usually busy, stressed, and not expert in finance -- making errors all too possible. Tax preparation software doesn't give them the representation they need if the IRS comes calling with questions.
If you go it alone anyway: Be ruthlessly organized, track expenses meticulously, and keep bullet-proof records. Be sure to know the difference between employees and independent contractors -- and remember that you're likely on the hook for quarterly estimated tax payments.
Why you need a pro: Buying a home means eligibility for two potentially big deductions: mortgage interest and property taxes. Certain closing-related expenses such as points paid on a loan may be deductible too, and there are other, less common tax breaks. Moving expenses can also be deducted (but this is the last year). A pro can make sure no tax breaks are missed.
If you go it alone anyway: You'll have to itemize deductions, so set aside enough time to fill out the more complex 1040 and Schedule A, particularly if you've never used those forms before. This also means itemizing other potential deductions, such as charitable giving, which may not have been on your radar when claiming a standard deduction.
Why you need a pro: Which state income tax rules apply, and when? It can get tricky fast. Rules vary depending on your status: Are you a resident? Part-year resident? Non-resident? The answer will inform how income is apportioned -- that is, figuring out how much is taxable and where.
If you go it alone anyway: Ask for help from an employer's payroll department, which may have helped others navigate similar situations, tax prep service RapidTax suggests. And find out whether there are reciprocal agreements between the states that exempt you from having to file in the state where you work. TurboTax maintains a list.
Why you need a pro: Landlords can take advantage of scores of deductions, including loan interest, taxes, upkeep and repairs on rentals, insurance, and even the cost of traveling to properties, according to the site Landlordology. A tax pro can help ensure none are missed.
If you go it alone anyway: Use Schedule E to report income (or losses) and expenses from a rental property. But there's a nasty surprise waiting for those who think rental losses are deductible -- as Nolo notes, they are considered "passive" by the IRS and can offset only passive income that doesn't require your participation. Typical jobs or investments don't qualify.
Why you need a pro: No more payroll taxes usually doesn't mean no more taxes, period -- it just changes the game. Retirement raises all sorts of tax questions regarding Social Security, retirement accounts, pensions, part-time jobs, and how tax liability will change once these other income streams are tapped.
If you go it alone anyway: There are plenty of resources to help, so don't. The IRS' Tax Counseling for the Elderly program offers free help for taxpayers 60 and older. And the AARP Foundation Tax-Aide provides free tax assistance to low- to moderate-income filers over 50 at more than 5,000 locations nationwide
Why you need a pro: There's a fate worse than paying for professional help, and it's making silly tax mistakes that can raise your audit risk because you rushed through a return. If you don't have time to scrutinize your tax return, pay someone who does.
If you go it alone anyway: Don't underestimate how long it can take to do your taxes. Even the streamlined 1040EZ takes an average of five hours to complete, the IRS estimates. The more complicated the situation, the more time is needed -- small-business owners could require a whopping 21 hours to get their taxes done.
Why you need a pro: If you don't want to deal with pesky calls from the IRS, a tax professional may be able to field them for you. And if there's an audit, authorizing a professional to represent you can avoid a stressful in-person encounter with Uncle Sam.
If you go it alone anyway: In an audit, provide only the required information -- nothing more, nothing less -- and be professional but brief when answering questions, CBS MoneyWatch recommends. Be extremely organized and never give an auditor your only copy of a critical document.