Is it better to do your own taxes or hire a CPA accountant? Despite what many have advised, I've been doing my own taxes for the past 15 years.
Along the way, I've cocked things up. For example, one time I forgot to report the cost basis to over $1 million dollars worth of stock proceeds! For some reason, I just passed over the stock section of the software.
My DIY Tax Mistake
You can imagine my surprise when I got a tax bill from the IRS for over $300,000! By not inputting the cost basis, the IRS thought I had another $1 million worth of income that I hadn't paid taxes on.
Instead, I only had about $10,000 worth of extra income since my cost basis was around ~$990,000. Day trading is tough and not worth it!
After scrambling to gather all my stock purchase prices, I submitted everything to the IRS and prayed it was all just a silly mistake. I gave the IRS folks a ring in Utah to explain what I had sent in, and they were so nice.
The man on the other end said, “Not to worry, we see these types of mistakes all the time.” Two months later, I got a letter from the IRS. It said I owed minimal interest, and taxes on just my profits of ~$10,000, or about $3,000. Phew! Thank goodness.
Lesson learned. Always report your cost basis and save all records of transactions. I'll never mess up that section again. Even though my experience may make you run to a CPA, there's more to consider. I cherish every learning experience and would do it over again.
Why You Should Do Your Own Taxes
My stock transaction incident happened years ago when I first started doing my taxes myself. Since then, tax software from the likes of TurboTax have improved tremendously. Thus, it's much harder to make mistakes filing yourself.
Overall, it takes me about 2-3 hours a year to do my taxes using TurboTax software and I just love it. My taxes are complicated too. I have rental properties, private equity investments, stock transactions, normal income, side income, and so forth.
There are a lot of things to think about if you're deciding to do your own taxes or hire a CPA. Here are several reasons why you should do your own taxes:
1. You learn how the tax system works
Once you start doing your taxes, you begin to realize how complicated the US government taxation system is. You'll learn about all the nice tax credits and deductions.
But, there are income limits for tax deductions and credits. So you may realize they don't apply to you or get phased out if you make too much income.
In addition, you learn what a W2, 1099, 1099-MISC, 1099-NEC, 5498, 1098, K1, 1040, 8582, and Schedule-E all mean. With knowledge comes the ability to optimize your own taxes.
2. You learn about your own finances
Given you now have a better understanding of how the tax system works, you start thinking about your own finances in a different way. You adjust your own finances in accordance with what the government encourages all Americans to do, i.e. buy a home and start a business.
You don't have to actually go and buy a home or start a business. But, you can put in pro forma numbers into the program and see what happens to your taxes if you do.
Doing your taxes allows you to play around with different scenarios and understanding the outcomes. Still deciding if you should do you own taxes or hire a CPA? Being able to play around with tax software is the best reason why you should do your own taxes.
3) The IRS people are good people
IRS folks are actually really supportive. This is contrary to what you see in the movies about big, bad IRS agents crushing people's lives. I've called them numerous times to ask for help. Each time they have been so friendly and courteous.
Why is this? The reason is because they know the tax system is so damn complicated! Everybody makes mistakes. In fact, I'd venture to guess that the majority of taxes done by individuals and professionals have at least one mistake, or one sub-optimal entry.
The IRS are not out there to punish normal folks like you and me. They are there to help you. A bad IRS reputation is definitely one of the key reasons why most people are afraid to do their own taxes vs hire a CPA.
4) Your tax professional won't listen to you
Another simple reason why you should do your own taxes is a CPA may not listen to you. Some people are very aggressive on their returns. For example, I was speaking to my CPA friend the other day. He said a couple who makes only $80,000 a year working in hotel services wanted to deduct $40,000 in expenses!
There was no way was my friend going to submit that. His firm's reputation, his license, and his name are on the line. Most people don't go to jail for blatant errors on their tax forms.
Instead, what the IRS does is wait 3 years to send you a notice. It contains a ~5% penalty a year so they can try and make more money from you.
5) You control your own schedule
Although it takes me 2-3 hours to do my own online taxes, once done, I like to let it sit for a while. I like to revisit my returns on a later date. The reason why I wait is because there are tax forms that sometimes come late. For example, I often get K-1 statements late.
Another reason is because you want to think things through. Time will also help you be sure you didn't forget to input anything.
Why You Shouldn't Do Your Own Taxes
When you're deciding to do your own taxes or hire a CPA, you have to understand the benefits of both. Here are the main reasons why you shouldn't do your own taxes and should hire an accountant instead.
1) You are bad with numbers
If numbers make you sick, don't do your own taxes. An accountant can really benefit you. After all, it's easy to mess up your taxes if you are not careful. And if you struggle with tax concepts and math, hiring a CPA is a good move.
Errors can cost (or gain) you much more than what a mistake free tax return will cost you. That said, I firmly believe the majority of tax returns have sub-optimal entries.
2) You have the best accountant and the money
If you have a rock-star accountant who is on the same page with you in terms of tax philosophy, you might as well have him or her do your taxes for you.
Furthermore, if you don't care about spending $500-$1,500 for an outstanding CPA, go for it. The CPA might be able to get you much more than an extra $500-$1,500, maybe. I say maybe, because there's only so much you can do before you go into the grey area.
3) You have an incredibly diverse amount of investments and income streams.
If you have 5 rental properties, 3 vacation homes, 5 different private investments, annuities, dividends, a side business and make multi-millions, you probably want to have a seasoned pro do your taxes.
If you only have a W2 and a home mortgage, there's no reason why you can't do your taxes yourself.
4) You don't enjoy reviewing your work.
If you were the type in school who took your final exam and handed it in without reviewing your answers thoroughly, you want to hire an accountant.
I personally love reviewing spreadsheets, budgets, tax documents, essays, over and over until I get sick of it.
Since you've gotten this far, you're in for a treat.
Use TurboTax At Home
For the past 8 years, I've been using TurboTax to do my own taxes. Before I used TurboTx, I had two fears. 1) Security and 2) What if all the work I input doesn't save.
As with anything done electronically, there is a security risk. But, fortunately I haven't had any security issues doing my taxes.
My one and only roadblock was when I came to form 8582 (Passive Activity Loss Limitations) for rental property. When I clicked the box saying I have passive losses for my rental when I first bought it 9 years ago, the program suggested I call an TurboTax Professional because supposedly this is a complicated thing.
Well, it's not complicated to me, and I wasn't about to now call after I spent 2 hours doing my own taxes. I clicked “skip” and then the program warned me that the passive loss form wouldn't be included in my form, and that I might have some issues. Well that wasn't very comforting, given I had some passive losses!
It turns out after doing some digging, that passive losses for an active landlord is not allowed anyway if you make over $150,000 a year. After $150,000, you cannot carry over any passive losses to help reduce your tax bill once you rental starts making positive income.
What I'm hoping is that the passive losses can be tacked on to my cost basis for the property if I ever sell it, so that my tax bill is less since my profits are less. I've been assured by an accountant this is the case, but we will cross that bridge when we come to it. For now, I've learned a lot, and I'm keeping all records.
TurboTax Makes DIY Taxes Easy
Overall, I'm very pleased with TurboTax, and I would recommend their products to anyone. They've been refining their DIY software for the past 10 years.
It's always intimidating to take on new things, but after some practice, all you'll want to do is do your own taxes. Once you understand the basic concepts, the rest of it is data gathering and data entry.
Doing your own taxes is a very rewarding feeling learning about your own finances. Combine straightforward tax software with all the answers you can find on the internet and you've got plenty of ammunition to do your own taxes.
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Tax Savings Recommendation
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Readers, do you file your own taxes or hire a CPA? What have you learned from your tax filings over the years?