​

Financial Samurai

Slicing Through Money's Mysteries

  • About
  • Invest In Real Estate
  • Top Financial Products
    • Free Wealth Management
    • Negotiate A Severance
  • Buy This, Not That (Bestseller)

Do Your Own Taxes Or Hire An Accountant?

Updated: 06/07/2021 by Financial Samurai 43 Comments

Do your own taxes or hire a CPA

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.

Related: Audit Rates By Income: Your Chance Of Getting Audited By The IRS

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.

Recommendation

Manage Your Finances In One Place: The best way to become financially independent and protect yourself is to get a handle on your finances by signing up with Personal Capital.

They are a free online platform which aggregates all your financial accounts in one place so you can see where you can optimize. Before Personal Capital, I had to log into eight different systems to track 25+ difference accounts (brokerage, multiple banks, 401K, etc) to manage my finances.

Now, I can just log into Personal Capital to see how my stock accounts are doing and how my net worth is progressing. I can also see how much I’m spending every month.

The best tool is their Portfolio Fee Analyzer which runs your investment portfolio through its software to see what you are paying. I found out I was paying $1,700 a year in portfolio fees I had no idea I was paying!

There is no better financial tool online that has helped me more to achieve financial freedom. It only takes a minute to sign up.

Planning for retirement when paying for private grade school
Are you on the right retirement path? Click to run your numbers through a retirement calculator

Tax Savings Recommendation

Start A Business: A business is one of the best ways to shield your income from more taxes. You can either incorporate as an LLC, S-Corp, or simply be a Sole Proprietor (no incorporating necessary, just be a consultant and file a schedule C).

Every business person can start a Self-Employed 401k where you can contribute up to $54,000 ($18,000 from you and ~20% of operating profits). All your business-related expenses are tax deductible as well.

Simply launch your own website like this one in under 30 minutes to legitimize your business. Here’s my step-by-step guide to starting your own website.

Start a simple business to pay less taxes and contribute more to pre-tax retirement accounts
Start a simple business to pay less taxes and contribute more to pre-tax retirement accounts. Instead of paying taxes on $100,000 in income, you’re only paying taxes on $12,000 for maybe a $2,000 tax bill, or 2% effective tax rate.

Readers, do you file your own taxes or hire a CPA? What have you learned from your tax filings over the years?

Tweet
Share
Pin
Flip
Share
Buy this not that instant bestseller Wall Street journal banner

Filed Under: Taxes

Author Bio: I started Financial Samurai in 2009 to help people achieve financial freedom sooner. Financial Samurai is now one of the largest independently run personal finance sites with about one million visitors a month.

I spent 13 years working at Goldman Sachs and Credit Suisse. In 1999, I earned my BA from William & Mary and in 2006, I received my MBA from UC Berkeley.

In 2012, I left banking after negotiating a severance package worth over five years of living expenses. Today, I enjoy being a stay-at-home dad to two young children, playing tennis, and writing.

Order a hardcopy of my new WSJ bestselling book, Buy This, Not That: How To Spend Your Way To Wealth And Freedom. Not only will you build more wealth by reading my book, you’ll also make better choices when faced with some of life’s biggest decisions.

Current Recommendations:

1) Check out Fundrise, my favorite real estate investing platform. I’ve personally invested $810,000 in private real estate to take advantage of lower valuations and higher cap rates in the Sunbelt. Roughly $160,000 of my annual passive income comes from real estate. And passive income is the key to being free.

2) If you have debt and/or children, life insurance is a must. PolicyGenius is the easiest way to find affordable life insurance in minutes. My wife was able to double her life insurance coverage for less with PolicyGenius. I also just got a new affordable 20-year term policy with them.

Subscribe To Private Newsletter

Comments

  1. Megan Adler says

    October 8, 2019 at 7:46 am

    I appreciate you helping me learn more about taxes. My husband has been thinking about doing our taxes by himself this year but I’m not sure it going to be a good idea. He’s no a big fan of numbers so I think he will struggle a bit. In my opinion, it better to get a professional to do out tax services but I’ll have to talk it over with him.

    Reply
« Older Comments

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *


n
n

Top Product Reviews

  • Fundrise review (real estate investing)
  • Policygenius review (life insurance)
  • CIT Bank review (high interest savings and CDs)
  • NewRetirement review (retirement planning)
  • Personal Capital review (free financial tools and wealth manager)
  • How To Engineer Your Layoff (severance negotiation book)

Financial Samurai Featured In

Buy this not that Wall Street journal bestseller

Categories

  • Automobiles
  • Big Government
  • Budgeting & Savings
  • Career & Employment
  • Credit Cards
  • Credit Score
  • Debt
  • Education
  • Entrepreneurship
  • Family Finances
  • Gig Economy
  • Health & Fitness
  • Insurance
  • Investments
  • Mortgages
  • Most Popular
  • Motivation
  • Podcast
  • Product Reviews
  • Real Estate
  • Relationships
  • Retirement
  • San Francisco
  • Taxes
  • Travel
Buy this not that WSJ bestseller 728
  • Email
  • Facebook
  • RSS
  • Twitter
Copyright © 2009–2023 Financial Samurai · Read our disclosures

PRIVACY: We will never disclose or sell your email address or any of your data from this site. We do highly welcome posts and community interaction, and registering is simply part of the posting system.
DISCLAIMER: Financial Samurai exists to thought provoke and learn from the community. Your decisions are yours alone and we are in no way responsible for your actions. Stay on the righteous path and think long and hard before making any financial transaction! Disclosures