I don’t enjoy doing my taxes, but I do them anyway. My main reason is to learn as much about the latest tax codes so I can reduce my tax liability. This post discusses five lessons from doing my taxes for over 10 years.
Why I Started Doing My Own Taxes
In 2000, I paid a CPA $500 to file my incredibly simple tax return because I had no idea what I was doing. Granted, I had a lot of trades in 1999 to calculate since it was the dotcom mania back then.
After realizing $500 was expensive, I paid $250 for an H&R Block CPA to do my taxes and show me the ropes for a couple years. After getting comfortable with all the forms and jargon, I started doing my taxes myself using H&R Block’s tax software. They started with a CD-ROM that I had to buy at an electronics retailer, but now everything is online, thank goodness.
I’m probably never going to pay a CPA to do my taxes again because H&R Block’s tax preparation software is so easy to use from home. It will ask you questions about your situation before getting started so it has the right forms for you to fill out. Further, the tax software is always up to date with the latest tax rules.
For those of you who want to have a H&R Block tax professional do your taxes remotely (because who wants to go to an office), they’ve come up with the H&R Block Tax Pro Go program.
I tried them for one year because I had questions regarding a couple K-1 filings from my private investments. It was very helpful to talk to a tax professional who inputted the information for me when I was stuck.
The product provides remote tax preparation with just a few easy steps.
1. Tax Pro Match & Upfront Pricing: Answer a few questions about yourself, get matched with the best Tax Pro for your needs based on your answers, and see your actual price upfront, starting at less than $60 for one federal and one state return.
2. Tax Document Upload: You upload your digital tax documents securely. If you don’t have a document ready, you can save your progress and resume where you left off.
3. Talk With a Tax Pro: Your Tax Pro personally calls you once your forms are received. You can also securely message them at any time throughout the process.
4. Virtual Tax Preparation: You return is completed within 5 business days and sent to
you, along with an explanation of your credits and deductions for review and approval before you pay.
5. Pay & File: You approve your return and choose how to pay. Or use your refund and pay nothing out of pocket. Then H&R Block files your return on your behalf.
Five Things I Learned Doing My Own Taxes
1) Make sure you input your cost base for all trades.
A decade ago I had a $250,000+ erroneous tax bill because I forgot to input around $1,000,000 in cost base for various trades. My real profit was less than $150,000, but the IRS thought I had $1,000,000 in profits. Never again will I make this mistake! Doing my taxes made me realize my errors. It also helped my stop day trading so much due to all the taxes and time it takes to reconcile my trades for taxes.
2) Private investments will often require you to file an extension.
Whether you invest in private equity, venture debt, or various alternative investments, there’s a good chance you’ll have to file an extension because their tax forms seldom ever arrive by the April 15-17 deadline to do your taxes. You’ll have to do an initial filing and pay any estimated taxes owed, file an extension, and then revisit your taxes before the October 10 deadline.
Currently, I’m investing in real estate crowdfunding, my favorite asset class to generate passive income. I get a K-1 for my real estate crowdfunding fund each year.
3) The IRS is not as scary as they seem.
The movies make the IRS out to be scary monsters. But in reality, I’ve found them to be caring folks who realize errors do happen.
When I had my missing cost base debacle, I called the IRS to get some help. They were very empathetic and helpful in explaining to me what I should do next. I filed everything appropriately and didn’t pay a penalty. I also double counted my home mortgage interest deduction once and simply paid the penalty of the overage.
Heck, some billionaire hedge fund manager in March 2021 was fined and forced to pay $105 million in back taxes by the IRS. He underreported $450 million in income. He’s not going to jail, despite cheating the IRS of so much. Regularly people are going to be fine.
4) You learn how to optimize your taxes.
Nobody cares more about your money than you. When you do your own taxes you are able to input pro-forma figures to see what your tax liability will look like if you take that job, sign up a new freelance client, relocate to a different state, or buy that 6,000 pound SUV for your business. Inputting various income and expense figures helps you figure out how you want to best earn and spend your money.
Further, you figure how ways to pay little-to-no taxes for the rest of your life by starting a business, taking advantage of retirement accounts and so forth.
5) You learn how to maximize your life.
When you do your own taxes, you realize how inefficient it is to earn W2 income or only earn W2 income. You also see how unrewarding it is to make a high income due to our progressive tax structure. As a result, you are less inclined to do uninspiring work just because of higher pay.
You’ll strive to earn passive income that is often taxed at lower rates, figure out an ideal income where happiness no longer increases, and care less about chasing the almighty buck.
Once you become highly involved with your taxes, you take steps to live more freely because you clearly see how much you are paying.
Understand Your Taxes At The Very Least
“Using tax software is one of the best ways for taxpayers to ensure they file an accurate return and claim only the tax benefits they’re eligible to receive.” – IRS
You don’t need to do your own taxes, but at the very least, you should understand how your income and investments are taxed, and what you can legally do to minimize your tax liability. Taxes will likely be your largest ongoing expense.
What I suggest everybody do is try to do your own taxes once with the help of tax software and a CPA to answer all your questions. If the time you spent is beneficial, then do your taxes yourself with online software, especially if your taxes are relatively simple. If your taxes are complicated, then go the hybrid route or hire a CPA whom you can guide.
Readers, what are some lessons you’ve learned from filing your own taxes? With tax software so easy to use and tax documents all downloadable online, what are some of the reasons why some people still pay someone to do their taxes?
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Wow, I had no idea that private investments will require you to file an extension to make sure you get every document in on time. The other night somebody told me that they are thinking about hiring a tax preparation service that could help them with their business and their assets. In my opinion, you should always look for reviews and recommendations before you get the help of an expert.
I have been doing my own with Turbotax all the time. I also studied tax codes that’s relevant to me. I’m W2 with RSU, ESPP, rental properties, K-1, and some dreadful foreign trusts informational returns which is a BITCH!!!! It’s extremely time consuming but very rewarding given that tax is by far, the largest expense for me.
ESPP is tricky for those who is not familiar with the how cap gain and discount is treated by the one year vs two years rules. RSU is a headache because brokerage doesn’t report cost base on 1099-b but a large list of transactions in fine prints (for my aging eyes) for sold-stock-to-pay-tax.. but they are all doable if one’s willing to spend time on it.
Knowing what kind of income I have and how they are taxed is extremely helpful to plan my tax. It’s not obvious. For instance, under AMT, how do I realize maximum LTCG while minimizing my overpayment for LTCG… As an engineer by trade where mathematical rigorous and precision are always desired, I reverse engineered IRS’s tax code/forms into a sets of functions. These functions are mostly piecewise functions of multivariable with “continuous but non-differentiable” points and/or jump discontinuities. With basic commands of Calculus, “Finding sweet spots/hotspot” is just to identify these discontinuities, avoid crossing them, if I have to cross them, what my price is exactly; and finding maxima in a given interval. This can be done by paper and pencil or visualize them buy engineering tool like Matlab or its octave free clone. By doing so, I know exactly why not to do certain thing in my finance. I wish IRS would publish all these functions along with the tax code so that I don’t have to derive them.
Would you be willing to share this? I would love to study your functions to create what-if scenarios.
My parents made me start doing my own taxes when I got a year into my job. I was 17 at the time. At first, it was a really scary thought and luckily, they gave me their 1040s to try and follow as an example. After doing it for the first time, I realized it wasn’t as difficult as I thought. The IRS isn’t scary at all. In fact, it’s fairly easy.
These days, like you mention, there are some many tax software online that it just doesn’t make sense to pay someone to do you taxes. My taxes have obviously gotten a lot more complicated with investments and side businesses that are reported differently. With some help with online tax software and some basic research in the IRS code, it’s really not that difficult. In fact, you learn so much more by doing it yourself and you’ll start to see where you can maximize your refund!
It wasn’t until I had a small business that I consulted with others about doing my taxes properly. A CPA friend graciously met with me and let me know that tax software could cover my current needs. I’m so glad I listened. This year I had more W2 income than normal, and my software remembered to carry forward a loss from my business. I would not have known to do that on my own. Between that and all the deductions and expenses it asks me about, I do much better around tax time now.
I’ve done my own taxes the past couple years using free file fillable forms – which is just a step above filling out the forms by hand. I’m an odd one, though, and I like filling out forms and seeing exactly how everything ticks.
I often wonder if the IRS was scarier in the past, perhaps in the 50’s. Every story I hear involving the IRS anymore is actually rather pleasant.
Hey Sam,
I always did my own taxes since my first paycheck. It’s really scary when I ask people about their taxes and how clueless they are. They just take it to their accountant and look at the check. The funniest thing I see is when they are happy they got money back. I always tell them it was always your money, you just over payed lol. I can understand 100% why you stopped working and I wish there were more people like you. I just wanna see what these welfare people and politicians will say about the 1% once they stop working.
Sam, I read your other posts and you have a great net worth but I seen that your rate of return is low. I can get 10% no problem but I do a bit of managing. I’m sure you can get at least 10% considering the amount you have. I’m just wondering, do you not care to make more money or you haven’t seen better opportunities.
Hi Adam,
What is your net worth and how do you know I get less than a 10% return? What do you think my net worth is and have you left work yet?
It is true I don’t care about large returns anymore since I’ve surpassed my financial target. But don’t forget a growing portion of my net worth is my business, which has far surpassed the S&P 500 performance since 2009.
I’d love to know what type of no brainer 10% returning investments you can recommend. If you are indeed retired, you are a rare person because all my other nonworking friends are much more conservative.
Thx
Related: https://www.financialsamurai.com/the-rise-of-stealth-wealth-guide-to-staying-invisible-from-society-rage/
Hi Sam,
I know you get less than 10% because I read your post about 2017 passive income and knew you had some rental properties although I wasn’t sure how much equity you had in the house. But I think you have 5 million dollars in net worth. I’m also including your house since I consider that part of your net worth. I didn’t take your business into account since that requires effort and time, and not necessarily money. But with your business you’re definitely worth more.
I’m 27 and have a net worth of 300k. I’m an engineer so my salary isn’t that great especially since I live in the midwest. That’s when I decided to do something on the side to generate more income. I buy really beat up homes and fix them up and sell them back for a profit. I repaired the first house myself and now I just hire others to do it. Technically this is a business so you’re right, its not really passive. Once I have a couple more years of experience I’m going to start to look for investors to fund my business. There are alot of people like me who have skills but don’t have the money to open up their own business. I have a friend who is an auto mechanic and wants to open up an auto shop but can’t since they pay auto mechanics so low ($18 an hour) that you’re stuck at your level. We have alot of opportunities here in the Midwest but not much money since alot of factories closed and went south.
If you want a no brainer investment, then buy rental properties in the Midwest, obviously you have to do your homework. You could buy a 20 unit apartment building for 1 million dollars and just hire a management company to take care of all the Managing. You could easily get $700 per unit, with maintenance and all other expenses you should be able to get 100k a year. Contact me if you need more details.
Thanks
Good stuff Adam, and thanks for responding and sharing.
I think it’s important to be careful comparing yourself too much to others, and especially to me. I’m almost 41, have been through several bear markets, have a family to take care of, and left work at 34. We are in totally different stages, so for you to say that I should be making 10% a year or not care about my returns as much doesn’t make sense because you’re projecting your goals onto me.
Instead, focus on your goals.
When I was 27, I was a VP at a global investment bank. My goal was to at the very least grow my net worth by 10% a year, but it turned out better. Here’s my path to $1M by 30.
Related:
The Average Net Worth For The Above Average Person
The Various Types Of Risk To Take In Retirement
As a CPA I appreciate you advising people to review their tax return even if they have a CPA prepare their tax returns. I have so many clients who come in and simply sign on the line without a second thought. My personal opinion is that if you have a W2, home mortgage interest, some charitable contributions, and real estate taxes you should be able to complete your tax return on your own. However, the new tax law is going to make things a lot more interesting.
1. Federal withholding on paychecks went down so a variety of factors may actually result in an increased tax bill (lost personal exemptions, reduction in state and local tax deduction and real estate taxes)
2. HELOCs are no longer deductible if used for personal expenses
3. Increase in AMT amounts
4. Qualified business income deduction for pass-through entities
Etc. etc.
I am recommending to all of my clients to have a “tax projection” completed before the end of 2018 to assess the implications of the new tax bill.
About number 3 – the IRS being seen as scary, why is that? I get that sense from movies and TV… that people are constantly looking over their shoulders to see if the IRS is watching.
I’m from the UK, but I live in Japan.
My experience of the tax authorities here is they are very friendly. They are more than willing to help you get the deductions etc. that you are entitled to.
What gives the IRS such a bad name?
Hi Sam-
Thanks for posting about this. I am working on growing outside of my comfort zone and I’d put filing my own taxes in that category. However, I do find it very tough to believe you do your taxes without a CPA. I know you report your passive income to us, and it’s obvious your income from FS is significant. All of this income, with the various deductions you take, seems like you’d need a tax pro to organize, advise, and help you file. I don’t doubt you can do it yourself, but it seems like it’d be a big project – something that takes you weeks to do. My dad owns a small business and pays his CPA around $20K a year to do his business and income taxes.
I have a couple questions:
1. Even if you can do it yourself, don’t you value your time above what you’d have to pay someone to help prepare/advise? Obviously you can still work with this person to give your input and make sure you understand everything but surely you’d save hours and hours by having someone help. Or maybe you do it in an hour?
2. Part of working with a CPA is to help protect yourself in case of an audit. You certainly are at a much higher likelihood of being audited than the average person. Maybe it’s just me, but if I were audited I wouldn’t want to be alone dealing with it. I’d sleep better at night knowing I worked with a pro to file. Is this something you think about?
Thanks,
David
Wow, $20,000 a year to your CPA? Your dad must be doing great! Thoughts on joining his business instead of making a name for yourself instead?
1) I enjoy understanding as much as possible about tax rules because it is my largest liability. Second, I don’t find it very difficult after doing my taxes for so long. Finally, I learn some new each year and I get to write a post about it. That’s a home run in my opinion. Check out my Tax category for all the articles I’ve written so far.
2) I’m not afraid per my point #3 about talking to the IRS. My experience with them has been very helpful, and if I make a mistake, I just pay the mistake plus a 20% penalty per year on the mistake. People think they are going to go to jail or something if they make a mistake, thanks to the movies or big cases in the media. The tax code is complicated. The IRS knows this. Think about a mistake more like not paying your credit card bill in full each month.
How old are you and what do you do?
Hi Sam-
Thanks for your reply. Short answer is, I have thought about it for sure but his business is a bit boring. I am 28 and work at a large tech company in media sales. Job itself isn’t so exciting but the company is great.
My dad makes about 4x what I make (from his business) so it’s always in my mind. He co-owns with his brother and his 3 sons (my cousins) are working in the business which has deterred me (less earning potential). I also live in NYC but the busisiness is in a not so exciting city.
I really enjoy your posts and have been reading them for several years now. After reading your Passive Income post last month, I have been wondering why you didn’t consider moving into your San Francisco rental for 2 years before selling it which would have reduced your capital gain by $500,000. You could have also leased out your current residence for 2 years and then moved back into it, without the residence becoming an income property. Even though it was on a busy street, I may have saved you a great deal in taxes. I am curious if you were aware of this rule and chose not to use it or were you not aware of it because you do your own taxes?
Probably life, the value of time, and the hassle of moving furniture back-and-forth and finding new tenants and then managing tenants. The other reason is, we had a great offer of 2.74 million, or 30 times annual gross rent. Bird in the hand.
We also lived in the home for three out of the past five years so there is still prorated exclusion.
Would you be willing to disrupt your life for two years or maybe three years to save less than 10% of your annual income? Have you done this before?
I have been using turbo tax forever now. Have always done my taxes myself and sometimes friends taxes oh and of course my children. I also have a couple of K-!s, and they don’t arrive until the beginning of March. So that is around the time I do my taxes. I have lots of dividends and interest but I don’t itemize anymore since I have no mortgage.
Interesting, when your career is Accounting, everyone always assumes I do taxes even though my career was in corporate accounting. I only do friends taxes and my children’s.
I’m in the unfortunate situation that the vendors my business deals with require a reviewed Financial statement. That alone costs me 12k a year. As far as my personal return, I would imagine its about par with Sam’s complexity wise and I pay $1800 for that. I have done my personal return before but the $1800 buys me piece of mind regarding audits and mistakes.
Its kinda funny when you think about it. I thought Sam was crazy when he spent 20 or 30k on his landscaping project because he could have done it himself. On the flip side he probably thinks I’m crazy for spending $1800 on my tax return when I could do that myself.
I guess it’s all about priorities.
Thanks, Bill
I do use a very expensive CPA due to the complexity of one of my investments. However I do check every calculation. Last year, I found several mistakes that would have cost me 20 grand.
I learned my lesson that I always need to check. I used to have a crappy accountant and I thought since I already hired someone to do this, I didn’t need to do something myself, until one day I accidentally found that I had been underpaying my taxes for two years because he couldn’t understand my k1. I confronted him and he suggested to continue to do it the wrong way!! It was also then that I found I was on the hook even if he made mistakes. I fired him immediately, hired a much better CPA, and corrected the mistake in time. Fortunately the IRS did not assess penalty. Since then, I obsessively learn tax code and obsessively check every form.
My friend was not so lucky. He was in a startup. It became successful and his stock options went in the money. His accountant didn’t understand, and did not report the profits. The IRS found out a few years later and he was assessed a huge penalty. He was in debt years afterwards.
Yes, professionals do not always know everything and they make mistakes. I have had to explain things to lawyers and accountants. I check everything. I have corrected the interest calculations of major mortgage lenders. I need to satisfy myself if I can that I understand and they understand.
Dealilng with will and trusts right now. Have you covered that Sam? I don’t recall one of your wonderful posts on this. Who do you leave money to, who do you appoint executor/trustee. I don’t want to pay trustee fees but I don’t want my estate to be sucked up by creditors or other claimants. I am perfectly happy to have my heirs spend and enjoy the money and hopefully invest the capital for their heirs, but I don’t want it to be in the wind in 6 months. I guess I will have to stay healthy and live long to prevent that.