This post is sponsored by H&R Block.
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!
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.
3) The IRS is not as scary as they seem. 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. 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.
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.
Related: How To Pay Little To No Taxes For The Rest Of Your Life
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.
You can visit https://hrblock.com/taxprogo to start your return. I’ll be starting my return the first week of April and ultimately file an extension due to three private investment K-1s that will arrive past the deadline.
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?
I have been using TurboTax. Works great also. Similar to H/R you can get help. K1 can be problematic along with late tax forms from private investments. Really thinking of not investment in private placement investments in the future. I’M looking for simplification and returns on vanilla stocks and bonds are just as good without the late headache.
It’s been quite awhile since I’ve done my own taxes, but I did simultaneously figure out my own taxes even when I had a CPA prepare them. This helped me to understand my taxes much better and allowed me to dialogue with my CPA efficiently.
The main reason I used a CPA was to deal with the of the complexities of my business, real estate income, and misc K1s. If I were a W2 employee with minimal complexities, I’d file my taxes myself all day long. :)
#3 is something I haven’t thought about. My hubby was audited the first year he ever filed taxes (by state, not federal) and CA state was a pain the bum to deal with. Turns out they were the ones that made the mistake but it took lots of arguing back and forth. I’m hoping the actual US IRS isn’t anything close to that nightmare. But it did leave my husband very afraid of filing taxes and in turn he keeps almost obsessive paperwork on the things he can figure out himself.
That’s good they made the mistake. But what a pain. When I was paying over $100,000 a year in income taxes, I remember thinking to myself if I got an audit, maybe the IRS can find some tax savings because paying this amount of income tax was just too painful.
It would be one thing if the government was magnanimous and efficient with our tax dollars, but they are not. And then I was inspired to write one of many posts complaining about the government such as:
https://www.financialsamurai.com/going-john-galt-protest-government-waste/
I started doing my taxes about 7 years ago – but we use Turbo Tax. I decided to do it to learn more about what I was handing off to someone else for years. I even did an experiment one year where I did them in Turbo Tax and then took them to a CPA. He missed a page of calculations and I had to go in and show him…$450 later I wasn’t impressed, BUT I know a good CPA can really make a difference too. Our return is complicated with 4 rental properties. Not as big as many others – but not easy either.
That’s cool you ran that experiment. What I’ve learned is that software is simply more efficient. The software company employees tax professionals to make sure the software is up-to-date and written correctly. Then that software is leveraged to hopefully as many people as possible for their business prosperity. Whereas accountant asked to do the same thing manually over and over again, and he or she might miss something as in your case.
There was one year, the H&R Block software updated a couple months into the new year because of a new tax law change. I thought that was pretty cool that they could simply updated online, and everything would be real time. If I was using an accountant, I’m assuming I would’ve had to mail the document into their office or go to their office. Software is just so much more efficient.
They actually just did it this year as well to add in the Tuition and Fees deduction that was extended for 2017 on 2/9. It’s definitely cool that they do this, but unfortunately they did not have the update ready when I filed with them on 2/26.
I understand it takes time to update/test software, but in the weeks following the legislation, they could have at least instructed people who had entered tuition data to hang tight until they finish updating the form 1040. But advising customers to delay paying is too great a risk for H&R Block!
I now need to file an amended return, so I asked H&R Block to honor their “Maximum Refund Guarantee”. The rep actually invented an alternate policy that as long as the IRS accepts your return (even if it’s sub-optimal), the guarantee does not apply. This of course completely defeats the purpose of the guarantee. I would have cut them slack if they simply argued that late legislative changes invalidate the guarantee, but it was completely unethical to push this fictional policy. I’ve been an H&R Block customer for 10+ years, but I think I’m done. Buyer beware.
I asked myself this question yesterday after I paid $399 out of my refund to pay my H&R tax pro. I’ve been going to the same guy for about 3-4 years now. H&R Block has an office about 2 minutes from where I live. Before that I was using TaxAct and some other programs to do my taxes.
Up until finding my tax pro, I always seemed to owe money to the government or state whenever I did my own. Now I’ve been consistently getting back a return every year and I even adjusted my W4–thanks to help from the tax pro–where I’m getting more in my check. The goal is to get more throughout the year and less back at tax time (except for credits, etc).
So I’d say convenience and a great experience thus far keeps me going back H&R Block instead of doing them myself. I’ll more than likely be moving this year so the chances of me going back to the software are high. We’ll see. Might still be worth the drive.
The year before you do your own taxes with software, simply write a list of questions and have an Excel spreadsheet with all the forms you need from each account.
It’s not that hard. And if you get stuck, you just click a button online to pay for somebody to help you. That’s what I did and it was pretty straightforward.
Thanks Sam, I’ll try that out. There were forms that I wasn’t even aware I needed because I just started investing last year with Motif and Wealthfront and their forms didn’t come out until mid-February. So I ended up making multiple trips to the H&R office.
I’ll keep a record this year as suggested. Seems simple enough.
Very sound advice, Sam! I did ours for the longest time, using Turbo Tax. It wasn’t until we delved into two separate businesses plus two W-2s that we went with a CPA. The real estate portfolio can be pretty tricky to navigate, with depreciation and maximizing other business expenses. The chiro practice is equally byzantine, with S-Corp hoops to get through.
All that said, if you simply have a few side investments, along with a standard W-2, there’s no reason you can’t DIY your return.
This is a very timely post.
I too have been paying the same cpa for the past 12 yrs (typically $600 cost/yr) and only last year I found out that for the past 3 years he ended up using the standard deduction for my tax return because at my income level there was a ton of phase outs and after I paid off my mortgage and gotten debt free I no longer had any itemized deductions that pushed me over the standard deduction.
So this is the first year I am trying to do the taxes on my own and coincidentally had purchased the H&R tax software pro that you just posted about.
It definitely is very intuitive and well done. My only delay I am having is waiting for K1 forms from private placement syndicate I had invested with for the first time last year (on a side note why is it that these forms take so long to prepare and send out? Do they not have all the information by the end of the year and just have to create the paperwork? Seems like a pain to do an extension just based on that)
That’s a good question regarding the delays in K-1. They are always delayed for some reason. Maybe it’s because private investments go on a different schedule and they are less liquid and are under less governments deadlines.
So the key really is to do your first round of taxes as efficiently and cheaply as possible, and then spend more time during the second round before the extension deadline. You don’t want to spend a lot of money and a lot of time on both rounds. Therefore, I find tax off word to be efficient enough.
I was going to wait a little while longer to look into how to file my very first K1 too but since this article brought it up here’s what my Turbotax had to say:
“Schedule K-1s are issued by pass-through entities (partnerships, S corporations, estates, trusts, and LLCs). These entities don’t pay income tax; instead, their profits and losses are “passed through” to their partners, owners, shareholders, or beneficiaries on Schedule K-1, and the recipients then report the K-1 on their own personal tax returns.
Your K-1 may not arrive until March, April, or even later. This is because the pass-through entity needs to complete their tax return before they can distribute K-1s.”
March 15th is the deadline for corporate taxes (C-Corp, S-Corp, Partnerships, etc). K-1’s are generated to individuals with an ownership stake in a business. It takes so long because in most cases CPA firms are completing the return and they need to do an audit or review of the financial statements so that they know the numbers they are inputting to the IRS are reasonable. That’s why most people with K-1’s have to file an extension because there are many more steps to the process rather than just adding up earnings and sending out a tax document.
I keep the complicated stuff within the tax sheltered accounts so I don’t have to wait for reports on what is income versus return of capital, or things like that. Soon after January I complete the first draft using my own records from my spreadsheets, which are always fairly close to actual. CRA corrects anything that is a few dollars out if I decide to file early because of travel. I can set up the payments in advance and have not been penalized for being a few dollars out. Usually I have paid a little too much and get a small refund.
Filing online is so much easier and faster than paper and mailing. Also I can file earlier and not have it dragging on into the year, when I am away travelling.
On my spreadsheets I also have my tax returns projected up to 2035 as it makes so much difference once you are withdrawing funds. It is all about minimizing taxes and adjusting which accounts to draw from and when.
The main reasons that I do my own are #4 and #5. It is the only way I can learn and strategize. Also, I can do my own projections if I understand the tax system. If I just left it to a professional, I would have to wait until 14 months to find out what I have to pay, and that is just not timely enough to make my projections and plans. During the year, I read articles to keep abreast on changes especially concerning real estate capital gains.
I do hire professionals to clean my house, paint, wash outside windows, clean gutters, service my car, cut my hair, advertise and interview tenants, which is all very useful, but prefer to handle finances, investments, and taxes myself. I do a better job.
Ditto travel arrangements. Do it all myself now.
I’ve always done my own taxes and what I have learned is #5. My income has never been high, but it will go down to about $30,000/yr in retirement (mostly pension). Under the new code, income over $24,000 will be taxed, but qualified dividends and long-term capital gains won’t be taxed until $77,400. I guess the government wants me to invest instead of work. Soon Uncle Sam, soon.
That’s great to know. Seriously, ever since doing my own taxes I love learning about new tax laws and income thresholds. Often times, we are not that far away from these thresholds we deem to be fair or beneficial. Therefore, knowing these rules helps us maximize our lives.
And your situation, would it really be beneficial to make an extra $10,000 in part-time work once you’ve hit that $77,400 threshold? Probably not.
The same goes for paying the net investment income tax, and a federal marginal income tax rate that I think is too high etc. i’ll simply work less Because I know money doesn’t buy happiness.
I haven’t read the actual tax code myself, but I did find two separate sources that state the upper threshold for 0% tax on qualified dividends and long term capital gains is $77,200 rather than the $77,400 upper limit for the 12% bracket for married filing jointly taxpayers. If this difference is indeed true I fail to see the point for it.
Rich,
>>qualified dividends and long-term capital gains won’t be taxed until $77,400
Are you saying once you’re 59 1/2, you can withdrawl from your PRE-TAX accounts, up to 77,400, if you have no other income?
Or to give another example, if you had a 5M dollar stock portfolio, and it was putting out 2% per year in dividends (100K), the first 77,400 is not tax at all? Again, assuming no other income…
That’s fantastic.
That’s taxed as income.
Dividend/cap gains exclusion to 77k is in non-retirement accounts.
So best bet is to have non-retirement accounts drawing 77k and let retirement accounts compound tax free till you have to take RMDs.
An added benefit is that the majority of my retirement assets are in a Roth IRA.
“They started with a CD-ROM that I had to buy at an electronics retailer, but now everything is online, thank goodness.”
Good times indeed! The 56k modem. Hoping someone doesn’t call the house line (or your parents/siblings picking it up to make a call) while you’re online – thank goodness for two phone lines!
Overall, good points covered here, Sam. On your question, my overall lesson on taxes was not forgetting I was married…
– Mrs. BD and I got married in May 2010. This gave us ample time to assess our combined tax situation. As previously shared, I ended up ramping up pre-tax 401(k) contributions the last two months of the year to lower our taxable income. I love Mrs. BD, but I didn’t love the additional tax burden we received as a result of being married.
– Being a single guy with one job, no kids (i.e., dependents), no house, and no other financial obligations, I had a very easy tax situation the first few years out of college. I’d fire up TurboTax, have a beer, and get my filing done in no time.
– Getting married changed that slightly. I just didn’t like the impact of now having higher income and the net result on our return. Alas, I thought I had an option. TurboTax asked something about whether or not I was married on or before December 31 that year. I read that to be a “no” because we didn’t get married on December 31. I interpreted this to mean, “If you’d like, you can still file as SINGLE for the year you actually got married.” Oops.
I remember I’m married each tax season now…It’s real simple (Mrs. BD also like to remind me :). Remembering this keeps me sane — and safe — in more ways than one. Enough said.
Ha! Was there a benefit to filing single by saving on the marriage penalty tax back then?
Now if you can only remember your anniversary. Then like it’s really good!
I don’t recall any particular benefit; I just (incorrectly) thought we had the option to file as single. I do remember seeing that I owed less if I were to file as single though.
And we’re good on the anniversary…it also happens to be our dog’s birthday :)
Hi I love reading you blogs and hope to some day understand them a bit more than I do now! I have zero financial savvy. I don’t file my own taxes m, but trust the CPA who does. I juggle three jobs. Because of the difference in taxes taken out To my actual tax bracket once all the incomes are added up, I have additional money taken out to make up for the incorrect tax rates. It’s always a guess for me. I never know exactly how
Much money I will gross at the end of the year at my two part time jobs. This year I got a tax return of $2,900. Do you have any suggestions as to what do for next year’s taxes? I never want to pay taxes. I know that’s the better way to do it I’m sure. But for me I don’t want to owe Uncle Sam.
Use prior year safe harbor to start (see below). Then if you want, recalc your taxes in Oct and see if you need to withhold more or less for the rest of the year. Stinks to let them keep any extra money until April but better that then paying a fine for withholding to little.
“use the “prior year safe harbor” rule that lets you pay in 110% of the prior year’s tax in estimated taxes. (If your adjusted gross income is $150,000 or less, the safe harbor is 100% of the prior year’s tax.) … They take their estimated tax payments seriously.”Feb 15, 2013
Why High Income Earners Need To Pay Extra Attention To 2013 – Forbes”
I think many people are just plain scared they’ll make a mistake, get in trouble or short-change themselves if they do their own taxes. I use turbo tax and the platform couldn’t be easier. I’ve talked to HR block about random things and they’ve been great, not to mention free!! :-)
I use to do my own taxes using TurboTax. But I found some things were too complicated, especially stock options and RSUs. So, I found a great accountant and have been using him ever since. I also wanted to make sure I was being conservative to minimize audit risk, and wanted someone I could bounce ideas and questions off of
One thing great about using software yourself is running different scenarios. The what/if calculations are extremely helpful. My wife and I both worked demanding corporate jobs. I was AMAZED how much less taxes we paid if one of us pulled back (Which we eventually did. It was a very tough decision).
At this point, one of our key goals is lowering our overall tax burden as % of net worth
Both H&R Block and Turbo Tax are good. I am a CPA. However, if you feel a need to use a CPA consider an enrolled agent (EA). EAs are licensed to represent you in front of IRS, often equally good and a cheaper. The nice thing about having a business like Financial Samurai, is that if Sam chose to use a CPA, he could right it off as a deduction.
Great tip on the EA! Thanks.
Been using H&R TaxCut since it was released. Prior to that did my taxes the old fashion way on forms with pencil and calculator … OK … adding machine :-) … I took the 3 month H&R Block Tax Preparation Course and worked part-time during tax season for two years to supplement our income when we started having a family and my wife stayed home to focus on our 2-children. A couple of promotions over the course of those 2 years gave us some breathing room so I stopped working part-time for Block but the experience has carried over for 30+ years as I have done my own taxes and those of my immediate family since then. On occasion throughout those years when they were a bit more complicated with options, refi’s, Schedule C’s for home based businesses, paying tax to more than 1 state, etc., I would do my taxes and have a CPA review them for a substantially lower fee that if they had prepared them just to give it a second set of eyes and a professionals opinion.
However, I agree with Sam. Filing your own taxes along with managing your income/expenses through a tool such as Quicken/Personal Capital, etc., really helps with a holistic view of how your money flows through the system and what opportunities are out there to keep much of your hard-earned dollars in your pocket (legally).
I don’t mind paying taxes … just don’t want to pay more than I need too! … I don’t mind paying for someone to prepare my taxes if there is a value of them saving me more than what I would have paid for the service…then again…my returns are not that complicated that with a little bit of time I can get them done and keep up with all the tax changes along the way.
HI
I spoked using Tax Prep software a long time ago. Even though I read and followed all the softwares guidance I did not have the knowledge or technical accounting understanding to tell if my return was correct. So I found a good CPA firm and they have been doing my returns ever since. Although I still do not have enough accounting knowledge to tell if my return is correct, I trust the CPA firm who also has to sign on to my return as the preparer. My theory is that I want to pay what I owe and no not want to deal with “gray area” problems.
I also have started to simplify my life. I use a different password on each site. My single spaced password list crossed three pages at which point I started to evaluate each site as to heather it made my life easier or better. If the answer was no, I notified the web site to cancel and close down my account.
As a senior citizen I have realized that the gray matter between my ears has a finite capacity and thus I find that gradual simplification of my financial and personal life gives me more time to pursue what I enjoy. It also lowers my stress level by having less to worry about. There is a saying, that less is more which I have found to be true.
Doing your own taxes is definitely a great way to learn how the forms and deductions work and also a good incentive to figure out how to minimize taxes due each year. It’s impressive you’ve done your own for so long. We’re lucky to have user friendly software like HR block now. I can’t imagine trying to file by myself back when there weren’t online tools that go step by step!
Your point #4 (learn to optimize taxes) has been the key to me. I have been doing taxes myself since early 90’s – first by hand and these days TurboTax. Granted that most of my early years, my taxes were fairly straightforward (one employment, few deductions, and some dividend/cap-gain reporting). No business income and no K-1s!
These days I do end-of-year tax analysis in December every year and see what last month changes I could make. I use previous year Turbo Tax to run some what-if analyses. It helps with things like doubling up on property taxes, charitable contributions, and of course tax loss harvesting (since I own many stock positions). This December, I was able to pull in 2018 deductions into 2017 to take advantage of lower standard-deduction threshold.
One advantage I see with a local copy of tax software (not an online version) is that I could bring it up any time of the year and do what-if analysis whenever I am making a move that could impact future taxes. I used an online TT version once a few years ago and gave up on it when it wouldn’t let me re-run my numbers later in the year. Then there is the whole trust thing – do I want to store my financial data on somebody’s server out there!
I did my own taxes for several years using turbo tax software. It seemed to go fine until I started buying investment properties, at which point I simply wasn’t sure how to answer certain questions or value things like repairs and improvements. I hired a professional and for the next 2 years did my own taxes while paying him to do them for real. Each year I then compared my calculations to his and found that he was saving me more then I was paying him making it worth the price. The bottom line is that as an owner of multiple properties, I find it reassuring to hire a pro, but if my situation became more standard in the future I’d probably go back to doing them myself.
Being an ‘actual’ CPA, I am a little disappointed in this article. I believe it provides people who have little or no knowledge about accounting and taxes poor guidance. For example, to call most of the people working at HR block ‘tax professionals’ is incorrect. It is also false to believe HR Block employees many CPAs. I just audited 3 local MN offices and looked up the credentials of every single tax person in each office. None of them are CPA’s (Certified Public Accountants are are actually certified via rigorous education and testing requirements).
For example, this ‘Senior Tax Professional” has 13 years in jewelry sales and 2 years of general college education with no degree. How can anyone in their right mind call such a person a tax professional? There are many more just like this one:
https://www.hrblock.com/tax-offices/local-offices/index.html#!/en/tax-pro-details/318064/stacy
I realize HR Block likely paid Financial Samurai to boost their services, but I know for a fact that HR Block is the bottom of the barrel when it comes to tax preparation. If you make 20K a year with a W2 and nothing else, it doesn’t matter which tax prep service is used because it is very simple. With any real complexity using a ‘tax pro’ at HR Block or other low-end tax prep services is not a good idea. Jewelry sales people can not provide real tax and accounting advise that business owners, executives, and investors really need.
Vince, I’d be disappointed with this article too if I was a CPA. Software has lowered cost and made tax preparation more efficient for the masses. The same thing is going on with the real estate industry. They aggressively try and protect their fat 5%-6% commission, despite the internet reducing costs.
The tax and real estate industry are the most active industries to lobby the government to preserve profits.
Some questions for you:
* What’s your definition of a professional?
* How long have you used HR Block’s tax software to come to your conclusion?
* If I can do my own taxes correctly for 10+ years, perhaps tax software has become good enough for other people to do their own taxes?
* Do you have to be a CPA to do your own taxes or someone else’s?
* Why do you think someone making $200,000 a year in W2 income has a more complicated tax return than someone making $20,000?
* Name a couple things you would do to save your client more money than up to date software with a tax person reviewing your work? I’m very curious about this one.
One of the best things about my business is when another product I already use asks me if they can sponsor a post about a topic I was already going to write about. Now that is a beautiful thing! Hopefully the first sentence of this post makes it clear this is a sponsored post.
Thanks
Hi Sam,
Great reply. This is why I read your blog/articles. Not only are you actively engaged and thought provoking, but your intelligence clearly comes through in your articles and responses.
1. I personally define a professional as someone who has both the educational and professional experience and technical expertise in a specific field or trade. For example, an engineering professional typically has both a degree in engineering and often licensure. The individual must also have the technical expertise that comes with a combination of intelligence and a little (or a lot of) experience. As such, someone who is in jewelry sales without a college degree or reputable certification of any kind would not count as a tax professional.
2. I have used HR Block software along with Turbo Tax. I was speaking more to the ‘tax professional’ people at HR Block and not the software. I will say, the software makes many errors because it relies on inputs from the users. Most users do not know how to answer many of the questions or often answer incorrectly, so the software only provides final tax returns that are as accurate as the information entered. For an individual well versed in the tax code, the software often works just fine, but has been known to make mistakes due to programming errors (which I believe isn’t all that common). I do believe software generally makes less errors than humans.
3. I think your comment about doing your taxes successfully for 10 years appears logical, but from reading your blog over the last year, I don’t think you can make this connection. I only know you through you writing and insights, but I believe you are well above average in both financial knowledge (in many different areas) and intelligence. Many people that fall below you in one or both of these areas may not be as successful as you at doing their own taxes.
4. You probably know the answer to this one, but anybody is able to file his or her own taxes without a CPA license. A persona can also file tax returns for others with a CPA if they are an EA (enrolled agent).
5. Good question, actually one complex item that comes into play at around 200K is alternative minimum tax. Also, it is very easy to take the standard deduction at a 20K income, but itemizing with 200K income again becomes more complex. In general, a single W2 income with nothing else is about as easy as it gets in the tax world as I am sure you have seen. Rental real estate, partnerships, etc. become much more complex.
6. Another great question. Really good CPAs are very busy. Most wouldn’t take on a simple completed tax return review. First, because the amount the person would expect to pay for a review of a completed return is not worth their time to review the return in the first place. Second, because the CPA is taking on some liability by completing the review. Without having done the work and without the proper time and compensation to complete a thorough review, it just wouldn’t make sense. Great CPA’s are too busy actually preparing tax returns and advising clients on tax strategies to take on the reviews. I am sure an HR Block ‘tax professional’ would have time to do the review though.
A good CPA comes in from the advisory standpoint. The HR Block software or the completed tax return reviewer is unlikely to advise on things like strategies to minimize income. For example, when a business owner has an option to take partnership distributions in a real estate holding company versus taking W2 income from their related but separate operating company. How about how much income that person should take from the operating entity versus partnership distributions? Ideally, from a purely tax maximization standpoint, they would take 100% partnership distributions and zero W2 income. Yet, this would not pass an IRS audit and they will owe fees and penalties. They actually need to take W2 income from the operating entity that is ‘fair and reasonable compensation’ for the work they are performing for the operating entity. Also, how much in distributions from the partnership can they take over time and what makes up their ‘basis’ to allow for the distributions (versus taking guaranteed payments, for example)? These are all complex topics that most people are unaware of. The software can not advise on these items and most ‘low level’ tax professionals (HR Block, Jackson Hewitt, etc.) have little to know of these topics.
I do like that you can get sponsorship’s. I am glad you pointed that out. It is a great business model and is often mutually beneficial for all involved. Yet, it does sometimes create an “apparent conflict of interest” (not necessarily an “actual conflict of interest”). Though, I am glad you point out the sponsorship up front.
These are some of my thoughts, but happy to talk more over the message board or via phone/email. Despite a disagreement on this topic, I think you are a wise man (based on your writing) and the readers, including me, are fortunate to be able to learn from your insights and thoughts on various topics. Please keep up the great work, it really is helpful, informative, and thought provoking. To give you an idea, I work over 80 hours per week with the business I own and an outside CFO role I hold (in addition to 3 children!), and your blog is the ONLY financial ‘blog’ I follow (though I do read a lot of other financial and economics related content).
Thanks for your answers! I enjoy talking to CPAs b/c clearly you guys know a heck of a lot more about taxes than me and the average person.
From my post, I will reiterate that it’s best to have someone qualified do your taxes for you for the first several years (let’s say 5 years), learn as much as possible about your tax returns and not be a blind dummy and just send in tax docs, and then give it a go yourself. Everybody learns so much more by doing. Surely after 5 years, you’ll have an intermediate understanding of the tax system. Every year, the tax software I’ve found gets better and more intuitive as well to the point of almost dummy proofness.
And since you say most CPAs are really busy with advisory work and more complicated tax filings, the average person won’t be able to hire a CPA at a reasonable price. And that’s where tax software and knowledge on the internet comes in, which is ubiquitous and free.
I’m glad you pointed out the example of distributions versus salary. Check out the post I wrote about this exact same topic as a business owner and tax enthusiast myself. I’d love to hear your thoughts about it:
The Proper Ratio Between Distribution And Salary To Save On Taxes And Avoid An Audit
And if you have time, I’d love your commentary on this one as well:
How To Save Over $100,000 In Your Pre-Tax Retirement Accounts Every Year – I think this one is a gem that many people don’t realize because most people don’t have the belief or ability to work a day job and freelance.
Look what I found from the IRS!
“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.”
https://www.irs.gov/newsroom/falsely-padding-deductions-on-returns-is-on-the-irs-annual-dirty-dozen-list-of-tax-scams-to-avoid
I know my dad worked at H and R block after his career in Engimeering. I know many do that. They take a course and then work at H and R Block as a second stint. But it’s true what Vince says. If I had a real complicated return, I wouldn’t turn to them. I would go to a CPA. When we dealt with my father’s estate, we went to CPA for the tax ramifications, a friend from high school with a thriving business. I wouldn’t have even considered H and R Block.
If there are estate tax issues to deal with, I am definitely going to a estate attorney or estate tax specialist as well. That’s a no-brainer. Big, complicated, tax issues need further consideration.
Before CD software and online filing I remember when you could call a toll free number to file your taxes instead of manually writing it on the tax form and mailing it out. This was in the late ’90s when I was working part-time while going to college. Those were good times!!
Today I go through Free Tax USA which I have been using for five years now. Pretty simple interface and easy to use. Since my tax forms are pretty much straight forward, it’s been an easy process to go through to file my taxes.
You learn how to give up on your returns bcause you’re so afraid of IRS…
When I met my husband, he filed tax returns every several years, in no hurry to receive small refunds. One year he owed on state taxes, and the state’s computers failed to adjust this payment due by past refunds. He received a letter.
Meanwhile, I had been doing my own taxes for years so I offered to file his. When the refund check for $1000 arrived, he signed it over to me. (That was before $1000 was a “crumb.”) I was hooked. When our returns became more complicated (and joint,) I decided to take H&R Block’s tax course.
I was so impressed with their expertise that I actually worked for them at night through three tax seasons. In the process, I scanned hundreds of returns and heard hundreds more stories from clients and the amazing staff at H&R Block. It was fascinating to pore over peoples’ portfolios and ask questions about their rental properties, and stock trades, etc. (in order to enter the returns;) especially to see how seemingly random investment decisions could so greatly impact their wealth as well as their taxes.
This experience taught me at a gut level how it is that a pair of school teachers can amass two million for retirement and how people making half a million a year can wind up having to work into their 70’s. I also came out of it knowing that–with rare exceptions and despite fidelity on the part of good advisers and other financial people–no one will understand and look after your financial situation like you will.
Doing your own taxes–just every five years or even just once–educates you in ways you simply cannot imagine without doing it (kind of like exercise.) It makes you pay more attention to wash sale rules regarding stocks, for example, and to short and long term holding periods; to paying attention to what is going on within your IRA’s and Roth’s in reference to your taxable accounts so that you don’t lose the ability to take a loss or the chance to recover that loss in a beneficial way. You suddenly “get” the scope of using depreciation and 1031 exchanges. You make better decisions.
You also better understand what is going on in the world and in our nation. You begin to viscerally feel how much effort goes into hanging onto what you make and to realize just what it is that politicians are wasting when they throw extravagant seminars for themselves (or when billions of dollars disappear into pockets instead of into programs.)
Both H&R Block and TurboTax have online programs for tax filing that include online help and the ability to pay for extra help if you need it. These programs are cheaper than going into one of the stores, and you can do a little at a time instead of having to gear up for the whole effort. I enter easy things like personal information and W-2’s right away, then add in 1099’s, K-1’s, etc. as they come in. The ability to “sweep” account information right into my tax return makes trading stocks and investing in notes with Lending Club and Prosper simple and mistake free.
Kate, I so agree with you on these two paragraphs:
“Doing your own taxes–just every five years or even just once–educates you in ways you simply cannot imagine without doing it (kind of like exercise.) It makes you pay more attention to wash sale rules regarding stocks, for example, and to short and long term holding periods; to paying attention to what is going on within your IRA’s and Roth’s in reference to your taxable accounts so that you don’t lose the ability to take a loss or the chance to recover that loss in a beneficial way. You suddenly “get” the scope of using depreciation and 1031 exchanges. You make better decisions.”
“You also better understand what is going on in the world and in our nation. You begin to viscerally feel how much effort goes into hanging onto what you make and to realize just what it is that politicians are wasting when they throw extravagant seminars for themselves (or when billions of dollars disappear into pockets instead of into programs.)”
I am always surprized (maybe not so much any more, now disillusioned) at how people want to avoid finances, taxes, and a whole range of tasks and activities related to managing your life that keep you smart and young. It does not seem to matter what people make, but rather what they spend, save, and invest, how they use leverage (whether debt or other types), and how they minimize taxes. For me, doing it myself makes me feel strong and in control, and confident in the future. That being said, I would consult a tax accountant and/or for very complex issues. The problem in the past for me has been that with new rules, these professionals do not know how to interpret and predict the consequences, and the cost may be high in proportion to some unknown future benefit.
I always do my taxes. I typically use Turbo Tax and I find it more than sufficient for my needs. The only time I could not use it was when I withdrew my Roth IRA contribution in the same year. I had to pay penalty and taxes on my earning but did not have a 1099-R. Turbo Tax would not allow me to pay the penalty without a 1099-R. I had to go to H&R Block. BTW, IRS asked me about this and after furnishing necessary documents they were satisfied. Turbo Tax online is awesome.
I do my own taxes and I think the key is that it just makes you more educated and involved in your finances and how you should be looking at your financial picture.
When I approach making more money or an opportunity arises I can immediatly compare the after tax return from one situation to the next.
Also, I just want to pay my taxes and not have a problem. Don’t get me wrong I want to pay as little as possible but I DO NOT want somebody trying to enter any grey areas to get a big refund for me in order to justify the fee I’m paying them. I put the numbers in and it is what it is.
Hey, Sam. My taxes are super simple. We have pension and dividend income and no major deductions. So I do my taxes myself. This year was interesting only because it was the first year we had to deal with our Obamacare subsidies. Our pension income turned out to be more than we expected (we got a retro check in 2017 for 2016 pension money owed us) and this meant we were entitled to a smaller subsidy. Oh, well. That’s the way it goes. And in reality, the “penalty” wasn’t onerous–only $598. I’ll be writing about soon. Nice post, my friend. Doing your taxes yourself is a great way to improve your financial acumen and help you keep as much money as legally possible from the ravenous maw of the federal beast. Cheers.
I am really surprised by Sam’s advice to pay any sum of money to have your taxes done, considering how strongly he has written against having to pay high taxes and government waste.
Pay money for the privilege of handing over your money to the government… are you kidding me?! When did we get so fat and happy? Toughen up and hustle people! I strongly strongly strongly believe it is unethical for the government to make a tax system so complicated that an individual can’t fulfill their obligation themselves. I won’t give in to this, and my advice to everyone is that the time spent learning a new skill here is worth a lifetime of dividends in tax optimization.
Hmm, the advice is literally the opposite of what you’ve written. I think it’s smart to learn about your taxes and leverage technology to do your taxes yourself.
I’m always fascinated by the interpretation of my posts sometimes. What were some of the phrases in my post where you believe I say pay any sum of money to get your taxes done? Thx
I do my taxes with TurboTax-I like the online tax service because it carries forward your information from last year, and -something I missed prior to this, tax loss carry forward, Sam it’d be great if you and your new CPA friend Vince could do a post on tax deductions about which most folks don’t know.
Cheers, great post and comments!
Yep, same thing with H&R Block’s software. I enjoy how they important all prior year info easily.
I’d love to see a “top 3 tax deductions” (or top 5) post that most Americans should be using
Sure. I just finished writing this for you.
https://www.financialsamurai.com/how-to-pay-little-to-no-taxes-for-the-rest-of-your-life/
Poor turn of phrase on my part. Not “any sum of money” like infinite funds…
You said “I will reiterate that it’s best to have someone qualified do your taxes for you for the first several years (let’s say 5 years)” and “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.”
Both of those options cost >$0. You’re saying it is fine to pay for tax help in some situations, and to be smart about it. I’m rejecting that entirely and challenging people to not spend a penny on tax preparation. (I use free fillable forms and advocate for simpler tax laws). Tax preparation spending is equivalent to a new tax.
We both agree that the more you know about taxes, the more you save.
Got it. That’s fine. I think it’s worth spending what I think is a nominal amount of money ($250 or less) for someone else to do it and for you to learn when you first start out. Study the return until you feel comfortable doing yourself. Way better than having to re-file or make an amendment due to a mistake and the notification from the IRS.
If you’re lucky to have someone teach you for free and do it for you for free, even better.
I have a question about what you think of paying estimated taxes quarterly. Should I do it? My tax advisor is recommending i do so. Curious what you think.
Mike, you have to do it if you own a business. In the same way that the government pulls taxes out of each paycheck, they want you, as a business owner, to pay your estimated taxes quarterly. If you do not pay them (and pay them on time quarterly), there are penalties. You can’t just figure out what you owe at the end of every year (or prior to April 15th), and send in a check. It doesn’t work that way.
And I speak from experience of doing things flat out wrong and loosy-goosy for many years. Once I got to a certain income level in my business, I went out and hired two CPAs, one to do my books, and one to do my taxes.
In Canada, we have to make quarterly instalments this year, for next year’s taxes (if not deducted from pay cheque). There are options as to how to estimate them. Paying same as what you paid last year is the easiest. They also send you the instalments amounts required. There are very stiff penalties for paying less than required. There is no option. When this first requirement first started, my cash flow for the year doubled as I had to pay last year’s and current year’s taxes in the same year. Best to shut up and pay and use the system to reduce/defer current taxable income (using business. rentals, investments).
Tax prep software like HR Block and Turbotax are awesome. I had been doing my own tax return manually for 5 years right out of college. I only had to deal with a W2 in the beginning so it was easy. Then, my mom and siblings started asking me to do their taxes and it started to get cumbersome with all the calculations and amounts to transfer from one form to the next. I’ve been using Turbotax for about 10 years and it has really saved me so much time since it imports the individual’s personal info from the previous year and does all the calculations for me and I don’t even have to print or find stamps to mail in the return. I also love that it keeps track of the proper amount to depreciate for capital assets from year to year. I’ll never go back to doing tax returns manually ever again.
I worked for Jackson Hewitt for a couple of tax seasons and the amount charged for completing tax returns was so unreasonable. It didn’t matter that sometimes only a W2 was entered yet the fee was based on a certain percentage of the refund amount. The majority of the people that came in were low wage workers who probably didn’t think they could handle completing the tax return themselves. Unfortunately, these were the people who really needed to be getting back a max refund and not handing a chunk of it over to someone else for a simple tax return. I think it’s great that Turbotax and others have a free tax prep version for people who have mainly just W2 income.
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.
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 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 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?
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.
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?
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.
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
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.
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.
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!
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.