Are you trying to decide if you should do your own taxes or hire a professional instead? Every year I use TurboTax software to do my own taxes and encourage others to do the same. Yet every year someone scoffs at me for spending a couple hours of my life learning, understanding, and optimizing my finances to pay the least amount of taxes legally possible.
A part-time tax preparer who’ll make $375 filing my returns isn’t going to know more than me. A full-time tax preparer with a CPA who charges $1,000 might be worth it. But after doing my taxes for 12 years, I’ve learned so much. And the only way a CPA will save me more money is by cheating. There is no secret magic that only tax accountants can use to reduce taxes.
Learn About Taxes By DIY
The best way to learn about something is to do it yourself. Remember when you were growing up and your mom taught you how to do a math problem? But, you’d completely forget how to do it come test time? How about reading all those SAT test prep books and then getting a mediocre score because you didn’t take enough sample tests?
Being instructed on how to do something is helpful. But, getting in the weeds and solving different variations of the problem is the only way to achieve mastery. The same concept goes for understanding and minimizing your taxes. When you do your own taxes, you’ll learn so much more about how the system works.
Main Reasons Why You Should Do Your Own Taxes
1) Nobody cares more about your money than you.
Do you really think some tax preparer is going to care as much about your money as you do? He’s got another 50 reports to do after yours, on tight deadlines. Of course not.
He most likely has neither the time nor the interest. You, however, are motivated to read everything you can. Learn about rental property depreciation, mortgage interest deductions, alternative minimum taxes, and so forth. Tax software is so sophisticated nowadays that even someone with no experience can do their own taxes. All you need are all your documents to plug in the numbers.
Related: Audit Rates By Income: Your Chance Of Getting Audited By The IRS
2) You can create test cases.
My favorite thing about doing my own taxes is creating pro forma scenarios. I like to see what my tax liability will look like based on various levels of income and deductions. If you really want to know what making $1 million a year means, input $1 million into the software. See how much you’d owe in taxes and get bent over.
Then try entering a poverty wage, or a median household income, and see just how much (or how little) is left over. Thinking of seeing how much a mortgage can help reduce your tax liability? Plug one in based on a realistic interest rate to find out.
You can also see how your tax liability changes if most of your income comes from dividends, long term capital gains, and rental income instead of earned income. Once you figure out what’s ideal, you can make appropriate changes instead of flying blind.
3) Gives you goals to strive for.
My goal each year is to pay no more than $40,000 a year in federal income tax and $10,000 a year in state income tax. With a $50,000 limit in mind, I figure out income goals for each type of income stream to achieve this balance.
You might have goals such as doubling your income, or reducing your tax bill to under $10,000 a year total. It’s easier said than done. Doing your own taxes lets you map out specific goals across your various income streams.
Related: Bar Stool Economics Show Why A Progressive Tax System Is Wrong
4) Makes you reduce costs.
Paying for something in cash hurts more than paying for something with a credit card. Cash is tangible and requires the act of counting. When you’ve got to input your W2 tax figures, HOA costs, and business costs one by one, it hurts! And because it hurts, you’ll be much more cognizant of figuring out ways to reduce costs.
5) Increases your knowledge.
Teach a person to fish. The reason why so many people get screwed over with bad purchases, expensive mutual fund fees, and higher than necessary interest rates is because people who know better take advantage of people who don’t know better.
Think about the classic situation where an unassuming person brings in her car for an oil change and comes away with $1,000 worth of repair suggestions. It happens all the time. The more you know, the more you’ll be able to protect and grow your money.
6) Saves you time.
For the first two years after college I allowed tax preparers to do my returns. Each time I had to gather my documents, schedule an appointment, pay for parking or transportation, and sit down with them for at least an hour to explain my situation in order for them to do my taxes to the best of their ability. I also had to go back again to answer any other followup questions, pick up my documents, and pay the bill.
Now I don’t have to explain myself to anybody. I can do my taxes from the comfort of my own home and pay for everything with clicks of the button thanks to the internet. If I need tax help, I can utilize TurboTax’s help service or simply search for questions online.
Related: Five Lessons From Doing My Taxes For Over 10 Years
7) Saves you money.
$49.99 is cheaper than $375 or $1,000. The biggest fear is that a self-preparer somehow screws up on his/her taxes and owes more or gets less back than possible. The simple solution is to double and triple check your work by going over each step.
Your tax software will also check for errors as well. You’ll learn that there is no more a CPA can do for you if you are doing your taxes right. All those commercials about a tax software finding you extra money are targeted towards people who don’t know how to follow instructions and do their own taxes properly.
The most common errors I see are: 1) forgetting to input the cost basis for your securities; 2) forgetting to include all costs associated with your rental such as the HOA, mortgage interest, marketing, cleaning, repairs, and travel expenses; 3) forgetting to include all interest income; 4) double counting your primary mortgage interest; and 5) forgetting to input all your charitable deductions.
Related: How Higher Taxes Saved Me A Boatload Of Money
8) Keeps your privacy.
If you are a private person who doesn’t want anybody to know your business, doing your own taxes is the way to go. Think about all the bank tellers who know exactly how much you have with their institution every time you deposit a check.
Very few of them stay for more than a couple years, so the longer you are around, the more people know about your finances. We derive comfort from returning to the same primary care physician year after year partly because of trust, but also because of privacy.
Below are the 2021 Federal Income Tax rates:
Do Your Own Taxes – They Are Your Biggest Liability
It should make everybody sick to their stomach that the government usually takes more from you than you can save. I introduced the Total Income Taxes to Total Savings (TITTS) ratio to motivate you to save more and reduce your taxes. Everybody should shoot for a TITTS ratio of 50% or lower to get ahead.
Most people will ignorantly go through life not knowing where their money is going. If more people did know how their money was being spent, I strongly believe the government would be much less corrupt and much more efficient with fiscal spending because there’d be more accountability. With more efficient spending, we could see a large positive shift in GDP and lower unemployment.
The most pragmatic solution is to probably have someone do your taxes the first time around. Sit down with him or her to go over your entire tax form and ask questions along the way. Once you’ve grasped the basics, go ahead and do your taxes online on your own. You might make some mistakes here and there, but don’t worry, the IRS isn’t some cruel organization who will punish you to oblivion. After several tries you’ll never want to let anybody do your taxes again.
I’ve used tax software like TurboTax for the past 11 years now because it’s easy to use. I also love how my info rolls over each year saving me time. It’s never been easier to do your own taxes. Just make sure to get the software version that best suits your needs.
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.
Updated for 2021 and beyond. Taxes are at the lowest levels they’ve been in years. Take advantage to make more money and invest for your financial future!
Cindy @ GrowingHerWorth says
When I first started doing my taxes, I did it the old fashioned way; forms from the library and a pencil. A few years out of college, everyone I knew was going to H&R Block and raving about the savings, so I decided to give it a go. I did that for several years, until the year I bought a Townhouse that was part of a Co-op and cashed out a 401k (stupid decision, yes). I could forgive the lady for being clueless on the Co-op; While they’re common in big cities like New York, at the time it was the only one in our state. I had to go out of state to find a mortgage. But she had absolutely no idea how to handle the 401k. Seriously?!? People leaving jobs and cashing out their 401k is a fairly common thing! I had to explain to her that I would owe taxes and a penalty on the money; finally she went and found someone else to walk her through the software.
After that I decided I was better off doing them on my own. I’ve mainly used Turbo Tax Online since, and have been very happy. Although I’m not in love with the redesign they did this year; I feel like it doesn’t explain as much as you’re going through it as previous editions did.
Mr. Utopia says
I’ve never paid a cent for tax preparation in my life. I don’t even purchase any software. That’s right, I do mine the old fashioned, manual way…just me and the tax forms. Fortunately, my tax situation isn’t too complicated, so it’s not too time consuming and I’m certainly not missing any deductions or credits.
I advocate doing your own taxes to anyone who will listen. Not only does it save you money spent on prep, but it also gets you thinking about the tax implications of your decisions. That’s something most people never consider.
Done by Forty says
I’ve always been DIY, but recently we were thinking of hiring a professional once we started our side business and purchased a rental. As usual though, I’ve found your article to be pretty convincing. I should at least try to DIY before admitting defeat and paying a CPA.
Michelle vitale says
I’ve always done my own taxes; first by hand, then with TurboTax. I like the software programs because they ask questions that help me think through and understand my taxes and potential savings. I have some new tax issues to face this year and next, so this is the first year I considered going to see a CPA. I like calling up H&R Block with questions through the year and have found them to be really helpful in confirming my own research. This gives me confidence that I can try to sort it all out on my own. Perhaps I’ll try their software. Also, I’ve found my retirement plan administrator really helpful in explaining tax situations and I always check the community learning center for tax courses. My grandma volunteered through AARP to do people’s taxes. She was a good role model.
Mike Hunt says
During the first two years of living overseas I used a tax consultant from one of the big 3, paid for by my company. I read through their work and found out they were costing me big bucks as they did not complete the overseas exemption and credits for foreign taxes properly. However they did give me familiarity with the forms I need to use.
With Turbotax, I need to manually pull those forms up as the normal questionnaire misses them… so once I got the template I’ve been using Turbo tax to file the last 5 years with no issues at all. I totally agree it’s worth the time to do it yourself and the impact of running test cases really helps with also paying estimated tax, if required, on time rather than incurring a penalty… this was another problem with consultants. They were late so filed an extension… turns out I owed and was assessed penalties for being late. Ouch!
This is my first year doing my own (second time filing since graduating). I’m using turbo tax and it seems like a good software. Right now it says I owe money so I’m not happy with it, but I suppose it’s not the programs fault… Right? Haha
Every year its the same ritual. I sit down and log into turbo tax and enter all the info but don’t file. I write down the final result. About a week later I will start over from scratch and make sure I come up with the same result. After that I will play with the numbers a bit to see how they change for different situations. Again I don’t file.
I end up calling the tax guy, and schedule my appointment. Drive 30 min to see him, sit and chat for another 30 – 45 min, drive home, come back in about 2 weeks and pick everything up.
Its kind of crazy really. He always has the same number more or less that I came up with when I did it on my own and his price is only a few bucks more then turbo tax. One of these years I won’t actually go to him anymore, maybe this is that year…
Financial Samurai says
Fascinating. Is it paralysis to file then? That’s a lot of time spent. The IRS really isn’t a bad organization. They are very helpful and kind b/c they know the tax code is ridiculous. I’ve called them several times before and they were always very courteous.
I think it has to do with the belief that if some mistakes were made the guy I hire to do it would be liable. Since he is retired and does this out of his home he only charges $125 to do our taxes. Turbo tax is usually saying right around $100 to file after everything is computed. To me I think the little bit of extra money is worth the added protection.
I will say that I have only had this routine for about the past 4 years. Before that I just always paid to have them done.
I have been doing my own taxes since some time in the 70s. I love it.. It is a challenge. I actually went to work part-time with H&R Block for about 9 years! It is a wonderful company that truly tries to teach their prepares to do the right thing and every return correctly. Unfortunately you can’t teach some things and every region has their idiots who manage to ruin the name.
When the full time job said I wasn’t allowed to work part-time there anymore, I found out about volunteering. I have volunteered direct thru the IRS and with AARP for many years. I also help out friends and family with their returns each year. I think I have helped more than 2 dozen young people (friends of my grown boys) the correct way to do their returns themselves.
Of course since I am retiring in a couple of months, I plan to go back to Block for the next tax year.
Yes it is my idea of fun!!!
I have been doing my own taxes for decades; ever since an expensive CPA screwed up my returns and I had to run around correcting things.
I figure I can’t screw it up any worse and no matter who does them, I’m still responsible.
Besides….. You really learn a lot!
harry @ 4HWD says
I struggle with this every year. I’m a huge do-it-yourselfer when there is value added and there is a huge upside to knowing how to do your taxes. But alas, there is a reason why CPA’s charge $1,000 to file taxes – they know their sh%&.
I agree that 100% of people are better off doing taxes themselves than going to a preparer like H&R Block, corner guy wielding a sign, etc. But I think a CPA can help a lot with tax planning/aggressive deductions. If you own a rental property in San Diego and you live in Orange County, how many trips to SD ‘to check on your property’ can/should you deduct?
If you want to follow the letter of the law and take only the deductions you’re entitled to then you’re probably ok with deluxe/premier online edition. But if you want to be as aggressive as possible and take advantage of all that gray area I think this is where a CPA will help.
I’ll let you know what I end up doing :)
Always done my own, by hand for 26 years, and the next 11 using H&R Block software after making mistakes three years in a row; that is the wrong kind of attention to bring to the IRS!:-) Until recently, I had a fairly complicated return with several unusual business, real estate, and taxable issues. I have recently been requested to attend to some family tax filings, and have a CPA do it. This removes any second-guessing from other family members, and I am finding fees at $275 for complicated returns and $75 for a simple 1040 plus State. Well worth it, to eliminate potential family friction.
Make some comparisons, if you are quoted $1,000; that doesn’t sound right unless it is for multiple returns. A pal files a very simple 1040 with a standard deduction, and he pays $400 for what appears to be 30 minutes work. He is uninterested in learning anything about taxes, or how to do it. Oh, well, we all have to pick our battles!:-)
All very compelling reasons to do one’s own taxes. Did mine on my own for the first time this year and it went as smoothly as can be. It’s definitely a great learning experience. My previous accountant was a family friend who didn’t really explain things very well, so doing it on my own was a refreshing change.
I have done my own every year except the year I graduated and the year I got married. I would estimate it takes 10-20 hours. My taxes are fairly complicated and aren’t getting any less so. I always use TaxAct but Iam glad to hear about this H&R product since they do have offices I could visit for more complex topics.
Also, I set up a pass through corp this year and I am going to need to learn about generating K-1’s for it so that I can further complicate my personal taxes.
Here’s an idea people might find interesting, since I live in TX and can’t invest in Prosper or Lending club I was thinking about setting up a Wyoming Corp which could. I can’t see any reason why this is a bad idea. It’s a great state to incorporate in and my sister lives there and would be a convenient registered agent.
I don’t know about the incorporation, but I do like Prosper. I made a few bad decisions early on when I started and invested more than 25/note. Of course those were the notes that went delinquent and got written off. But, hopefully by next year I’ll break even and have learned my lesson. Good luck!
Financial Samurai says
I go w/ H&R Block not only b/c the software is easy to use, but exactly for the reason you mentioned on being able to go to an office an ask more questions directly with someone if necessary.
The First Million is the Hardest says
I always do my own taxes. My tax situation isn’t very complicated so there’s no reason to pay someone hundreds of dollars to do it. The software is basically idiot proof these days, I really see no reason most people shouldn’t be doing their own.
David Michael says
One of the great benefits of being retired is that we pay no taxes. Nada. Zilch. Been there, done that.
And, actually I don’t mind paying taxes, as I did when I had my own company and I shared a great deal with the federal and state governments. But we are no longer rich or famous. We just live a very simple life and the state of Oregon and the federal government have so many exclusions for seniors over 65, that we live beneath the cut-off. Indeed, much of the year we live off the grid entirely, amongst the foothills of the Sierras and deserts of the Southwest on BLM land in our moving home (RV). Yep. We are in the 47% that Romney loves to hate and calls us the slackers even though we raised five kids, paid for their university, and they now get to pay taxes, especially the two doctors (MDs). And, I do prepare my own taxes every year, just downloading the free forms on my computer from the IRS website. There’s nothing like keeping life simple. God bless America!
Financial Samurai says
Question: Do you still have to file if you owe no taxes? And, can you share how you are paying no taxes?
David Michael says
Sam…of course the answer is for a person to make less than taxable income. (Not that I suggest it because I actually don’t mind paying taxes, as I did when I had a substantial income when working professionally.)
As a senior on social security there are numerous tax exclusions so I have rarely paid taxes over the past 20 years, except social security and medicare, when working a seasonal job to add to our income. The rule of thumb is take your social security income, divide that by two, add your current earnings for the year, and subtract by $32,000. If the number is less…voila, no taxes.
Example in our case: $28,000 social security (two people), divided by two to give $14,000 plus seasonal employment at Amazon this past year for $12,000 (two people) results in $26,000 (a lesser number). Therefore, on a total income of $40,000 for the year, we paid no tax. We have been fortunate in that our savings have grown over this time about 5% a year and never been forced to touch them, always keeping a separate emergency fund of $20,000.
Financial Samurai says
Interesting David. And if you are happy to live off $40,000 on two, then more power to you!
Do you ever feel guilty not paying any taxes for 20 years though? That’s the fun part of it.
I like doing my own taxes. I have a vested interest and I’m usually smarter than people working at H&R block. Now if it were a CPA, maybe I would trust them more, but I would still check everything. But since I’m unwilling to fork over $1,000,I do them on my own.
Taxes are a PITA but I learn something new every year. I look at every number like a hawk and try my hardest to understand where it’s coming from and why. Tax forms can get super complicated but with enough time they all start to make sense.
Sandy T says
I do my own taxes, also. For all the reasons you listed. It’s fairly easy. I collect all my tax stuff as it comes in (I’m a hard copy sort of lady), and then I have it all handy. I actually just did them this weekend. H&R block in fact. Super easy and quick. They ask all the questions, and I answer. Love it.
All your reasons are valid. You forgot some other reasons, you can import directly from many banks/financial institutions. Now, you typically have to review this, particularly if you have capital gains because the companies often do not have cost basis, but it still saves a lot of work. I use Turbotax online – which some probably are against because of security – but I have found it pretty nice and easy to use. It already has a lot of your personal information stored on it, so you don’t have to enter that information again. It lists all the charities you contributed to last year, and most people typically contribute to the same ones year after year. I trust the banks with my financial information, I don’t see the difference with Turbo Tax. And hey, if good enough for Tim Geitner, good enough for me.
Mark Ferguson says
I hire the best accountant I can find to do my taxes.
1. I dislike doing taxes very much and I don’t need the stress
2. They save me much more money than I spend on them
3. My taxes are very complicated with 9 rental properties and 2 S corps with employees.
Mike B. says
I have done my own taxes now for 15+ years. I used H&R Block software for about 12 of those years, but recently switched to a different provider. I now use TaxAct, which us $17.99 all-in for federal and state deluxe package (single return). So it’s a lot cheaper, and the software is super easy to use, actually much easier to use than H&R Block’s software, in my opinion. I also used TurboTax for a year in between but found it much too expensive, especially compared to TaxAct, though it was nice software.
Financial Samurai says
Sounds good. Harder for me to switch to save $30 b/c I’m already in the H&R Block system. Although I assume Tax Pro can just important the H&R block file too.
I do want to have an insurance policy of being able to go to an H&R Block office close by and raise hell if something wrong were to happen. Kind of like why I buy Apple products due to their ubiquitous Apple Stores.
When I was a student, I went to H&R Block to get my taxes done for like $20. It worked for me – until I grew up and realized that they gave me HORRIBLE advice, and cost me a A LOT in tuition reimbursement. So, I started doing my own online. I generally input all my data into uFile and Turbo Tax – yes, I do twice with two different companies, mostly as a “check” because they almost always have the same result, but also because they have different promotions and I go with the cheaper option when I’m ready to file.
The “test cases” are another big reason I do them on my own. I never know if I should bother claiming my medical expenses, so this way gives me the option to try it out to see if it helps or hurts me before submitting my taxes.
Renee s says
I agree with you completely and have always done my taxes myself. This year, however, I found a great opportunity by being a mystery shopper and I totally took advantage. All I had to do was go get my taxes done by a reputable company and the mystery shop paid all of my tax fees ($350, but they would have paid up to $1000) PLUS they gave me $50 for my time. That was totally worth it, in my opinion.
Financial Samurai says
Fascinating world of mystery shopping! I might have to look into that.
What mystery shopper service did you use? I’d love to get paid for that!
Wall Street Playboys says
“A full-time tax preparer with a CPA who charges $1,000 might be worth it. But after doing my taxes for 12 years, the only way the CPA will save me more money is by cheating. There is no magic that only tax accountants can use to reduce taxes.”
That right there is the truth.
Why do you use H&R instead of turbo tax? Seems like it is the same stuff.
Also you should take note of the people who tell you you’re wasting your time for doing your own taxes, you quickly realize that you’re making more money than them so who are they to give you advice, ha, pure comedy.
Agreed. I think it’s a good idea to let a pro do your taxes just one time if you have a more complicated situation like a rental property or a business. For example, they will establish the cost basis and depreciation for your rental and then you can repeat that for the next 27 years since it’s the same. I’ve been using TurboTax for many years and it’s really easy – most of the stuff is pre-filled from last year when you open it. It’s a LOT faster to do it myself than to have to explain my situation to a pro. MUCH cheaper as well.
We do our own taxes for all of the reasons you’ve mentioned. Because of our rental properties and my self-employment, they are a pain and it would be really expensive to pay someone to do it as well. I like doing “test cases” like you mentioned and it’s hard to play around with different scenarios if someone else is paid to do the work for you.
Completely agree with you, Sam. The biggest reason for why I choose to do my own taxes is something you mentioned: tax accountants have no magical powers. They probably have a bit more knowledge, but that can be offset by how powerful tax programs are now. Also, I’m a bit of a nerd and doing my taxes is kind of fun for me.
I agree with you. I’d much rather learn how to do my own taxes than sit down with someone who is just using a Turbo Tax like program anyhow. In fact, I plan to volunteer through an IRS-sponsored program to help low-income taxpayers file. The software I’ll be using is exactly like Turbo Tax or H&R Block’s; perhaps a bit less sophisticated since many of the forms and deductions don’t apply. Would like to read the article you linked, but its broken: Total Income Taxes to Total Savings (TITTS) ratio. Thanks!
Agree Sam, I like doing my taxes so I’m more aware of future financial decisions. I think this is the TITTS ratio link Sam meant to post.
Nick @ Step Away from the Mall says
I haven’t in the past, but may this year. Not entirely sure though because in 2013 I lived in NJ for most of the year, worked in NY all of the year, and moved to MA towards the end of the year. So it would be a little extra complicated this year. I also sold investment property I owned with a partner in 2013, moved for a new job, bought a personal residence, and started a couple of online businesses.
Or… maybe this is just the challenge I need to get up to speed.
My husband does our taxes every year for all the reasons you listed. It doesn’t take much time and it’s much cheaper than paying someone. He uses the H&R Block software as well. He was so on top of it this year that we’re already done! It feels good to get that out of the way.