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How Should You Prepare Your Taxes?
1. Do It Yourself (Through the IRS)
- Cost: Free to $20
- Time: 5 to 10 hours
If If you prefer to print out your tax forms, prepare them with pen and paper and send them to the IRS with an old-fashioned envelope and stamp, more power to you.
Filing through the IRS website is another option. If your annual income is relatively low ($72,000 or less in 2020), you can file online for free. Otherwise, expect to print and mail the forms.
You need time and confidence in your understanding of tax law to go this route. Or you need a super simple tax situation.
2. Do It Yourself (Through Tax Software)
- Cost: $25 to $150
- Time: 1 to 5 hours
I've used TurboTax to file my taxes for most of my adult life. Other popular options include TaxSlayer, H&R Block and TaxAct.
Be somewhat wary of the marketing you see around these companies in terms of price. Often these tax software giants will prepare your taxes for cheap or free but will then charge you to file electronically.
If your situation includes any complexity at all, or if you want audit protection or if you want to ask a question or two of a tax professional, expect to pay extra. But your bill is still likely to be lower than if you hire a person.
3. Hire a Person
- Cost: $100 to $350
- Time: 1 to 2 hours
This is actually three options in one. You can hire a CPA (Certified Public Accountant), a tax lawyer or an enrolled IRS agent.
According to the National Society of Accountants, the average American pays $220 for professional preparation of a regular Form 1040 with no itemized deductions and $323 for itemized deductions. The amount you pay will vary depending on where you live, whom you hire and how complex your taxes are.
Hiring a person to prepare your taxes is probably the most efficient option in terms of your time. It also can offer peace of mind, as you’re less likely to wonder if you made a mistake.
This option doesn’t let you totally off the hook. It will typically cost you more money. And you’ll still need to gather and organize all your financial statements and paperwork.
Reasons To Hire an Accountant To Do Your Taxes
No matter where you’ve gotten tax advice, you’ve probably heard or read the question, “How complicated are your taxes?”
You may not be totally sure what that means.
Here’s a list of reasons why people hire tax accountants. Keep in mind that it’s impossible to pinpoint everyone’s specific circumstances.
- Not enough time or patience. I can think of a few hundred things I'd rather be doing than preparing my taxes. If I could hire a person for free, I would. For some people, this may be a simple time versus money trade-off.
- Peace of mind. If you've ever prepared your own taxes, you've probably experienced that lingering anxiety in the back of your mind: Did I mess something up? CPAs can make mistakes too. But it can be reassuring to have a professional take care of your taxes.
- Major life change. Some of these include marriage, divorce, childbirth and buying a house.
- Complex finances. Do you own your own business? Are you self-employed? Did you realize gains or losses from any investments? Do you own a rental property? Those are just some of the special situations that may lead you to hiring an accountant to prepare your taxes.
- Income of at least $200,000. According to Kiplinger, the IRS audits just 0.4% of tax filers. However, that number increases to 1% for those reporting income of $200,000+, and jumps to 2.4% for those pulling in $1 million or more. Just keep in mind that not all tax accountants can or will represent you before the IRS.
- Plan to itemize deductions. If you aren't taking the standard deduction, there's a good chance hiring a tax accountant will be a good fit for you.
- Owe unpaid taxes. If this is you, please hire a tax professional as soon as possible.
Free Tax Preparation Options
You may be able to qualify for free help preparing your taxes. To look into your options, start by visiting the IRS' Get Free Tax Prep Help tool.
You can also explore these three programs:
- VITA (Volunteer Income Tax Assistance): This IRS-run program offers free help to those with incomes of $57,000 or less, those with disabilities and those for whom English is a second language.
- TCE (Tax Counseling for the Elderly): Another IRS program, TCE serves those who are at least 60 years old.
- AARP Foundation's Tax-Aide Program: This nonprofit organization provides those 50 and older with free tax help.
Do you prepare your taxes on your own or by hiring an accountant? Fortunately, there’s no wrong answer to that question.
How you choose to prepare your taxes is ultimately your decision. Consider how simple or complex your tax return for 2021 will be as well as how much time and money you want to spend preparing your taxes before you decide.
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