For some people, tax season poses less worries, and the process happens painlessly. Just populate the requisite fields on your 1040 with information from W-2, then claim the standard deduction. After that sign on the dotted line and e-file. Once you are done, the check will be in the email.
For other people, preparing taxes presents an overwhelming situation. Imagine handling numerous 1099s, W-2s, navigating the new qualified business income (QBI) regulations, and tracking a laundry list of write-offs associated with your real estate holdings, side hustles, business, or other income. While not impossible, doing it yourself (DIY) with the best tax preparation software can still serve as a time-consuming activity. In some cases, it might be wise to outsource your tax preparation to a professional to avoid mistakes and headaches.
When contemplating which path you should take, the most common choice points boils down on how comfortable you feel doing your taxes. If you are an experienced tax DIYer who knows what to expect on your return and digested tax reform, proceed on your own by buying a copy of tax software from TurboTax or downloading your forms for free. Nonetheless, if your case is sophisticated, or you do not have the mental fortitude to do alone, consider hiring a tax professional to manage your return.
To understand when it is okay to hire a tax professional vs. DIY your tax return, the following represents some common cases where DIYing could make sense, followed by the scenarios where hiring a pro is wise.
4 Times when you should DIY your tax returns
You only have one job
When you prepare your taxes, and you do not need to enter income information from multiple accounts, from a financial point of view, you would be best served by filing the returns yourself. This scenario possibly does not involve a seasoned pro. It can often be justify to the likes of free tax software to prepare your form and submit it.
You didn’t experience changes from your previous tax situation
If you did not experience a significant life event change-2019 (think the birth of a child, divorce, wedding), you could likely roll forward most of the previous year’s elections and information. But ensure you update any deductible expenses or new sources of income.
In years you do notable life events, if they are pretty easy, a tax preparation software may still be able to manage your needs. Nonetheless, when various events stack up in the same year, things can get confusing. In that case, seeking a tax pro’s assistance may be in your best interest.
When you are claiming the standard deduction
Tax reform did an advantageous thing for many: It made itemizing your deductions more sophisticated. It virtually doubled the standard deduction, making it less valuable to itemize your deductions. Thus, it is less likely you will need to know about what qualifies and what doesn’t as a deduction. A free tax preparation software might manage your needs just fine.
Whereas you do not need to track your expenses to claim the standard deduction, you will still need to track and tally your deductions since these may prove useful on your state income tax. Provided you understand and can easily insert these expenses into your state income tax return, tax software will manage your needs just fine.
You did not buy a house
Before-tax reform, purchasing a home was often the gateway into itemizing your deductions. Most expenses qualified for deduction inclusive of mortgage interest, taxes, real estate, and more.
These are still deductible; however, the higher standard deduction, together with new caps on local taxes and state and the qualifying amount of interest associated with mortgage principal that you can deduct, have hampered the cost-effectiveness of owning a house.
Luckily, the new limit on qualified mortgage interest linked with principal only applies to mortgages originated on or after December 14, 2017. In the situation, you did nothing with real estate and did not purchase a home; you will not need to trace such expenses. In that situation, free tax software can be a wise choice.
5 Times you need to a tax professional
The following scenarios make sense to hire a tax pro.
You have multiple sources of income
Tax reform brought significant changes for those who worked multiple jobs and won a business, side hustles, and freelance. The reform introduced the QBI deduction, where those savvy who make an extra income and consider it as part of a business or trade qualifies for a twenty-percent deduction on that income. Nonetheless, the QBI regulations are complicated, so it might make sense to hire a pro.
If you own a business or operate side-hustle activities, you might miss a lot of benefits by doing your taxes. And when these jobs scale enough, it could amount to significant tax burden- and possibly missed credits and deductions.
Whereas you might think a little side hustle is not worth speaking with a tax professional about, it could still be a good idea. While tax software can serve as an excellent tool for unsophisticated tax situations, a CPA can help you get tax breaks by learning more about your unique scenarios.
You own and rent out the property
Rental properties are an excellent tool for generating wealth since they produce capital gains as the property appreciates, together with income from renters occupying the property. The many deductions linked to the property can go a long way toward shielding precious rental income.
A tax pro can help you manage the expenses associated with maintaining your units and navigate the tricky capitalization, expensing, and depreciation rules. The time might come to sell this property, and managing the disposition will prove tricky if you are inexperienced. Do not risk misstating your gains and potentially costing yourself a lot of money to the government.
You Itemize Your Deductions
If you are not claiming the standard deduction, you might have incurred a significant expense during the year. Since some expenses exist in a gray region and there are many deductions to know, soliciting the assistance of a tax pro may prove a wise investment on your part.
Hiring a tax professional could result in claiming more tax deductions and, thus, reduce your overall tax burden. In a sense, if you hire an accountant or any other tax professional who can uncover more expenses than you otherwise can yourself, the extra savings on your tax bill may end up paying for the tax advice. Not only will you have more money, but you will also spend less time preparing your return.
You experienced changes from your previous tax situation
Life has many turns- if in 2019 you had a change in family status, made a cross country move, or even welcomed a child; you need to make sure you prepare your tax accordingly.
The number of cases that can affect your filing status and claims are numerous. Navigating these life changes is not always easy, especially when your mind is not up for the task. A professional might make any tax benefits work to your advantage and other strategies to reduce your tax liability.
Specifically concerning divorce: Married taxpayers who file jointly are both responsible for all taxes owed on the joint return. In a divorce, when these taxpayers file separately, they will only need to claim their earned income and should not include any alimony or possible child support paid.
You sold a business proceeding to retirement
If you are at a point in your profession, where you want to avoid any retirement errors and sell your business, hiring a tax pro becomes almost requisite. While DIYing your taxes is certainly within the realm of possibility, none of the tax preparation software options provides support for preparing Form 8594: Asset Acquisition Statement.
Thus you will either have to wade through the procedure of agreeing on a sales price with the seller, categorizing your assets appropriately, and making sure the forms match the seller’s and buyer’s tax returns for the year.
Typically, when it comes to deciding between tax DIY and hiring a professional to manage your return, the decision ultimately comes down to the complexity of your tax case, comfort level, and the effort you are willing to put forward and cost.