Should you do your own taxes or hire the job out?
It's not what you know that's important here. It's what you don't know -- or, more to the point, what you think you know and really don't.
3 new ways to save on '08 taxes
If you have a simple return, you might consider e-filing or using a basic tax program. But remember, you're not hiring a tax pro just to put numbers in boxes. Any monkey can do that.
Before we get any deeper into this, a disclosure: I have two law degrees, and I'm licensed by the New Jersey Board of Certified Public Accountants. I make a lot of money as a tax preparer. I have a vested interest.
To help you decide whether to do your own taxes, I offer three questions that can frame the issue:
1. Are you prepared to give your taxes your time?
In 2008, the Internal Revenue Service estimated the average taxpayer needed 26.4 hours to do his or her 2007 tax return -- or 56.9 hours if a Schedule C for business or a Schedule E for rental properties was filed.
Filing online through the IRS Web site or through a tax program such as TaxCut or TurboTax can save you a lot of time filling out the forms. But you still must organize all the materials.
And that assumes you have a fairly simple return with a limited number of deductions. It also assumes you have a good idea of what records you'll need to do your taxes. Not sure? No problem. MSN Money has a checklist that can help.
2. Are you prepared to put up cash to hire a preparer?
Getting someone to do your taxes can cost $75 to $150 at the low end -- assuming a simple return -– or up to several thousand dollars for a complicated return. The average for an itemized return is more than $200. It tends to be cheaper to get a return done in the Midwest and more expensive in the West.
One consideration: If you itemize, any fee you pay may be deductible on your 2008 return. Tax preparation fees qualify as miscellaneous deductions, the sum of which must be more than 2% of your adjusted gross income before you can claim a deduction.
3 tips: Get the best preparer
3. Are you prepared to deal with the complexity of the federal code?
Congress has amended the nation's tax laws in 42 of the past 45 years.
Because the tax code is so complicated, 62% of Americans have professionals do their tax returns.
That was more than 96 million out of the approximately 155 million individual returns filed in 2008.
A growing number of individuals are filing electronically -- more than 90 million did so in 2008. Much of this growth has come from professionals filing their clients' returns electronically.
Even though electronic filing has made mathematical errors less likely, many taxpayers still need or want assistance. So, if you've got the money and you lack the time, skills or interest to handle your own IRS paperwork, look for a tax preparer who will give you your money's worth.
Here's where you need help
There are a number of situations in which I'd say you'd be foolish not to hire a tax preparer. They include these eight:
1. You have significant amounts of income and possible tax losses from a business.
2. You have investment gains and losses, especially from limited partnerships.
3. You have income from foreign countries.
4. You have investments in several investment rental properties with losses.
5. You have a tax-free exchange of property.
6. You have potential exposure to the alternative minimum tax.
7. You have made significant noncash charitable contributions, such as property, stocks or other assets.
8. You've had a change in marital status, such as a divorce or the death of your spouse.
When you can do your own taxes
Pay for advice, not typing skills
There are basically four categories of tax preparers: storefront agents such as those at H&R Block, certified public accountants, enrolled agents and lawyers. It's not the title that's important. It's the way the preparer approaches your return.
If you go to a tax preparer who just takes your numbers and puts them into your return, I believe you've wasted your money and time. The key is finding an individual who specializes in taxation and keeps up with tax trends and changes in tax law. What you should pay for is advice and direction. More specifically, here are three things to expect:
1. A good tax preparer starts by asking a lot of questions. The only way you'll get your money's worth is if the preparer understands what you do and how you do it, and then scours for every legitimate deduction.
2. A good preparer is a teacher who educates you on what's allowable as a deduction.
3. A good preparer should focus not only on your 2008 transactions but also on how you can reduce your 2009 taxes.
Retired? A tip for 2009 taxes
(Use this deduction finder to see whether you've missed any ways to save.)
Clearly, a tax attorney is going to be more expensive than an enrolled agent or a storefront tax preparer. But if your income justifies it, the more sophisticated advice and direction should more than offset the additional cost.
If you do nothing else, get a checkup
Again, I'm biased. If you choose to do your own taxes, fair enough. But let me make a suggestion: Consult with a good tax professional at least once every three to five years, just to find out whether you're missing anything.
What Obama means for your taxes
If you're starting your first job, for example, you may not know that you could contribute to a Roth IRA.
You can't successfully play the tax game if you don't know all the rules. That's why I think everyone should -- at least occasionally -- pay a professional.
Published Jan. 23, 2009
High