Tax planning: Can you just do it yourself?

It’s been said that there are only two certainties in life: death and taxes. Yet, as hard as it may be to believe, before 1861, there was no such thing as an income tax in America. That was the year when Congress first implemented a tax to help defray the costs of the Civil War.

What may even be harder to believe is that Congress repealed the income tax in 1872. However, it would appear again when the states ratified the 16th Amendment in 1913. Back then, things were relatively simple as the tax code was only 27 pages long and less than 1% of the country paid income taxes.

Fast forward to today, and tax season can feel overwhelming for many people. The current Internal Revenue Code is over 4 million words, covering more than 12 million regulations. So, it’s no wonder taxpayers wrestle with whether to go it alone or seek professional help. Let’s explore the considerations and options to help you make the right decision for your individual situation.

Why you might consider doing your own taxes

For many, the idea of handling taxes independently is appealing. After all, avoiding professional fees can save money, and with the proliferation of user-friendly software, the process may seem manageable.

But is it? Before you decide, ask yourself these questions:

• How complex is my financial situation? If you have a single W-2 and no additional income streams, doing your own taxes might be straightforward. However, if you’re self-employed, own rental properties or have substantial investments, things can get tricky.
• Do I understand the latest tax laws? Tax laws change frequently, and staying up to date is essential to avoid errors or missed opportunities.
• How much time do I have? Tax preparation can be time consuming. Will you have the bandwidth to dedicate several hours to learning, preparing and reviewing your return?

DIY options: software and hybrid solutions

If you decide to take the DIY route, tax preparation software can be an invaluable tool. Platforms like TurboTax and H&R Block guide users step by step, often asking simple questions to populate the necessary forms. Some even offer hybrid models that combine DIY filing with access to professional assistance if you hit a snag.

Benefits of DIY tools

• Cost-effective: Most software options are affordable, with tiered pricing based on complexity.
• Convenience: You can work at your own pace, anytime and anywhere.
• Support features: Many include audit protection, error checks, and live help from tax experts for an additional fee.

However, while these tools work well for straightforward filings, they may fall short for those with complex financial scenarios.

The case for professional help

As your financial situation becomes more intricate, the need for professional tax preparation increases. Consider these scenarios, where hiring a professional may be the better option:

• Multiple income streams: These include freelancing, business ownership or investments. Managing multiple income streams often involves navigating unique tax implications, such as self-employment taxes or capital gains.
• Significant life changes: Situations can consist of marriage, divorce, a move to a new state or the birth of a child. Each of these events can alter your tax filing status, eligibility for credits or deductions significantly.
• Advanced deductions and credits: These might be those for home offices, charitable contributions or education expenses. Understanding and properly applying these deductions can reduce your taxable income and maximize your savings.
• Estate planning: This includes managing trusts or inheritance tax implications. Proper planning ensures your assets are distributed as intended while minimizing tax burdens for your beneficiaries.

Cookie-cutter tax prep companies, such as those you find in retail malls, can handle many situations efficiently and at a reasonable cost. However, for high-income earners or those with highly specialized needs, a Certified Public Accountant or an Enrolled Agent is often worth the investment.

If you want to do your own taxes

If you're confident in handling your taxes on your own, take some time to gather all the necessary documents, including W-2s, 1099s and receipts for deductible expenses. And don’t be in a rush to get it done. Break the job up into manageable blocks of time, across several days. This slower pace will allow you to take your time and be thorough, which will help minimize the chances of making a costly mistake.

And be sure to explore all opportunities to help reduce your tax liability or increase your refund. One effective strategy is to utilize any tax credits for which you qualify. Another is to make sure you’ve maximized any qualified contributions to retirement accounts, like a traditional or SEP-IRA.

For 2024, you can contribute up to $7,000 into a traditional IRA, or $8,000 if you are age 50 or older. With an SEP-IRA, you can contribute up to 25% of your earned income, or $69,000, whichever is less.

And here’s some good news: You have until Tax Day 2025, April 15, to make your contributions for 2024. And here’s some better news: If you don’t have an IRA, you can still open one and contribute to it for 2024 until Tax Day 2025.

Time to call in the pros?

If your tax situation calls for professional assistance, finding the right preparer is critical. Here are some quick tips you should consider:

• Check qualifications: Look for CPAs, EAs or attorneys with a proven track record and relevant experience. Verify their certifications and ensure they are up to date with current tax laws.
• Ask about fees up front: Avoid preparers who base fees on the size of your refund. Instead, seek transparency regarding their fee structure and any additional charges that may apply.
• Understand their process: Ensure they will review your documents thoroughly and provide a clear explanation of your return. Ask how they identify opportunities for savings and deductions.
• Verify accountability: Confirm they’ll stand behind their work if errors arise. A reliable preparer should be willing to correct mistakes at no additional cost and offer written assurance of their responsibilities.

The IRS provides a directory of credentialed preparers, which is a great starting point.

And for more information, download our PDF, 10 Tips for Working with a Tax Preparer.

Tax filing and planning are intricate tasks with significant consequences. While DIY options are suitable for some, they’re not for everyone. If your financial picture is even moderately complex, working with a tax professional can save you time, reduce stress, and potentially uncover savings you might otherwise miss.

At Edelman Financial Engines, we believe tax planning is an essential part of your financial strategy. If you have questions or need guidance, reach out to your planner – we’re here to help.