How to file tax returns: DIY or hire a pro?

There are few things more dreaded than doing tax returns. For many taxpayers, filling out complex forms, deciphering tax code, identifying deductions, calculating what’s owed—and writing the check—ranks right up there with getting a root canal.

If you’re self employed, it’s even more painful. You’ll file taxes once a year, but may be required to make estimated payments 4 times a year. And if you received unemployment benefits, grants, or loans in 2020, you’ll be jumping through extra hoops to file returns or secure any stimulus and small business pandemic loan payments due.

Not surprisingly, many taxpayers delay or avoid completing their tax returns. According to the Internal Revenue Service (IRS), 14 million Americans owed more than $131 billion in back taxes for the 2017 tax year. Why? ”It’s too hard to file,” “I can’t afford the tax payment,” or “I’m simply too ‘busy’,” they say.

Pro tip: The IRS really wants you to file your tax forms by their deadlines, even if you can’t pay the taxes due. For that reason, they assess two different penalties: one for late filing and one for late payment. By filing on time, you’ll avoid paying one of those penalties.

Follow our step-by-step tax preparation guide to get through the process quickly, correctly, and with less angst.

Should you DIY or hire a tax pro? It depends on your budget and complexity of tax situation. Photo: Greg T. Guarnero

Most people hire a professional tax service to decipher tax jargon and correctly fill out all forms needed in one sitting. However, you can do the tax filing yourself, as long as you properly plan and gather the necessary paperwork. Should you DIY tax filing or outsource the work?

The first step: Understanding your current tax situation. Ask yourself the following questions:

DIY tax preparation can be time-consuming. However, if your tax situation is simple and hasn’t changed from the previous year, learning how to file taxes can be worth the effort. Self-filing is relatively uncomplicated if you meet all of the following criteria:

If you decide to do your own taxes, it’s best to use tax preparation software. In 2019, the average taxpayer spent 11 hours filling out their own tax forms. With tax prep software, you’ll spend just four hours for the whole filing process—and make fewer mistakes, too.

Each software package comes with unique features and pricing. In general, tax software should cost less than $130. When choosing tax software, such as TurboTax, E-File, or H&R Block, make sure it:

If your income is under $72,000, you may qualify for the IRS Free File Program, which gives you complimentary access to trusted online tax-filing programs. If you make under $57,000, have a disability, or speak limited English, you can also qualify for the IRS’s Volunteer Income Tax Assistance (VITA) program. The IRS also has a program for people over 60—Tax Counseling for the Elderly (TCE)—that can assist with questions about pensions and retirement.

If you’re a first-time filer, entered a higher tax bracket, or plan to itemize deductions, it pays to hire a tax pro. Photo: Bharmal and Associates

The more complex your tax situation is, the more you’ll need a tax professional to prepare your income tax return. You’ll provide earning and expense documents—including W-2s, 1099s, and proof of retirement contributions—and they’ll take care of the rest.

It pays to hire a pro if any of the following describe you:

Even if your tax situation is simple, you may want to consider hiring a pro to minimize mistakes and maximize deductions.

Tax specialists are easy to find, but there are many different types with varying levels of expertise and accreditation. They may also offer different services, from simple tax preparation to year-round financial planning.

Here are three types of tax preparers that can help you this tax season:

1. Enrolled agents

Enrolled agents (EAs) are experienced tax pros licensed directly by the IRS. They can assist you with just about every tax topic and are usually the most affordable option. They’re also particularly helpful if you need representation for a tax audit or appeal.

Enrolled agents are uniquely able to work across state borders, so location is not an issue. Because they specialize primarily in tax issues, however, they may not be able to provide assistance with other accounting needs.

2. Certified public accountants

Certified public accountants (CPAs) pass a national CPA exam, and must meet continued professional education and ethics requirements to maintain their license. Offering a broader range of services, they’re a good choice if you have a complex tax situation or financial planning needs throughout the year.

3. Tax attorneys

Tax attorneys are legal pros and the most expensive option for filing taxes—hourly rates range in the hundreds of dollars. They’re often hired by taxpayers who’ve run into trouble with the IRS (perhaps for tax evasion) or faced lawsuits that may impact their tax situation.

Find a tax pro near you.

Whether you DIY or hire a pro, gather these essential documents before you start a tax filing:

You should also be aware of your filing status (single, married filing jointly, head of household, etc.). Along with total taxable income, this will determine your tax liability based on your state and federal income tax brackets for the year.

If you claim deductions, qualify for certain tax credits, or have other taxable income, you’ll need to file additional forms. Photo: The Tax Advisors

Most people need to submit Form 1040, the Federal form that the term “tax return” usually refers to. If you’re over 65, you’ll submit Form 1040-SR, which makes retirement income easier to report.

In addition to the primary tax return, you may need to submit one of four other common tax forms:

Don’t forget: If you’re subject to state income tax, you’ll need to file those forms as well.

For the 2020 tax season, you will not have to pay state income taxes if you reside in Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, or Wyoming.

Residents of all other states must complete the appropriate forms, which can be provided by your state tax agency.

Can’t afford to make a tax payment at filing time? The IRS will work with you to set up a payment installment plan.

Missing a tax deadline can lead to hefty fines. You’ll owe 5% of your unpaid tax liability each month you fail to file—plus more for every month you fail to pay, not to exceed 25% of unpaid taxes.

April 15 is the big filing and payment deadline for every taxpayer. If you’re self-employed (or expect to owe more than $1,000 when you file), you’ll also owe quarterly estimated tax payments throughout the year, based on the IRS calendar.

Pro tip: Quarterly filings are deadlines that busy business owners often forget, so it’s important to set reminders on your calendar to stay on top of this requirement. A tax professional can set up automatic withdrawals from your bank account and send you reminders so you never risk an overdraft.

It’s always good to file on time, even if you can’t pay. The IRS and other tax agencies will work with you to set up installment payments.

Choosing between the standard deduction or itemized deductions is simple. First, use this IRS tool to calculate the total standard deduction for which you qualify.

Next, tally up how much you’ve spent throughout the tax year on eligible itemized expenses, including out-of-pocket medical expenses, mortgage interest, and charitable donations. If your total itemized deductions are higher than the standard deduction, it may pay to itemize. Otherwise, take the standard deduction.

Diligence and attention to detail are crucial when doing your own taxes. A mistake on your tax return can cost time and money. You may have to file an amended tax return. If not caught in time, you may also get slapped with an IRS audit and pay hefty penalties.

Here are a few common tax-filing mistakes to avoid:

Hiring a trusted tax pro will reduce headaches, keep your records secure, and make filing easier next year. Photo: Ryan Goulding CPA

Hiring a tax pro eliminates the headache of filing your own taxes. But it’s important to find a trustworthy tax preparer who can maximize deductions and keep your personal records secure, while avoiding shady operators looking to make a quick buck during tax season.

As you interview tax professionals, ask these important questions:

Average cost to outsource state and federal tax returns: About $200 for standard deductions; $300 or more for itemized deductions, according to 2018-19 data from the National Society of Accountants. Self-employed? Expect to spend upwards of $450 to cover the cost of preparing additional tax forms, such as Schedule C.

Anyone can hang up a tax preparation sign. Protect yourself from trouble by requesting a tax preparer identification number, asking smart questions, and checking online reviews.

Be wary of “cheap” pricing. Tax prep services usually start at $75 for the simplest returns. Most tax pros charge by the hour or flat rates; they’ll never charge based on the size of your tax refund.

Protect yourself from fraud and identity theft by avoiding tax services that:

Pro tip: Verify a tax return preparer’s credentials by using the IRS directory.

Once you find a tax preparer you trust, stick with them. They’ll have all your information on file, making tax preparation easier the following year.

What’s more, you’ll have a professional who’s familiar with your tax situation. They’ll be able to offer advice throughout the year, pinpoint opportunities for deductions, and help you stay on top of every future tax season.

Find a tax professional in your area.