Tax Software Is Not for Everyone; It’s Often Best to Stick With a Pro
Yes, online tax preparation is better, easier and cheaper than ever. Most people can now prepare and electronically file their state and federal returns for less than $20.
That doesn’t mean we should, however.
No amount of technological sophistication can compensate for taxpayers who don’t know what they’re doing. Although the best programs can guide you through a relatively straightforward return, there are many instances where a professional tax preparer is a much better bet.
Strongly consider hiring a tax preparer if any of the following apply to your situation:
* You don’t follow instructions well.
A friend recently asked which schedule he should use to write off as business expenses costs his employer had already reimbursed. When told he couldn’t do that--that it was not a matter of whether to use Schedule C or Schedule A--he insisted he’d been writing off these expenses for years.
This friend had been steadfastly ignoring all the “help” boxes in his tax software that could have explained he was making a mistake. A tax preparer could have made the issue clear in about two minutes--and a good one would not have signed off on his tax return had he insisted on deducting nondeductible expenses.
* You want, or need, to be told what to do.
Using tax software requires you to be inquisitive and willing to sort through all the advice provided to find what applies to you. This makes preparing many tax returns time-consuming, and you can still not get all the information you need.
Some people just don’t want to go to the effort. If you’ve got anything more complicated than a 1040EZ or 1040A, you can expect to spend several hours researching tax law and typing in data on your own. It’s much easier to spend 30 minutes to an hour with a tax preparer and let him or her do the work.
Personally, after five years of testing tax software and several dozen hours of professional tax training, I have never gotten through a complete return on any program without having to resort to a tax guide or a call to my enrolled agent for clarification on some point of tax law not adequately described in the software’s help package.
* You don’t want to keep up with the latest in tax law. Just because you understood what the rules were last year doesn’t mean you can file a correct return this year. Congress passed new laws, the IRS came out with new rulings, and judges made decisions that could have affected your tax situation. Your daily newspaper will cover developments that concern a large number of people, but it won’t report on every change. Certified public accountants and enrolled agents subscribe to newsletters and alert services and take continuing-education courses to stay up to date. They live, eat and breathe this stuff 24/7, whereas the rest of us have lives to lead.
* You own a small business. If you can explain what a mid-quarter convention is and when it does and does not apply, you might be able to look over your tax preparer’s shoulder while he or she prepares the return. Most other small-business owners should simply hand over their records and do whatever the tax preparer says.
Depreciation schedules, payroll taxes and Section 179 expense limits are just the start of what an entrepreneur must understand to tackle a small-business return. There are many gray areas of tax law related to business, and returns with Schedule Cs tend to get audited more frequently. A tax preparer who understands your business and has a good relationship with the IRS and the state Franchise Tax Board is an invaluable business asset.
Besides, the expense of preparing your business return is an above-the-line deduction.
(Above the line, by the way, refers to the line on your tax return that discloses your adjusted gross income; it means that these deductions reduce your taxable income dollar for dollar. By contrast, below-the-line deductions such as itemized and standard deductions reduce your tax bill by a percentage that roughly equals your tax bracket. Below-the-line deductions are inferior, in terms of tax savings, to above-the-line deductions.)
If you have a retirement program that includes your employees, a benefits-savvy tax preparer is a must. Any errors could disqualify your plan and make contributions taxable to you and your staff.
* Your taxes are otherwise complicated. How complicated is too complicated to do it yourself depends on the software--and the tax preparation skills of the taxpayer. Generally, though, if you have extensive investments, household employees, rental property or foreign income, or if you live in more than one state or country, you probably could benefit from a professional’s advice.
Tax software varies in its ability to guide inexperienced taxpayers through common but difficult areas, such as determining who qualifies as a dependent or whether the earned-income credit applies. TurboTax is probably the best of the batch, but still requires some work on the taxpayer’s part.
By the way, just having to file a California return could qualify your tax situation as complicated.
California tax law differs in significant ways from federal tax law, and most professional tax preparers would chew glass before they would try to do a state return by hand. If you do use tax preparation software, make sure that it includes both state and federal programs. Some, like Microsoft’s new TaxSaver product, are federal only and thus useless to Californians.
* You’re really, really paranoid. A glitch in H&R; Block’s programming allowed a handful of people to see part of other filers’ returns at its tax preparation Web site; that problem has since been fixed. Such lapses are rare, and most Web sites bend over backward to safeguard financial data. If you’re really touchy about your financial data, though, you might want to stick to the software you can download into your computer or that you buy packaged in a store. (You’ll also want to avoid H.D. Vest’s tax site, which offers free preparation in exchange for access to your data.) You’re probably still safe electronically filing your return, however; the IRS and the state Franchise Tax Board have set high standards for their e-filing systems and no one has reported any breaches.
* You need tax advice throughout the year. Is a Roth IRA a better choice for you than a deductible IRA? Should you rent out your home while searching for another, or sell it first? Are your investments wisely positioned for maximum gain with minimum tax impact? Does paying off your mortgage early make sense? Is your state and federal income tax withholding right, or should you adjust it?
Tax guides, personal finance books, Internet Web sites and interactive calculators can give you answers to these questions; unfortunately, the answers are often contradictory and may not fit your particular situation. There’s nothing like a professional who knows you and who can give you personalized advice.
Those who need heavy-duty investment and financial planning advice in addition to tax help should consider looking for a CPA who is a personal finance specialist. The California Society of CPAs maintains an interactive database of CFP-PFSes at https://www.calcpa.org.
* You don’t want to face the IRS alone. This can be a perfectly rational reason for paying someone $100 to $200 a year or more to prepare your return, even if your situation meets none of the criteria above. You can always hire tax help after you receive an audit notice, of course, but having a conscientious professional prepare your return in the first place reduces the chances that you’ll be facing an expensive adjustment later on. Once again, an audit-savvy preparer who knows you will be better able to answer sticky audit questions-- provided you don’t blow the whole thing by insisting on going along. Audits are the one time when everyone should leave it to the professionals.
Liz Pulliam Weston is a personal finance writer for The Times and a graduate of the certified financial planner training program at UC Irvine. Questions can be sent to her at liz.pulliam@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053. She regrets that she cannot respond personally to queries. For past Money Talk questions and answers, visit The Times’ Web site at https://www.latimes.com/moneytalk.
