I’ve wanted to do a post on taxes for the last few weeks and I think this is a good time. I found an interesting article on cbsnews.com about whether you should hire a tax professional to prepare your taxes or if you should do it yourself. I’ve prepared my own taxes for the last five years and this is the second year that I’ve been offering my services to clients so I have a pretty good grasp of when things have gotten a little more complicated than the average non-financial-industry individual is comfortable handling.
Most people with a couple of free hours, and the desire to learn can prepare their own return. Using computer software like taxact.com or turbo tax only makes it easier. But taxes are not something that you want to learn through trial and error. If things get beyond your typical W-2’s and 1099’s you may want to consult an expert. The good news is, you probably know someone that does their own taxes and would be willing to answer your questions for free. Just make sure they know what they’re doing.
The article below gives a few examples of when it might be good to hire someone to do your tax preparation. While it’s not all encompassing, it’s a good start.
Do it Yourself or Hire a Tax Pro?
The IRS estimates that about half of all tax returns are prepared by a tax professional.
The most common reasons individuals cite for using a professional tax preparer are not having the time, willingness or ability to prepare their own. With times as tight as they are today, a lot of folks may be tempted to try to save a few bucks, forgoing the tax preparer’s fees, and prepare and file their own tax return.
But that may be penny wise and pound foolish.
Examples Of When To Consider Turning To A Professional Tax Preparer For Help:
· Short Sale: If you sold a home through a short sale last year — a transaction in which the lender allowed you to sell the home for less than the mortgage balance and cancel the remainder of the debt — you will need to report the sale. A temporary tax law effective for such sales from 2007 through 2010 allows individuals in this situation to avoid reporting as income the amount of the debt that was cancelled. A tax pro can help to ensure you report this properly.
· Rental Income: Many homeowners who cannot sell their homes have turned to renting their house, in the hope of waiting out the decline in home prices and selling later, when the market improves. If you’ve received rental income, you’ll need to report it on Schedule E, Supplemental Income or Loss (from rental real estate, etc). The rules for rental property deductions are complicated, especially when you lived in the house part of the year and rented it out for the remainder. To be deductible, some expenses must be apportioned over the rental period and other expenses — such as repairs — need to be classified as repairs or capital improvements, which affects how they can be deducted.
· Recovery Rebate Credit: Last year, the government issued the “recovery rebate credit,” checks that totaled $600 per person, or $1200 for couples, or more. While eligibility for receiving the rebate check is based on your 2008 income tax return, since this was done last year, Congress based the initial round of checks on 2007 tax returns as a way to get the money into the hands of folks more quickly. Since the rebate was really a credit against your 2008 taxes, many folks who did not receive a rebate check in 2008 may be able to claim it when they file their 2008 tax returns. If, in 2008, you lost your job and will report lower income, had a child, graduated college and were no longer claimed as a dependent, or are a retiree who did not file a 2007 tax return, then you may be eligible to claim an additional “recovery rebate credit” on your 2008 taxes. See an experienced tax pro to help you figure this out.
· Self Employed Income: If you are self employed, there are a lot of tax deductions and complicated tax issues to consider. While you can deduct business-related expenses, this is an area in which a lot of folks are likely to go too far, and the IRS is on the lookout for that. Also, computing and reporting the correct amount of self-employment taxes is tricky – just ask Mr. Geithner!. A tax pro with experience in reporting self-employment income and the unique and legitimate tax strategies of your specific work or situation can also help you maximize your tax savings.
· Investment Sales: If you report sales of stocks or mutual funds in non-retirement accounts, you’ll have to compute the capital gains or losses from the sales. You’ll need to complete Schedule D – Capital Gains and Losses. But to calculate your gains or losses, you’ll need to figure out your cost basis, which includes what you originally paid plus any reinvested dividends. And if you sold shares of stocks or mutual funds you’ve owned for a long time, then you may have a hard time doing that, especially if you cannot locate all your records. A tax pro with experience in reporting investment income can help track down the information you need, or come up with a good faith estimate that the IRS will accept.