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I filed by 2008 tax return yesterday, and I’ll be getting a refund of about $2,000!  This will allow me to pay off a large chunk of debt and help get me back on track after the forced two week unpaid vacation at work.  And thanks to the the free E-filing you can get on the IRS’s website, I was able to save a couple hundred dollars and file the return myself for free.

Being an accountant, it’s pretty easy for me to file my own taxes.  Is this a realistic option for you?  It depends on your situation.

According to Consumer Reports, you should weigh the amount you will save against the hassle required to file your own taxes.  Here are some questions to ask yourself to determine both how much you will save and how difficult it will be to do your own taxes.

How much will you save- If you have a pretty basic return and go to somewhere like H & R Block, you are probably looking at a cost of somewhere between $100 and $300.  For those with a more difficult return or those who prefer to go to an actual CPA firm instead of just a seasonal tax place, you could be looking at $100 to $300 per hour.

In order to file your own taxes, you are looking at a cost between $0 and $60.  If you make less than $56,00 in adjusted gross income, you can e-file your taxes online for free.  If you make over that amount, your best bet is to spend between $30 and $60 to buy tax software such as Turbo Tax. 

How difficult will it be for you to do- Here are some questions that will help determine how difficult it will be to file your own taxes:

  • Do you use the standard deduction, or do you itemize deductions?- The standard deduction is a $5,700 deduction from your adjusted gross income and is given to everyone (if you don’t itemize your deductions).  Itemized deductions are used if their total adds to more than the standard deduction.  The largest itemized deduction is the interest paid on your mortgage.  This alone will often add up to more than the standard deduction.  Other itemized deductions could include charitable donations, parts of health bills, state and local taxes and other misc. deductions.  If you itemize your deductions, it will typically be more difficult to do your own taxes.
  • Do you have taxes automatically withheld from your pay?- If you work for a company and draw a salary, you almost certainly have taxes automatically withheld from you and will receive a W2 each year telling you how much you earned and how much you paid in taxes.  If you are self-employed or paid “under the table”, you will have to figure these things out yourself and doing your own taxes will be much more difficult.
  • Do you rental properties or any other kind of large investments?- Rental properties and other large investments can be very tricky with taxes.  If you have these you should probably use a professional tax preparer.

Based on this criteria, here is Consumer Reports summary of whether you should file your own taxes:

The bottom line. Software makes it relatively painless for even math-phobic folks with straightforward tax situations to prepare their returns. If you don’t have the patience to spend the time at your computer, you might prefer to hire a pro to do the job. Or you can pay a tax preparer one year, then do it yourself with software the next, assuming that your income and deductions are similar. If the results are comparable, you might feel comfortable enough to continue doing your own taxes unless your financial situation changes.

Filing your own taxes can be a great way to save a couple hundred bucks, but it is something you want to be careful with.  Tax frued is no joke, just ask Wesley Snipes.  If you are going to do it yourself make sure you have all the proper documents and are inputing 100 percent accurate information.  There are three rules when dealing with the IRS:

  1. Documention
  2. Documention
  3. Documention

 

Follow that rule and you will minimize the risk of being audited.

Please continue sending any personal finance related questions, suggestions and tips to centsabilitytowealth@gmail.com.

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