Wednesday, February 22, 2017

Tax Time: How to Prepare Your Tax Return

By this time of year,  many people are ready to file their tax return and (hopefully) get a refund.  Let's take a look at the alternatives available for filers:

Complete Your Return Manually

Seriously, if you are single with no children, all your income is from employers who issued W-2s and you don't have any investments or retirement accounts, you can probably complete a 1040 EZ manually in less than 30 minutes.  The only problem with this is that you'll have to file by mail, which will delay your refund.

Use Online Software

There are a variety of online programs that allow ordinary people who are not accountants to accurately complete most tax returns.  If your adjusted gross income is less than $64,000, you have access to a variety of commercial programs via IRS Free File.  You must enter the program via the IRS website, not the program's website, in order to use them at no cost.  The companies may (will) try to "up sell" you but the basic return will be free.

If your income is more than $64,000 or you need specialized forms you may need to upgrade to paid versions of the programs.  Nevertheless, unless your financial situation is extraordinarily complex, you should be able to complete your own return with online software.  

Besides price, the main advantage to completing your own return is that by the time you are done  you have a clear understanding of where your money is coming from and how it is being taxed. Some very intelligent people have told me that their mortgage payment is tax deductible and that's why they keep making it, rather than paying off the house.  The mortgage payment isn't deductible, only the interest is--and it is only truly deductible if it and your other deductions are more than the standard deduction of $12,600 for a married couple who files jointly.  

If you do not qualify for IRS Free File, different programs have different costs and features.  Turbo Tax is the most robust package and in fact your W-2, 1099 or other tax document may have their logo on it along with a data entry shortcut.  Turbo Tax allows you to take photos of many forms and import them, possibly saving you time on data entry.  Turbo Tax is also often the most expensive program.

On the other end of the spectrum is FreeTaxUSA which never charges for federal returns and charges only $12.95 for a state return.  The interface of FreeTaxUSA is not as fancy and it lacks Turbo Tax's import features.

The main thing to watch out for with the online programs is the up-sell.  Many of them lead you though a long and involved interview/data entry process which prepares the proper forms.  However, the "free" return you signed up for does not include many of your forms and you only learn the true cost of your return when you go to save or file it.  They are betting that you won't want to do all that work again and will just pay the money.  

The online packages all offer e-filing as part of their service. 

Use Packaged Software

TurboTax Deluxe 2016 Tax Software Federal & State + Fed Efile PC/MAC Disc  [Amazon Exclusive]If you don't like the idea of  your personal financial information being on some company's website, you can purchase programs like Turbo Tax or one from H &R Block.  .  They can be downloaded or bought in a store on a disc.  The price may or may not include efiling.  

Before purchasing a package, review the contents to make sure the package you buy includes the forms you need. 

Once you have downloaded and installed the software, you don't have to worry about Internet connections so your may be able to move more quickly through unneeded screens. 

Most packaged software allows you to prepare more than one return per license so if you have multiple family members who need returns, they should be able to share the software.

 Use a Storefront Preparer

When many Americans think taxes they think H&R Block, even if they've never used H&R Block's services.  H&R Block and similar seasonal storefront tax preparation services hire relatively low wage help and train them to complete tax returns by using software similar to that listed above. 

While some of these people actually learn something about taxes during their training and tenure, according to Glass Door, the average seasonal hourly tax preparer makes $10-15/hour and at that rate, you aren't getting much expertise. They use a computer-generated interview to fill out forms.  If your taxes are simple enough to entrust them to H&R Block, Jackson Hewitt and the like, they are simple enough to prepare on your own computer for less money. 

Use a CPA or Enrolled Agent

If preparing your taxes takes real accounting, then hire a CPA.  The CPA will be able to compute your profit and loss for rental properties or business ventures.  He or she will be able to advise whether certain things are deductible, and will be able to give you advice about how to save money on taxes next year, even if he or she can't reduce this year's taxes.  

Enrolled Agents are non-CPA tax professionals.  They, along with attorneys and CPAs can represent you in front of the IRS.  

If all your income is reflected on tax forms issued by business or brokerage houses, a CPA is probably overkill, unless you just plain don't want to fool with it.  However, it has been my experience that the most time-consuming part of preparing your taxes is gathering the information needed, and you have to do that whether you are going to do your own taxes or farm them out to someone else. 

While there are people who have complex tax situations which require the advise of a professional, the vast majority of Americans are perfectly capable of preparing their own tax returns. 
*Part of Financially Savvy Saturdays on brokeGIRLrich and Super Saving Tips*


  1. And some of us are lucky enough to have a family member working as a tax preparer :)

  2. Turbo Tax this year. Next year the IRS website.

  3. Nice overview. If you want truly free online software, try CreditKarma's new tax program.