Self-preparation accounts for slightly less than half of e-filed tax returns; the remaining half is done by hired tax preparers.
Your situation will determine whether you are better off using tax software or a professional. These are some deciding elements for you.
Overview
- Tax preparation software makes it simpler for consumers to do their own taxes, but there are still circumstances where it makes sense to hire a professional.
- Your ability to prepare and file your taxes for free through the Federal Revenue Service (IRS) Free File program will depend on your income.
- 2 The average price of tax software is $20 and above. The more expensive bundle you may require depends on how complicated your scenario is.
Determining Factors
How Difficult Your Finances Are
Generally speaking, it may be preferable for you to consult a tax expert the more difficult your tax position is. What makes anything complex? If you experience any of the following:
You run a company
There are some unique regulations that you might want to address with a tax expert, regardless of whether your business is a full-time activity or just a side gig. There are several ways to deduct the cost of equipment purchased by your company, for example. The ideal approach will depend on your present tax situation as well as your future financial outlook. Many of these situations can be handled with the right tax software (TurboTax Self-Employed, for example, helps you make a Schedule C for a sole proprietorship), but you won’t get personalized advice.
This year, you experienced a significant life event.
A tax expert can inform you of the pertinent rules that you’ll have to follow and the tax advantages that you may be eligible for if you founded or sold a business, went through a divorce, acquired or sold a home, rented out your property, or experienced any other big life change.
The market was bustling with your activity
Data from forms like the Form 1099-B, which brokers use to report your securities transactions, can be automatically loaded into tax software.
A tax expert, however, may assist in making sure you have all the other data needed for your return, such as your tax basis, which might not be included on the 1099-B. A tax expert can also assist you with reporting and managing activities involving restricted stock or employee stock options.
You need to list items
Once more, tax software enables you to include this data. Yet, a tax preparer can provide you wise counsel on the deductions to which you are entitled, the documentation you require, and other issues that could help you lower your tax payment while averting IRS penalties (IRS).
Your knowledge of taxes
The thought of math, taxes, and the process of preparing and filing a return can be overwhelming for some people. Others view paying taxes as an annual task that must be completed, grudgingly or not.
You’ll probably be more than capable of handling your next tax return if you’ve been filing your taxes year after year and not much has changed in your financial or personal status. But make sure you are aware of any pertinent regulation changes, such as those resulting from the Tax Cuts and Jobs Act, the major tax law that became effective in 2018.
Look at these instances: The personal exemption was taken away, the standard deduction was almost doubled, and state and local tax deductions and mortgage interest deductions (SALT) are now limited in some ways.
Assess your readiness for the assignment if you have never filed a tax return. Realize that you don’t need to be an expert in math—the program or online study site will handle the calculations. And you don’t need to be an expert in taxes; you’ll be asked for the data you need to finish your return.
Your schedule
Whether determining whether to perform something yourself or employ someone else, time is always a crucial consideration. You will spend the same amount of time, either way, obtaining the evidence required to prepare your tax return. The documents you need to prove your deductible expenses include W-2 forms from employment, 1099 forms from banks, brokers, and other income sources, as well as canceled checks, credit card statements, and online banking records.
So, the time spent doing the actual return is what differs. That could be a few hours or a few days, depending on your circumstance. The IRS estimates that it takes the typical taxpayer 13 hours to complete Forms 1040 or 1040-SR. Using a preparer is preferable if you don’t have the extra time.
The cost of filing your taxes depends a lot on the qualifications of the person who does it, how hard your return is, and where you live.
The Price
The IRS estimates that the average cost of filing a return is $240. (including all associated forms and schedules across all tax return preparation methods). 8 The intricacy of your return, the tax preparer’s level of experience, the type of software they use, and their location all affect how much they charge for their services.
For little to nothing, you can prepare your own taxes. During the 2022 tax year during the 2023 tax filing season, if your adjusted gross income (AGI) is $73,000 or less, you can use Free File, the IRS’s no-cost tool that enables you to complete your return online and submit it electronically.
If your income is too high for Free File, you can purchase tax preparation software or use a website; costs start at $20 and increase based on your needs. If you require specialized software for self-employment income, rental income, farming income, or other more complicated situations, the price will go up. Some businesses also provide free, simplified software versions that are appropriate for straightforward returns.
How Much Time Do Taxes Take to File?
The typical person needs roughly 13 hours to complete Form 1040 or 1040-SR. The 13 hours are broken down into four hours to complete and submit the form, four hours for recordkeeping, two hours for tax planning, and one hour for miscellaneous responsibilities. Business taxpayers can anticipate spending 22 hours on their taxes on average. This translates to 12 hours of recordkeeping, 4 hours of tax planning, 5 hours of completing and submitting forms, and 2 hours for miscellaneous chores, albeit the total does not equal 22 owing to rounding.
What is the price of a tax software?
The price of your chosen tax software will depend on its capabilities and the specific software you select. For taxpayers with simple returns and earnings below a particular threshold, the majority of software suppliers offer a free online version (note that you may still have to pay to file your state return). If the free version is inaccessible to you, you can anticipate paying $20 to $200 for the commercial version. In general, costs rise as features and capabilities increase.
How Much Does a Tax Preparer Cost?
The National Society of Accountants estimates that the average cost to produce a Form 1040 with itemizing on Schedule A in 2020 (the most recent year for which data is available) was $323, including the cost of the state return. For Form 1040 with the standard deduction, the average charge was $220. (again, with the state return). If you include more schedules, your payment amount rises. Schedule B, Schedule C, Schedule D, and Schedule E, for instance, each had an average additional price of $42, $192, $118, and $145, respectively.
Final Thoughts
Whether deciding whether to use tax software or hire a tax preparer to handle your income tax returns, two important considerations are the complexity of your tax position and how much you are ready to spend. You can obtain free software from the IRS if your income qualifies. Otherwise, your tax situation’s complexity will determine which software program works best.
You might want to spend money on a tax preparer if you want to itemize, if you own a business, if something big happened in your life this year, or if you traded a lot of stocks. These professionals will assist you in planning ahead for the following year and staying on top of potential tax savings.
