Uncommon Cents

A while ago, one of my favorite (non personal finance) bloggers asked me how I do my taxes. The sad part is the best answer is the one that’s a cliche: “Very carefully.”

Most Americans do their taxes one of a few ways:

1) An accountant or other tax professional;

2) Tax preparation software like TurboTax;

3) Manually

An accountant or other tax professional: this has the potential of being the most expensive way to do your taxes, but also has the potential to have the best financial outcome. A well-trained tax professional may be able to find you deductions that you couldn’t easily find yourself, and if your taxes are especially complicated, with multiple deductions or varied sources of income like self employment, it may be worthwhile to try to find a CPA or tax professional who charges by the hour to prepare your taxes. If you are concerned that you may be audited, going to a tax professional at least gives you some feeling of security that a professional prepared your return. A bit of additional information: according to the IRS, “A practitioner may not charge a contingent fee (percentage of your refund) for preparing an original tax return,” so the amount of money that ends up in a return has no bearing on what they can charge.

Tax preparation software: TurboTax, TaxCut, and other software has been growing in popularity. As computing your taxes becomes more complicated (no matter what the politicians say), using a personal computer to assist in preparing your taxes makes lots of sense. TurboTax actually offers a free Web-based version for simple returns (my return isn’t really simple enough). There is some cost in most of these, of course–Intuit has to stay in business–but it seems to be a middle ground between paying a professional and doing it yourself. There are some niceties generally associated with this type of software, such as electronic filing which can speed up your refund (since I almost always owe at the end of the year, I’d prefer to slow down the process!). Interestingly, TaxCut is owned by the traditional tax preparer H&R Block, so it appears that it’s well understood by the tax preparers that software tax preparation has fully come of age.
Manually: Interestingly, I fall into the third category. To some extent this is my trying to be frugal–I have a lot of difficulty paying someone else to do something I can do myself. This goes from simple things like an oil filter change (five minutes, no tools, just a bit of a mess) to more complicated matters like doing my own investing (research is fast and easy to do–and no added cost with my Internet connection and the public library). I don’t think that preparing taxes manually offers the same sense of accomplishment that, say, building a bicycle wheel from a bare rim, hub, and spokes does; there’s also the rather large possibility of errors. However, I feel like doing them myself helps to educate me about tax preparation and keeps me from spending even more than I want at tax time.

I may be missing some, but I think that for most people they have three choices to prepare their taxes. Each have their pros and cons. Personally, I do my taxes myself, largely by hand (well, with the assistance of some Excel spreadsheets and my iPod touch calculator) both because I’m frugal and because I’m trying to educate myself, but everyone needs to make the best choice for themselves.

Trackback URI | Comments RSS