Tax time is anxiety-inducing for many of us. Figuring out which forms you need, digging up last year’s return, and trying to decide if you should do them yourself or let someone else do them can all be a cause for concern.
Depending on your situation, taxes might not be complicated, and you can easily file them yourself for free. On the other hand, there are a few situations which may call for calling in an expert. You’ll have to pay them for their assistance, but they can help you maximize your return and avoid costly penalties.
Why it’s important to file your taxes
If you work for an employer, you’ll receive a Form W-2 sometime before January 31. If you’re a contractor or freelancer, you may receive a Form 1099 from someone you’ve worked for.
Your employer or the company you did work for also sends a copy of that Form W-2 or Form 1099 to the IRS and your state Department of Revenue. If you don’t file your taxes, you may be subject to late fees, penalties for underpayments, and penalties for non-filing. You may even miss out on refunds for overpaying on your withheld taxes.
Interest income and income from investments may also be reported to government agencies, so be sure to claim those on your taxes as well. The government has the power to garnish your wages to pay for your back taxes, so make sure you file your taxes to avoid this!
Freelance and side income
You may earn income from work that isn’t subject to W-2 or 1099 reporting. If that’s the case, it’s your responsibility to track your income so that you can properly report it when you file your taxes. The government still wants their piece of the pie, and you may be subject to penalties if they discover you have unreported income.
There are a few different factors to consider when deciding if you should hire someone to do your taxes or do them yourself.
Types of deductions
There are two types of deductions you can take on your taxes. One is the standard deduction, which reduces your taxable income by a pre-determined amount, regardless of your liabilities. The other method is itemizing deductions. This might be beneficial for you if you own a home, have a lot of medical expenses, or are self-employed.
Your financial situation will determine which type of deduction is best for you. If you’re unsure, tax software should be able to run both scenarios for you. If you hire a tax preparer, they should be able to tell you which one would be more beneficial as well.
The benefits of itemizing
Even if you don’t own a home and didn’t pay a lot of medical expenses, it is worth taking a look to see if you can benefit from itemizing your tax return.
Itemizing can be tricky because it’s easy to miss deductions. Here is a brief list of some common expenses that can be itemized, but this is not a complete list by any means:
- Taxes paid on vehicles
- Charitable contributions
- Mortgage interest
- Mileage, if used for work purposes
- Student loan interest
- Child and dependant care
- IRA Contributions
- HSA Contributions
- Home office deduction
- Medical expenses
A complete list can be found here.
Should you do your own taxes?
The answer is: It depends!
If you’re just taking the standard deduction, and have only one or two sources of income which were reported on a W-2, it’s pretty safe to go ahead and take care of filing taxes yourself. The process is straightforward, and you may be able to file your federal taxes online for free right on the IRS website.
If you’re not quite comfortable taking the plunge entirely on your own, you may also choose to purchase software to help you file your taxes. This could be more affordable than paying a professional but relieve some of the pressure of having to fill everything out yourself. Tax software tends to be fairly intuitive and can walk you through the documentation you need to gather and help you choose between itemizing deductions or taking the standard deduction.
If you plan to itemize deductions, have multiple income streams, are a contractor rather than an employee, or work from home, it may be wise to have a professional prepare your returns. They can help make sure that you keep more of your own money and maximize your return and that you’re correctly taking into account all of your deductions. They can also help you decide if you need to start making estimated tax payments on your income to avoid costly late penalties.
No matter your tax situation, if you feel more comfortable hiring a professional then, by all means, do so. If your taxes aren’t complicated you’ll pay a lower fee, and if it saves you from stress and anxiety then it is well worth the financial cost.