The most dreaded aspect of a new year is not the resolutions; it's the taxes. Every American wants a big refund, but very few people have the time or skills to struggle over complicated tax forms. The simple tips below will you help decide whether you should invest in tax software or hire an accountant this year.
Comparing Accountants with Tax Prep Software
Your best friend hires a CPA, your neighbor uses Turbo Tax, your boss needs a tax attorney, and your sister closes her eyes to choose one of the numerous Free File providers listed on the Internal Revenue Service website. Picking the best tax solution can be complicated. Here are the major options:
Tax Preparation Software
TaxACT, H&R Block at Home, CompleteTax, Turbo Tax, and Liberty Tax Service's eSmart Tax are all examples of computer-based and online software packages that can help you file your federal and state tax returns. Depending on the software, you may enter your W-2s and other details into Form 1040 fields, or you may answer questions in an interview style and let the software do the complicated work for you. Certified Public Accountant
Certified Public Accountants, or CPAs, are highly trained professionals who are licensed to practice accounting in your state. Most specialize in a particular area, such as business finances, tax audits, or estate planning. Not all CPAs handle personal tax return preparation.
Enrolled Agent
Enrolled agents are authorized to represent you in front of the Internal Revenue Service, or IRS. They either have passed rigorous testing or have gained experience as an IRS employee. Some enrolled agents work for tax preparation services.
Tax Attorney
Tax lawyers handle the most complicated tax issues and often charge the highest fees. They typically work on estate issues, business strategies, and legal cases before a tax court.
CPAs, enrolled agents, and tax attorneys are all referred to as accountants for comparison purposes below.
Similarities
Both tax preparation software and accounting professionals offer several advantages. At a basic level, they both ask questions and help you fill out the correct tax forms. They can guide you through the impact of major life changes, such as buying or selling a home, changing jobs, getting married, or having children. They also track your tax returns from year to year, making it easy for you to see how your tax liabilities have changed over time.
When you work with a reputable tax preparer, whether an accountant or online tax software, the work will be guaranteed. The preparer will also steer you away from the most common filing mistakes, which limits your chances of being audited. At one time, only accountants would appear at your side during an IRS audit, but now even major tax software companies will assist if their products made mistakes.
Differences
Neither an accountant nor electronic tax software is a one-size-fits-all solution. These services vary dramatically in their price tags, time commitments, and privacy costs.
Price
Some tax software is free, while others cost up to $60 per year. In general, vendors price their products in one of three ways:
• the software costs money but the tax return filings are free • the tax software is free but each filing costs $10 to $20 • the tax software is free and a simple 1040EZ filing is free, but state returns and complicated federal returns cost $15 to $30 eachIn contrast, when you hire an accountant, you pay per hour or per document. Their rates can go up to $100 or more. Some accountants will let you deduct their fees from your refund amount, while most software requires advance purchase.
Time
The IRS estimates that a simple federal return, such as the 1040EZ, takes 7 to 12 hours to prepare. A more complicated return for a business owner or landlord can take 22 to 32 hours. The actual amount of time depends on your familiarity with the software, your knowledge of the tax process, and your speed of data entry.
Many people prefer just to hand their documents to an accountant, sign the finished return, and wait for the refund. You must schedule an appointment, usually one or two weeks in advance and often during standard business hours. Keep in mind also that accountants are swamped during tax season and may be difficult to reach via telephone or email.
If you have only a few W-2s and a standard deduction amount, working with tax software can be a lot more convenient and time-saving than hiring an accountant. You can start your tax returns from home, on the road, or at work and pick up where you left off. Most tax preparation software packages allow you to ask questions through a toll-free phone number or online chat site. Keep in mind, however, that not all tax packages handle state returns, so you may end up completing tax forms after all.
Privacy
The final cost difference between accountants and software is the potential loss of privacy. With an accountant, you can choose to submit your data to the IRS electronically or mail a paper return. Only the accountant or a junior tax preparer sees any of your personal details.
On the other hand, tax software stores your confidential information on your computer, which can be stolen or hacked, or on the Internet, where identity thieves may intercept your communications. While the risk to your privacy is low in both cases, the potential threats must be considered.
Doing Your Own Taxes versus Using an Accountant
When considering your tax help options, do you need a trusted advisor or a processor? If your situation is complex or you want a professional to guide you, you may prefer the services of an accountant. If you are comfortable with filing your taxes but just need basic assistance, then a standard tax software package may give you everything you need.
You may prefer tax software if:
- You need help with simple federal and state tax returns
- Your tax situation changes little from year to year
- You understand tax law and know which deductions are allowed
- You need only basic suggestions for next year, such as increasing your tax withholding or limiting personal exemptions
- You have more free time than money
You may want to hire an accountant if:
- You must deal with itemized deductions, rental property income, small business profits or losses, or back taxes
- You need a tax preparer who understands your personal situation
- You want suggestions on how to increase deductions, get tax credits, or reduce liabilities for next year
- You want to learn more about your financial situation
- You have more money than free time
- You want a second set of eyes to review your return
At the same time, accountants are often more familiar with the intricacies of state tax returns and minimizing state tax liabilities than their computer-based competitors. They can also assist you with paying taxes in multiple states or countries, taking retirement distributions, claiming lots of unreimbursed employee expenses, or filing taxes on limited partnership shares.
Computer System Requirements for Tax Software
If you choose to purchase tax software, you must make sure that your computer meets or exceeds the manufacturer's specifications.
For Windows PCs, manufacturers recommend using Windows XP, Vista, or Windows 7. Your computer must contain a Pentium processor, at least 512 MB of RAM, at least 80 MB of free hard drive space, Adobe Flash for animations, and a PDF reader such as Adobe Acrobat.
For Macintosh computers, users should have an Intel-based processor, OS 10.5 or above, 128 MB of memory, Adobe Flash, and Adobe Acrobat. Mac users are generally referred to online tax preparation forms if the software is Windows-only.
In both cases, you should have a high-speed Internet connection, a high-resolution monitor, and a printer. You also want to use the latest Web browsers: Internet Explorer 7.0 or higher, Firefox 3.5 or higher, Chrome 5 or higher, or Safari 4 or higher.
Purchase Tax Software or Hire an Accountant?
In the end, you must compare tax software and accounting professionals and decide which service offers you the most advantages. Price, convenience, complexity, education, and availability all play a part when you get help for this year's tax returns.