Lay off my taxes you filthy Accountant

January 19, 2012 · 45 comments

Got this email from a PDITF reader a few days back…

Do you recommend getting an accountant for pretty much everyone making a decent wage? Currently my wife makes $50,000 a year and I make $70,000. We live in the Washington, DC area. We do no active trading, only W2 pay from our employers, a small amount of unemployment benefits from my wife, 401k and 401k roth contributions, nothing out of the ordinary.

We are new to our city, so I’m not sure if I should just do our taxes online or actually find someone more qualified.

Thoughts? Seems like a wise investment, but I’m really not sure where to start.

That is a good freakin’ question sir. One that I’m not sure I am qualified to answer. All I can do is tell you how the Ninja household operates…

I finished college back in 2007. I got a big-boy job, and for the first time in my life, was faced with the grim reality that I now had to file my own taxes (apparently my mom wasn’t willing to do it anymore :(). Since I only made $38,000/year and hadn’t done much in the way of managing my money, everything was pretty straightforward. I filed through a website called Tax Act in about 30 minutes. It didn’t cost me a dime and I was stoked to get a $400 refund back from the IRS.

Obviously, things have changed quite a bit since then. I got married (dual income!). Moved 1,200 miles for a job (unfamiliar deductions). Our income is much higher than it use to be. We tithe. Could take mileage deductions for some stuff. blah. BLAH. BLAH.

Even though our situation has become a little more complex over the years, we still file our taxes online. Every year I think “This will be the year I finally pay someone to do my taxes for me!” but I never freakin’ do it. It’s probably because I’m frugal. No scratch that, it’s definitely because I’m frugal.

I don’t know if this next statement is completely accurate (any tax people want to verify accuracy?) but my understanding is that itemizing deductions is only worthwhile if those deductions total a greater amount than your standard deduction would. As a married couple our standard deduction is $11,600. Our itemized deductions would be very close to that amount so I don’t see a reason to itemize. I could either show Uncle Sam all the things I’ve done to earn a $12,000 deduction, or I could just take the $12,000 deduction they already offer.

I would totally pay an accountant to do our taxes if we owned a house (thus getting to deduct mortgage interest) because then we would have $30,000 in itemized deductions. But since we have no kids, don’t own a home, aren’t making $500,000/year, and don’t really have any investments outside of standard retirement accounts, things are still pretty simple. I don’t think hiring an accountant is really a bad idea, but until our life gets more interesting we will probably steer clear.

How bout you all? Do you pay someone to do your taxes or do you do them yourself? Was my understanding of itemizing and standard deductions even correct? Should I pay someone to do our taxes this year?

1 slug | sunkcostsareirrelevant.com

I am married with a kid, own a house, trade stocks, and my wife has her own business and we still do it ourselves on TurboTax. At one point two years ago, I was in the same position the reader was in – thinking about getting an accountant. What I did instead was do my taxes again on TurboTax and then print them before filing. I took them to an accountant and paid him to look over the return and add value. The “added value” did not exceed the cost of his time because we apparently do a good job with our taxes. I will repeat this process again if my taxes grow more complex, but for now, I’ll just use TurboTax and hold my breath while Congress simplifies the tax code :-)

2 Money Beagle

My dad’s best friend as a kid grew up to be a CPA. They’ve stayed close for over 50 years. He has always done our taxes and never charges us. I always offer to pay but he insists. So an alternate way is to make sure you have a parent who has a buddy who does taxes and you can save some money and get them done by a pro! :)

3 Ninja

Haha. Noted. Off to form friendships with people that can provide me with free services.

4 Ryan

In 2 years, I’ll have my bachelor’s in accounting & finance and I’m more than willing to take a look at your taxes for free/link to my blog when I start posting again. :)

5 Mo D.

We’ve paid an accountant to do our taxes for the past 5 years, but I’m re-thinking that for this year’s tax season. We’re DINKS, with a mortgage, but no other deductions other than our RSP contributions through our bank and our employers. It costs us $45 each for the accountant to do our taxes; I think the software would cost about that much, so we’d save probably $50.

6 AMD @ amomsdime

Your taxes sound pretty simple-you could probably do it by hand (it doesn’t take THAT long) and save yourself the $50! If you weren’t confident in that you could try hand vs. software and see if there’s any significant difference. Unless you’ve moved for a job in the past year the mortgage doesn’t affect our taxes up here (sadly-I’d love to write off that mortgage interest) so it sounds like it’s really just adding in your RRSP deductions.

7 Mo D.

I used to do my taxes by hand back in the day and came up with 3 different totals everytime! LOL! Mind you, that was A LOT of years ago. Wouldn’t it be great to write of our mortgage interest in Canada!?! That would be sweeet! I think I’ll give doing our taxes a-go this year… and save the $95… thanks AMD!

8 Ladam8518

In general it is only worth itemizing your deductions if the sum of your itemized deductions is greater than the standard deduction. The standard deduction for 2011 is:
$5,800 for Single filers or Married couples Filing Separately (S or MFS)
$11,600 for Married filers and Qualifying Widow(er)s (MFJ or QW)
$8,500 for people filing Head of Household (HoH)

Itemized Deductions include the following: (Sorry using asterisk as bullets)
*Medical Expenses in excess of 7.5% of Adjusted Gross Income (AGI)
*Taxes you paid:
**State Income Tax (State refunds are then partially taxable) or State Sales Tax
**Real Estate Tax
**Other Tax – Usually property tax on vehicles, etc.
*Interest You Paid:
**Mortgage interest on first or second home only
**Points paid on same mortgages
**Mortgage Insurance Premiums
**Investment Interest for Non-passive Activities
*Gifts to Charity
*Casualty and Theft Losses:
**Each occurence must be reduced by $100, and
**Only the amount by which the total exceeds 10% of Adjusted Gross Income (AGI)
* Job Expenses and Miscellaneous (In excess of 2% AGI)
**Unreimbursed Employee Expenses
**Tax Preparation Fees
**Other Expenses incurred to produce taxable income
*Other Miscellaneous Deductions not subject to AGI limits:
**Gambling Losses (may not exceed Gambling winnings)
** and other less used deduction

For more information see IRS Publication 17 and the instructions for IRS Form 1040. Pub 17 contains much more in-depth information but the instructions give a good general overview.

9 Ninja

You obviously know your stuff :) Thanks!

10 Ladam8518

Forgot to mention that there are some cases where itemizing is favorable or required when it is less than the standard deduction:

In general if you itemize on the federal return, you must itemize on your state return and the same for taking the standard deduction. There are some cases where the itemized state return is more favorable than the standard deduction even if the federal return favors the standard deduction.

If you are filing married filing separately and one spouse itemizes, then both are required to itemize.

11 Eric J. Nisall - DollarVersity

Being a tax accountant, I can say that if you already calculated that you won’t benefit by itemizing, then you shouldn’t. One reason is that your return is simple enough to do on your own, you will save quite a bit on tax preparation feed since many preparers will charge more money to prepare a Schedule A, and the shady ones will tell you that it’s necessary (probably using some industry jargon you may not understand or be able to follow in order to justify it) just to charge the extra fees. Even though tax prep fees are deductible on the following years return, guess what? You still have to be able to itemize in order to claim it, and you also need expenses in excess of 2% of your AGI for those other deductions to be applicable.

That being said, you should always pay someone who is experienced and who you trust/feel comfortable with if you feel that you may be doing something wrong, or if you’re just not sure how to handle some aspects.

12 the weakonomist

I’ve always paid someone to do it for me. My financial life is complicated enough that it’s worth it but I would even without it. If I get audited, they have everything in file and can work with the IRS and I don’t get any gray hairs.

13 Jennifer

When my husband was in the Marines, we always got our taxes done for free on base. We paid someone to do it last year, because we had income from more than one state, plus interest from investments, etc. This year, I am getting them done at H&R block for free (courtesy of a mystery shop! woohoo! actually – they are going to pay me to get my taxes done – which is even better!) otherwise I would probably just do them myself. It didn’t look too complicated when the girl did it last year, and writing her a check for something that I thought I could do myself did hurt a little. However, this year will be the first year my husband and I will do an itemized deduction. We own a house, but don’t pay enough in interest on our mortgage (which I guess is a good thing) to have ever made itemizing worth it. This year, though, we started contributing a full 10% tithe to our church, so we will finally be over the $11.600 mark, enough so to make itemzing worth it in my opinion. And I would rather have someone else walk me through that rather than risk messing something up. If it looks easy, maybe I will take it on myself next year. Unless I get another mystery shop… :)

14 Michelle

I just use the online software that HR Block offers. It’s worked for me so far.

15 Chad

One strategy I know of for those that are close to the $11,600 Standard deduction is to take the standard every other year, and push some expenses into the alternate year. That way they can lower their overall tax rate. Let’s say on average you have $11,000 in deductions. Save some of your donations until Jan 1 or work to get them in before the end of the year. That way you could get the full $11,600(but only have $9,000 itemized) in 2011 and in 2012 itemize for $13,000(arbitrary number I chose.) This really only works if you are borderline. Which is frustrating because you get the least benefit of standard deductions.

16 Larry

In effect the standard deduction is the IRS’s estimate of how much a taxpayer can deduct if they are unable to itemize. Some of the most common deductible expenses are charitable donations, state taxes, mortgage interest, and property taxes. A couple who rents, lives in a no-tax state (like Washington), and doesn’t give to charity can take a nice deduction even though they have no verifiable deductible expenses!

As for doing your own taxes, in simple tax situations I generally don’t see why you shouldn’t. Taxpayers ought in my opinion to know the basics of tax law, and there are any number of ways to educate yourself. When would you definitely need an accountant? Some possibilities: you have limited partnerships, a lot of Schedule C (sole proprietorship), E (rental) or F (farm) income/expenses, you have passive income/losses, an inheritance, complicated charitable donations of non-cash property, that sort of thing.

I think Ninja moved from CA to WA during 2011, and that might require some care in filing part-year resident returns for both states.

As for me, I work for an accounting software company, and so I have half a dozen accountants I can ask for tax advice any time. As for the original question – “We do no active trading, only W2 pay from our employers, a small amount of unemployment benefits from my wife, 401k and 401k roth contributions, nothing out of the ordinary” – there is nothing here that suggests a need for an accountant. But the writer does not appear to be very familiar with tax law. Contributions to a 401k are tax-deferred and have no present tax consequences, and contributions to a Roth 401k are made with after-tax dollars. The writer’s 401k contributions will be reflected on their W-2 but are not included in taxable wages.

17 whimsical melange

Granted my tax situation isn’t complicated at all, but even when it got interesting with the forms I had to fill out with my hdhp+hsa (that was a trip), I still have done my taxes myself. I pay about $10-15 to file my taxes online. They even store back copies of my fed/state returns in case I’m a moron and lose mine. Most of the sites have interactive questions to help you figure out anything that you’re not sure about. The one I use will also link me back to the IRS directly with any questions so I can read the relevant forms and instructions. If it ever got to the point where I was confused then I would get an outside party involved. Lucky for me my best friend is a tax accountant.

18 Zan

Yes we absolutely have an accountant do ours. My husband has a freelance career that has him working all over the U.S., in different countries—coupled with a MULTIPLE obscure deductions that we would never even think of. And I have freelance work in addition to my “regular job”, plus deductions for being a full-time student. So..its both a monetary benefit to have her help us and also a stress reducer in that we just have to keep track during the year and then I ship it off and get a neatly package binded book with all our financial info.

19 Kate

I think that it starts making sense as soon as other countries get involved. My husband is a dual Canadian-American citizen living and working in Canada, so he actually has to file two- thanks o the US rule about worldwide income. I was to croak every time we get a 1200$ tax bill, but trying to negotiate the two systems is a mess.

Starting next year, we’ll both be living in a 3rd country as Government of Canada employees,so it will only get more complicated. I think I will have to concede to having someone do mine as welll… Sigh.

20 Brian

I do taxes as a side gig every year. The majority of people who I do taxes for could easily do it themselves they are just too lazy to do it. I have done my own taxes for a while now and have fairly complicated ones. Turbotax tends to do a great job.

You were pretty close on your itemized v standard deductions. When you finally decide to purchase a house, you will be much much more likely to itemize since that is the only way to write off the interest.

If you ever want to get bored and fall asleep one night, read Pub 17.

21 Norman

I have been doing my own taxes for 35 years, ever since I told the lady at H&R Block about a deduction she didn’t take. So I thought, what the heck, I can do this stuff myself! I’ve been using taxslayer.com for the past couple of years and love it. I don’t have to load any software on my computer or pay for the software. Taxslayer only charges for electronic filing of both my fed and state.

22 Ryan

I pay someone to do my taxes, and have for the past 3 or 4 years – basically about a year after I started my business and decided I needed someone to double check my work. I wouldn’t do it any other way. But then again, having a business makes things very different. If I didn’t have business income, I would have continued using tax software and prepared my own taxes.

23 StackingCash

I married an accountant. Before that, I have a cousin who is an accountant. If it were not for several complex financial situations I got into, I would have done them myself or with some of those tax software thingys before I would pay for an accountant.

24 Dave Hilton

To pay or not to pay…

We paid someone to do ours the first couple of years we were married, but I decided I could save money and do it myself. So I took the FREE tax classes offered by a local Jackson Hewitt tax service & using the info I learned- applied for a part-time job (at that same office) doing other people’s taxes. This way, I got better & better at finding deductions, reading the forms, learning the ins & outs of filing taxes, made some extra cash (I worked the little cubicle office at Wal-Mart on Sat & Sun that tax season) and also got our taxes filed FREE (another perk of the job was you could file one tax return at no cost).

I made nearly $2000 (including the bonuses they offered for productivity & refund loan fee collections) in a couple of months, learned how to do taxes (even the unique forms for farms, foreign income, etc.) & didn’t have to pay to have our taxes done. BONUS!

Now, I just use one of the software programs (I prefer TurboTax) to do our taxes. Don’t see any reason to pay someone when I have the knowledge to do it myself without too many headaches.

25 Kristin

Last year was the first year I did my own taxes. I started doing the Turbo Tax online stuff, but then said to myself, “This isn’t too complicated!” (I was able to use the simplest form.) I used one of the FreeFile links on the IRS website to do my federal and state taxes. Things are a little more complicated this year, but I’ll sit down and try to do it myself, first, this time. We’ll see how that goes; I may end up consulting someone if I can’t figure out my education/part year state residency/moving deductions and credits.

26 Kaye

We own a home and have two kids, so we get to take advantage of itemized deductions and child credits and all that jazz. We still do them ourselves. Until about 3 years ago, I did them by hand, checked them using a free filing site (TaxSlayer) and ta-da – done. Three years ago we were able to use Turbo Tax for free thanks to our military affiliation so we started using it. It’s what we now use and it really couldn’t be easier.

I think I might consider an accountant if we started buying/selling/trading in the stock market though and the prospect of those taxes frightens me a bit just because I am unfamiliar with them.

27 Jennifer

No way!!! Turbo Tax is so cheap and easy. I don’t have a particularly tough tax situation anymore, just normal deductions like mortgage interest, etc. (my most unique situation is an investment in a retirement home, which requires Schedule K-1). But even when I had slightly more complicated taxes (employee stock purchase plan and when I incorporated myself for a small business), Turbo Tax handled it well.

Unless I become a multi-millionaire with lots of unique investments (Mitt Romney style), I’ll stick with Turbo Tax.

28 Weirdo

I used to my own taxes for about five years. Then I started my own business and it got really complicated. It’s a heck of a lot easier and less of a headache to just cut the check, have them take car of it, and then write off that expense of hiring the CPA next year!

29 Lutus

Woohoo for living in Florida!!!! (No state income tax)

I do my own taxes by hand. Mortgage deduction, giving deduction (tithe), wife took college classes (deduction), etc……

Everyone should do their own taxes, by hand, at least once. That way people who actually pay taxes (about 50% of americans) will see just how much Uncle Sam is robbing from your paycheck every month and how freaking convoluted our tax system is!!! :(

30 Travis

As a CPA, I am obviously biased in my answer… but, we really do add a lot of value outside of regular return preparation. If you form a client/CPA relationship (at least with myself and other small CPA firms) you can call us ANYTIME to discuss a question or concern you may have about your financial situation BEFORE you enter into a transaction. A lot of people can prepare tax returns since you use after-the-fact data, but our benefit really comes from being proactive in decision making before-hand. Tax planning is a huge part of my overall financially planning practice. We stay on top of current legislation and let clients know of any law changes that will affect them because we know them personally.

31 Travis

Errr… *financal planning practice, not financially…

32 Travis

Errr… *financial planning practice, not financially…

33 Melissa Z

The other benefit of having a CPA do your taxes is that they’ll usually help you if the IRS does decide to go after you.

The IRS claimed my uncle & his wife had improperly taken deductions for their two children, ie claiming that my two cousins didn’t exist. They wouldn’t accept birth certificates, doctor records, ect. Their CPA got it all cleared up for them.

34 kim

It’s funny, no one would hand someone 25% of their income for any reason without being fully versed on the contract/details, yet many pay taxes without having a clue how it works! Do it by pencil once so you learn the code (and understand politics, as cap gains is today’s hot topic), and then do it online by yourself. Even H&R Block staff can do complicated situations, like income from multiple states, rental income, and sole proprietorships. Stock/bond investments (capital gains for the big kids) aren’t complicated. Since so many rely on investments for their retirement they should know the tax implications.

35 TJ

As another CPA in the crowd, I agree with Travis. A relationship with a CPA helps a person plan for taxes better than coming in after you’ve done something and asked if you did it correctly. There are a number of reasons people have someone else do their taxes for them. It could be as simple as they don’t want to be bothered by them (not everyone is as cheap… um I mean frugal as Ninja) Even though I do this for a living, I tend to think that if your return is uncomplicated you could and probably should do it yourself.(hope the CPA mafia won’t put a hit out on me for saying that). IF your situation is a bit more complicated than normal and it is beyond your true abilities (not the super human tax expert abilities you think you have) you could stand to get some help. Today’s software packages are pretty good but the tax code is a very complex animal and some of them will miss things.
All I ask is if you decide to use a CPA, don’t wait until April 12 to go in and expect it to get done.

36 Anonymous

Did mine myself in my early 20s but since 1) moving to a state that has state AND city taxes in addition to federal (ugh) 2) increasing my side hustle/freelance work and 3) having something weird come up every year, such as money I received from an annuity that belonged to my dad ….it’s SO worth the $70 or so that I pay to have someone organize everything for me so that I just have to look it over and sign. And I like knowing that if I did ever get audited, a professional will be going to bat for me.

37 krantcents

I started to use a CPA, years ago when I started buying rental property. It made a lo t of sense because It was expected to grow into a huge business. It did! I still use one because of the things I do. He is very inexpensive because I started with him nearly 35 years ago.

38 C The Writer

I make nothing a year, have no kids, no house, no nothing.

Yeah. I do my own taxes. And get a paltry little bit of money back each year. :)

39 Jenna, Adaptu Community Manager

I’ve done my own taxes since I was 18. As I’ve gotten older it seems to be getting easier. No more multiple state taxes (working and going to college in one state and living and working in another), no more freelance gigs (yeah full time employment), etc.

40 Andy Hough

I use one of the free file companies from IRS.gov. About 70% of taxpayers qualify to e-file for free. I still do my return on paper first so I can compare it to the results from the software. They have always been the same so far.

41 B

Mine have gotten exponentially more complicated in the last decade. It was super easy back in the day, and I just did them on paper. Then came better jobs, marriage, 2 kids, and last year some occasional side income, We’ve always gotten away with the standard deduction before, but now I have an expensive house so this year I’ll have to itemize. Last year I did it on TurboTax but then did it on paper to be sure it all matched and filed by mail.

42 Desi Guy

I have been using Turbo tax deluxe for the last 2 years and that works great for us. This year i ended up getting a great deal and paid under $20 for the Turbo tax deluxe fed + state download edition. I have put that in a post here – http://desiguyfinance.blogspot.com/2012/01/turbotax-deluxe-fed-efile-state-2011.html

43 James

I have been using Turbo Tax for the last 10 years or so. It’s easy, just go step by step through the process and answer the questions and input the numbers. (I didn’t say it is frustration free, sometimes you have to spend time finding numbers and figuring things out, but it’s not hard) I make $200,000/yr, have a side business, three kids, house, multiple investments, etc. I itemize so I have to keep good paperwork over the year, but you need to do that for an accountant also so that doesn’t change.

I love doing my Turbo Tax online, it isn’t based on your computer so I can start my taxes one day, it imports all my info from the past, I can compare everything for the last 10 years, I can log in multiple times over a couple weeks making additions/changes as needed, double checking the return to make sure I have everything needed and didn’t miss anything. I save a pdf after I file my return, but I could also print out my returns for the last 10 years if needed, say my computer crashed or house burned to the ground. I do my banking online, and doing my taxes online is no less secure.

If I’m thinking of taking a deduction I don’t understand, I simply research it online and on Turbo Tax. If you are reading a financial blog you are in the ranks of those who can do their own taxes. I don’t see any problem with someone farming that work out if you want, but even if a CPA offered to do my taxes free I would stick with Turbo Tax, it’s nice to go through the process just to stay on top of the changes and understand your own taxes and how it all works.

Oh, and don’t forget about the It’s Deductable method that goes with Turbo Tax. I drop off my stuff at Goodwill and keep records throughout the year. Just enter the item in It’s Deductable and it shoots out your deduction amount into your tax form. Saves me hundreds of dollars a year just by donating my old stuff. Often the price it gives for the donation is pretty high, so the reduction in taxes is about the same as I would get by having a garage sale, without the effort! Turbo Tax figures the value out, so I don’t worry about an audit or proving the values.

44 Skrpune

Like Norman, I had a bad experience with someone at H&R Block years ago that soured me – my employer at the time was paying us through an HR company’s name and gave us bonuses through their name and put the bonuses on a 1099-misc…the H&R Block rep insisted that I file it as self-employment income, rather than acting appropriately (request a proper W-2 form from employer, file a form with the IRS if I don’t get it, and simply add it to gross income totals). Did my own taxes for years since then, until we moved to Toronto for a couple years. Tax situation was complicated enough that I paid someone to do it then…having to file in two countries can be less than fun. When we returned to the US and still had to pay dual taxes for the previous tax year (split the tax residency year between the countries), I was hard pressed to find someone in the US that could do Canadian taxes, so I followed the precedent set by Mr. Canadian Tax Preparer Guy and filed myself….~18 forms later, I was done. Figured that if I could handle that, I can handle our US-only taxes since then! Even with a mortgage, dual incomes, 403(b) investments, and IRAs, I’m able to do our taxes myself. I generally use 2-3 different online services, calculate multiple situations (deductions vs credits, IRA deductions/not, etc.), make sure at least 2/3 match, and then file with the one that charges the lowest fees. Last year, I calculated with CompleteTax, eSmartTax, and TurboTax. 2/3 did match (one neglected to take into account the Making Work Pay credit) and then I filed with TurboTax. Saved us a chunk of change in preparation fees, paid oodles less in federal taxes (I was able to cal the max deduction I could take for an IRA given our income), started a Traditional IRA, was able to budget/plan for what we did end up having to pay to the feds, and filed at the last minute to delay paying that amount. Boo to the yah.
This year, I’m chomping at the bit to get started. Hubby doesn’t have YTD totals on his online pay stubs, so I downloaded one by one, added up the totals, plugged those numbers into spreadsheets, and did my preliminary calculations. Seems like we’re in pretty good shape, if I calculated correctly…depending on the final numbers and final IRA deductibility calculations, we won’t have to pay too much in federal ($300-800) and will likely get a refund from IL state.

45 Kyle

I started paying someone to do my taxes three years ago. It was the best investment I ever made. The man has gotten me back or saved me from paying SO MUCH MONEY.

WAY more than the $350 he charges me to do them.

I will never do my own taxes again. Accountants’ job is to know the legal loopholes to get you back/save you money. It’s silly not to take advantage of them.

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