Tax Prep Tips: Is Cheaper Always Better?
Published on - February 29th, 2012 (Modified on - March 1st, 2012) (by April Dykman) This is a guest post from Richard Barrington, who has earned the CFA designation and is a 20-year veteran of the financial industry, including having previously served for more than a dozen years as a member of the Executive Committee of Manning & Napier Advisors, Inc. Richard has written extensively on investment and personal finance topics. Previously at GRS, he shared how to find the right CD or money-market account, tips for sound saving and investing, and last year’s discussion about tax prep costs.
You may be about to make your most expensive decision of the year.
With the U.S. tax season approaching, you face a range of choices for how to prepare your tax return. That choice could save — or cost — you a large sum of money. Tax rates are likely to continue to rise. Preparation fees alone can cost hundreds of dollars, overpayment of taxes can easily run into the thousands, and the price of filing a false return can be far greater still. That’s why choosing your tax preparation method may well be your most expensive decision of the year.
By outlining some of the issues involved in deciding how to get your taxes done, this article could help you avoid making a costly mistake.
How will you prepare your tax return this year?
GetRichSlowly.org, MoneyRates.com and MSN Money jointly conducted an online poll in February 2012 asking readers how they plan to prepare their tax returns this year. There were nearly 12,000 responses, and here’s how they were distributed:
- 49% said they pay someone else to prepare their returns.
- 38% said they handle returns themselves with the help of tax preparation software.
- 10% said they prepare returns themselves by hand.
- 3% said they have a friend or family member who will do it for free.
While using a paid preparer was the leading response, the next two answers combined for a similar percentage of the responses, making for a roughly even split between those who do it themselves and those who pay a professional. What issues should you consider when deciding how to prepare your taxes?
Weighing the options
GetRichSlowly.org researchers gathered information on a number of different tax preparation options. The results are based on advertised data on 98 online products from 27 different providers, as well as quotes from 28 offices of 12 professional preparers across the country. The following is a rundown of the major categories, and a summary of what these approaches might cost:
Free options. There are ways of getting your taxes done for free, including filling out forms by hand or using the online forms and instructions the IRS provides. There are also some options which offer a free federal return in combination with a paid state return, which will typically cost about $20. These free options are best suited to the simplest tax situations.
Online.These options include online tax preparation and software downloads. This will typically cost you about $27 for a federal return, plus about $22 more for a state return. These programs come with varying degrees of sophistication, though obviously they are unable to give personalized advice or help with highly complex situations. Be sure you are entering your data on a secure website (one starting with https://).
| Online Tax Preparation, Lowest Advertised Cost | |||||
| Product (Company Name) | Version | Federal 1040 Simple Price |
State Price |
State e-File |
|
| 1040.com (Drake Enterprises) | Simple | $0.00 | $29.95 | $0.00 | |
| 1040Now | 1040EZ | $14.95 | $17.95 | $0.00 | |
| At Home (H&R Block) | Free | $0.00 | $27.95 | $0.00 | |
| CitizenTax | - | $19.99 | $29.99 | $0.00 | |
| CompleteTax (CCH) | Basic | $0.00 | $29.95 | $0.00 | |
| efile.com | Free Federal | $0.00 | $19.95 | $0.00 | |
| EfileTaxReturns.com | Free | $0.00 | $22.95 | $0.00 | |
| eSmart Tax (Liberty Tax) | Basic | $0.00 | $19.95 | $0.00 | |
| eTax.com | Free | $0.00 | $29.95 | n/a | |
| ExpressTaxRefund.com (RT Software Inc.) |
Basic Return Package | $29.95 | $20.00 | $20.00 | |
| ezTaxReturn.com | Free Federal + State Return |
$39.95 | $0.00 | $0.00 | |
| FileYourTaxes.com (Taluy California Corp.) |
Free | $0.00 | $23.50 | $0.00 | |
| Free1040TaxReturn.com | Standard Return | $9.95 | $19.95 | $0.00 | |
| FreeTaxUSA (TaxHawk, Inc) | Free Edition | $0.00 | $9.95 | $0.00 | |
| IRS | Free File | $0.00 | n/a | n/a | |
| Jackson Hewitt | Basic | $0.00 | $29.95 | $0.00 | |
| KeyTaxx.com | Standard Return | $9.95 | $19.95 | $0.00 | |
| OLT OnLine Taxes | 1040EZ Simple | $0.00 | $7.95 | $0.00 | |
| OnePriceTaxes (AFJC Corp) | Federal and State Taxes | $14.95 | $0.00 | $0.00 | |
| OnlineTaxPros | Deluxe | $19.95 | $14.95 | $0.00 | |
| RapidTax (Rapid Filing Services LLC) | Basic | $9.99 | $19.99 | $0.00 | |
| TaxACT (2nd Story Software) | Free Edition | $0.00 | $14.95 | $0.00 | |
| Taxbrain (Petz Enterprises, Inc) | 1040EZ Tax Package | $14.95 | $29.95 | $0.00 | |
| TaxSlayer | Free Edition | $0.00 | $17.90 | $0.00 | |
| TaxHawk | Federal Tax Return | $0.00 | $0.00 | $0.00 | |
| TaxSimple (Thompson Reuters) | Basic | $0.00 | $24.95 | $0.00 | |
| TurboTax (Intuit) | Free Edition | $0.00 | $27.95 | $0.00 | |
| Notes: 1. Prices shown are lowest online advertised price as of February 2012. 2. Most “free” services are limited to customers with a certain tax situation. 3. Information is provided for general guidance. Contact specific provider or visit official website for details. |
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| Software Download, Lowest Advertised Cost | ||||
| Product (Company Name) | Version | Federal 1040 Simple Price |
State Price |
State e-File |
| At Home (H&R Block) | Basic | $19.95 | $36.95 | $19.95 |
| Tax Act (2nd Story Software) | Free | $0.00 | $14.95 | $7.95 |
| TurboTax (Intuit) | Basic | $29.95 | $36.95 | $0.00 |
| Notes: 1. Prices shown are lowest online advertised price as of February 2012. 2. Most “free” services are limited to customers with a certain tax situation. 3. Information is provided for general guidance. Contact specific provider or visit official website for details. |
||||
Paid tax preparer. A paid tax preparer can give you advice specific to your situation and may be the best approach for complicated tax returns and maximizing legal tax deductions. However, the personal service will cost you more: a federal return will typically cost between $112 and $191, with another $15 or so for a state return.
| Professional Tax Preparer, Lowest Phone Quote | |||||
| Company | Type | New York City | Kansas City | Los Angeles | |
| H&R Block | Federal State |
$40 $39 |
$119 $39 |
$99 $39 |
|
| Jackson Hewitt | Federal State |
$75 $40 |
$150 $40 |
$80 Free |
|
| Liberty Tax | Federal State |
$200 Free |
$250 Free |
$150 Free |
|
| Individual tax preparer | Federal State |
$165 Free |
$40 $40 |
$50 Free |
|
| Notes: 1. Prices shown were obtained through telephone interviews in February 2012. 2. Most “free” services are limited to customers with a certain tax situation. 3. Information is provided for general guidance. Contact specific provider for details. |
|||||
Videoconferencing. A hybrid of online preparation and the personal approach is a tax preparation video conference. H&R Block offers a variety of these programs, with total costs for a federal and state return ranging from $39 to $408.
| Live Video Conference, Lowest Advertised Cost | |||||
| Product (Company Name) | Version | Federal 1040 Simple Price |
State Price |
State e-File |
|
| Block Live (H&R Block ) | Basic | $0.00 | $39.00 | $0.00 | |
| Notes: 1. Prices shown are lowest online advertised price as of February 2012. 2. Most “free” services are limited to customers with a certain tax situation. 3. Information is provided for general guidance. Contact specific provider or visit official website for details. |
|||||
Making the best choice
So which of the above is right for you? Here are some things to think about:
- Match the approach with your needs. If you file a form 1040EZ or a 1040 without itemized deductions, then a free approach or simple software should do the job. However, if you have several investments or deductions, or if you file in multiple states, you may need a more sophisticated approach.
- Choose software that is up-to-date and well supported. If you use software, make sure it is up-to-date both technologically and with respect to changes in the tax code. Also, find out in advance what kind of user support is available.
- Make sure a preparer has a Preparer Tax Identification Number (PTIN). The IRS now requires all paid tax preparers to have a PTIN, so steer clear of a preparer who doesn’t have one.
- Check your preparer’s professional qualifications. These may include being a CPA, Enrolled Agent, or tax attorney. For all other paid preparers, the IRS is introducing a new testing requirement: people who pass the new test will be called Registered Tax Return Preparers.
- Research your preparer’s history. Check with your local Better Business Bureau to see if there have been any complaints. Skim online reviews, remembering to take both highly negative and highly positive reviews with a grain of salt.
The IRS advises taxpayers that when using a paid preparer, never sign a blank return in advance. That’s a good reminder of the ultimate truth about any tax preparation approach: in the end, it is your name on the line.
Tax preparation costs are on the rise
GetRichSlowly.org researchers also obtained cost information on the various options and compared the data with last year’s survey to identify trends in tax preparation costs. The numbers show that costs are on the rise for both software and paid preparers, though software is still considerably cheaper. The following are average starting prices rounded to the nearest dollar, with the change from previous year rounded to the nearest whole percent.
|
Paid preparer |
2011 tax year | 2010 tax year | Change |
|
Federal Return |
$112 |
$90 |
Up 24% |
|
State Return |
$15 |
$20 |
Down 27% |
|
Combined |
$127 |
$110 |
Up 15% |
|
Software |
2011 tax year | 2010 tax year | Change |
|
Federal Return |
$27 |
$23 |
Up 16% |
|
State Return |
$22 |
$20 |
Up 10% |
|
Combined |
$49 |
$43 |
Up 13% |
Average state return costs for paid preparers appear to be coming down because more and more preparers are including them with the cost of federal returns.
Other ways to measure cost
What you pay to prepare your return is just one way of looking at cost. Here are some other things that can affect the cost of your tax returns:
- Paying the right amount. According to the IRS, the average tax refund for the 2010 tax year was $3,003. Adjusted for inflation and projected over 50 years of paying taxes, this would come to more than $300,000 you might have coming to you in refunds over the course of your lifetime. Those are high stakes, and even a slight miscalculation could mean a big difference in what you have coming to you.
- Paying the price. There are a variety of penalties for underpaying on your taxes, and cases of tax evasion can carry even stiffer punishment. According to IRS statistics, the number of criminal tax investigations increased by more than 26% from 2008 to 2010. When the IRS recommends a case for prosecution, it gets a conviction about 70% of the time.
- The value of your time. In most cases, the cheapest form of tax preparation is to do it yourself, but you also have to remember that your time is worth something. If paying $100 or so can save you hours of filling out forms and trying to understand the tax code, then it may be well worth it.
The takeaway
Before you make this momentous decision, it’s important to assess not just which tax preparation method has the lowest price tag, but also which gives you the best chance of filing an accurate return without taking up an undue amount of your time.
How do you prepare your taxes? How did you decide which method works best for you?
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I no longer trust any of the cheap ways to do my taxes. The software algorithms are geared toward keeping the company out of disputes – in other words, they heavily favor the government over the tax payer and overlook perfectly legit deductions. They have their reason for doing this. But what it means is that choosing a cheap method can cost you !
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I may not agree with you. Tax preparer companies compete with each other for client’s business. If they can’t take care of every deduction just to be good with government then they should not be doing business.
Millions of Americans use different tax software/tools If a legit deduction is not entertained that news would go viral and can take company out of business.
I do my taxes every year for free with TaxAct, and I know I haven’t missed any breaks which is legally mine.
Not sure which one you are referring to in particular.
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That’s quite a thorough overview
Even though I’m not in the U.S., it’s a good framework for trying to make this decision.
I’m surprised that the poster didn’t mention audit protection. I have an accountant handle my return (it’s not a simple one!) so I know it’s done right and I’ve got a professional to back me up if I’m ever audited. Having that support and having a professional who can answer my questions was a crucial part of my decision.
I’ve noticed that some tax software offers audit protection and customer support as well (for instance, Turbo Tax has an “Ask Caroline” feature here in Canada.) That kind of personal help may be important to some people.
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Funny, I just wrote about this for today. I’ve been using TurboTax for a few years myself, and have found it to be pretty reasonably priced and very reassuring. I feel pretty confident about the accuracy of my return as they update the online software every year and include previous infromation to double check if what I put in makes sense for me. There’s also a help line available, though I’ve never used it so I can’t comment on how useful it is.
I think for young people out there with simple to moderate tax situatuions, doing it on your own is pretty straightforward with some software. If my situation were a little more complicated and I had more to lose with a mistake…I might go to a professional.
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I think the complexity of one’s taxes also have an impact on the decision. As mentioned, if it’s going to take you hours to figure out what forms you need to fill out, what deductions you are entitled to etc. then it can be worth it to pay someone else to do it and ensure it’s done right.
I’m not in the US but I do ours by hand because they are pretty simple to do but if either my spouse or I were self-employed (not taxed outright at work) or dealing with certain types of social assistance, or massive amounts of foreign investment then I likely would hire someone else.
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Hi Sarah, that is a very good point. I AM self-employed and my taxes are quite complicated. But my CPA probably saves me more money and I sleep better at night. I pay him a lot, but I feel that he keeps things straight so that I don’t have to worry. And not worrying is priceless!
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My husband is self-employed and this made us tear our hair out (and now we’ve moved internationally) until we found a great accountant. Nevertheless, I keep trying. I dutifully run the numbers through one of the free programs, get a our tax owed/due number, then send everything to the accountant. I am invariably wrong. I do this every spring. It’s one of my rituals
. My husband says when I get within $10 of the accountant’s figure, I can do them.
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Hi KS, you may not be aware this, but the tax programs available to you are different from the program(s) that the accountants use. They are able to get you bigger refunds or you end up owing less.
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My husband periodically talks about starting his own business and whenever he brings it up I remind him that if he does, I will no longer be doing his taxes.
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Who comes out ahead- the accountant or your own numbers? I generally do my own taxes but I am afraid that I am not getting all of the refund that I could be. This year I am seriously considering having someone else do them even though I have already input the numbers into a software system. This year it is more difficult because we have income from our side gigs and I want to make sure it is all done correctly.
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Taking your paperwork to a CPA for one year to give you peace of mind and reassurance can be a good thing. Then you’ll know if you need to keep going or you are capable!
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The fact that so many people have a difficult time doing their own taxes is all the proof I need that the system is too complicated. When many people have to pay a specialist hundreds of dollars, or hope that a computer system is accurate, how are they supposed to elect people to fix the system? We don’t even understand it! I really think this should be a priority for governments across the Western World.
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Innumeracy is the problem. You have to remember that more than half of Americans are below average in intelligence.
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Where I work, a number of people can’t do their own taxes. And, I assure you, it’s not a tax code thing. It’s a numbers and low literacy thing. If you can’t read well, or you are not good with numbers, taxes will be hard no matter what they are (unless the gov’t just takes your money and gives no refund for overpayment).
Think of it like housecleaning: it’s not that hard, but you do have to work at it, and some people just aren’t good at it. So they hire a professional. Nothing wrong with that.
For what it’s worth — I don’t own a home or anything complicated — I have done my own taxes since I was a teen. I’ve found the whole process pretty darn simple even though I have never had just one job (usually 3 or 4) and sometimes have worked in multiple states. It takes time, memory, and reading skills. If you’re short on any of those, I suggest getting a professional to do your taxes.
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I do mine myself. For me, anyway, it’s not that hard to figure it out. My returns aren’t super complicated (I’m not self-employed and I don’t have foreign income), but they aren’t super easy either (I have some investment income, an ESPP, etc.). It takes me about an hour to do my taxes by hand, then I have to go in and fill them out online.
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For the past 5 years since college, I’ve done my taxes both by hiring someone to do it and by using software to do it myself. Doing it myself is my current approach, which costs me $50-60 per year. My tax situation is fairly simple so this only takes me a few hours to do. I’ve only used Turbo Tax and can honestly say that it’s a pleasure to use.
Hiring my taxes out was costing me $150 or so per year, which is three times that of doing it myself. I chose to do it myself because I wanted to feel good about knowing how to do it myself. It’s actually more work hiring it out, as you need to send papers back and forth and make phone calls. This way, I handle it all and get it done, when I want it done. I feel better doing it myself!
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“Paying the right amount. According to the IRS, the average tax refund for the 2010 tax year was $3,003. Adjusted for inflation and projected over 50 years of paying taxes, this would come to more than $300,000 you might have coming to you in refunds over the course of your lifetime.”
This is blantantly incorrect. The average household does not get $3,0003 per year in refunds. The average refund is that much. So, if 50% of the people get a refund that’s an expected $150,000 per year. If it’s 50%. A quick google tour leads me to believe 41% do not do file taxes at all. Say 20% of the people who do file taxes get a refund, that’s 20% of the 60% for a total of 12% of households.
Which would be an expected average return of $36000 (not counting inflation) rather than $300.000 over a lifetime. But again, you’re overlooking the fact that quite a few of those refunds are for very specific cases. So, think if there’s any special expenditures you’ve made this year. Nothing special in your life? Nothing special in your taxes most likely.
Don’t get frightened into thinking you need a professional because you’re missing out on $300.000…
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Sonja, I appreciate your point, but this does not mean the article is “blatantly incorrect.” The key word in the section you cite is “might.” I didn’t say this is what you probably have coming in lifetime refunds, but the point was to give a sense of the kind of money that can be at stake when you do your tax returns.
Both the IRS and I describe $3,003 as the average refund – neither they nor I describe this as what the average household gets. So, the section on paying the right amount is correct as written.
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In the last four years I’ve used TurboTax ($30?)once, a CPA once(about $125), and went to H&R Block twice.
Since I stayed home part of the year last year (I’m still home with the baby) I think it will be easier for me to do my taxes online.
Last year I paid H&R Block about $300. I like that they protect you if you get audited. But this year I’m going to face my fear of getting audited and do them online with TurboTax. It should be easy and inexpensive. I already took a test drive and it seems like they are easier to use than I remember.
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I’ve been using Turbo Tax since 2008, and as I am a W-2 worker with some 1099 income, no real estate, and take standard deductions, a tax preparation software is adequate for my needs. As my tax situation become more complicated I imagine I will need professional help.
Plus, this year I actually won a Turbo Tax giveaway from another personal finance blog… so filing will be free for me.
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When I was single and had only one job, I did everything myself….I started paying a CPA the year (long ago) that I got: 1. Divorced, 2. Laid off, 3. Unemployment, and 4. Part-time work. I’m a smart cookie, but all of the combined factors left me feeling at sea.
Since then I’ve stayed with him faithfully, I have a steady W2 job (or two) and 1-2 1099 jobs, and occasional other side hack jobs, so I really rely on his expertise. (hey, I wouldn’t want him doing my job, right? I’m happy to pay him to do his.)
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That’s a great overview!
One caveat – if you live in NYC, as I do, tax prep costs for having someone do it for you are more like $300-400. But it’s worth it to me. I was audited once, a hellish experience, and having an accountant to walk me through it helped enormously. (BTW, in the end I owed exactly nothing, $0.00. Keep those receipts!)
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The costs listed were almost bizarre. It seems like the costs between NYC and Kansas City were flipped for some of the numbers.
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Steve:
I know what you mean – one tends to associate New York City with high costs. However, our researchers double-checked and the figures are correct. Sometimes, a higher concentration of competing services in a big city can drive prices down, which may be why New York’s price quotes were lower than Kansas City’s.
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Here on campus, our accounting students work under the supervision of professors in the VITA program, where they do tax returns for free. They are then checked by professionals before filing. The students do simple AND complicated returns because they need real world experience, so they are glad to wrestle with problems. I will never forget the year that one of my children sold a short story in England and was paid in pounds — the student nearly dance with delight at this new challenge.
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I am a volunteer tax preparer for the VITA program, which I found out about through my accounting professor. It is a tax preparation service for eligible low income taxpayers. It’s a great way to learn about the accounting world and, as a bonus, is a rewarding experience. Volunteers can get their taxes done for free through this program. (Unfortunately, I had already filed through TurboTax when I learned this.)
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I volunteered for the VITA program when I was in college!
Some places like senior centers, etc. offer free tax prep to people of all ages. Doesn’t hurt to look around. My credit union advertised the free filing options in our state.
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The article didn’t mention another free option — the VITA and TCE volunteer tax clinics. I’ve been volunteering locally for several years. The IRS provides certification for preparers on many types of returns, including Military, Schedule C, and International returns. We even have some CPA’s, paid preparers, and ex-IRS employees working at our clinic.
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Don’t go for the cheap alternative if you honestly don’t know what you’re doing.
I usually use tax prep software, but there have been years where I turned it over to a trusted tax pro and, as an earlier comment stated, not worrying is priceless.
In 2008 I moved twice and owed state income taxes in 3 states and 1city. In 2009 there were capital gains, depreciation, and some other self-employment issues to deal with. The $250 fee for a good accountant is an expense I will never regret.
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I had a rude surprise this year when Turbo Tax (which I’ve used for the last three years) told me I had deferred payments on income from previous years to this one. Whoa – What?? Sure enough, in looking back over the forms for the last two years, which I should have checked before E-filing naturally, I found this crazy check box buried in the middle of lots of text. I had sold IRA shares in small chunks (and then converted to a Roth) to make the tax burden less painful – paying taxes over several years. This was on purpose, but the software had made sure I “had the largest possible return” for me, totally reversing all my planning. Grrrr!!! And I can’t blame anyone but myself for not looking thru the fine print before clicking “File.”
The years I bought and sold my first house, moved for a new job, and took the down payments out of my investments, I hired a CPA and they were great!
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I used TurboTax for the first time this year and it was pretty simple and easy. Previously I used H&R Block but was really angry last year when their advertised special made it look like it would be free/cheap, but the bill was suddenly over $200 dollars because of less than a dollar of interest on a money market bank account. Doing it myself is far better than being surprised with a huge fee.
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I’ve been filing my taxes online pretty much since I started having anything worthwhile to file late in high school or beginning college. At first I used H&R Block (it was recommended, and very cheap at the time as online systems were just beginning to spread), but when I found out that State Farm, who I have accounts with, has an agreement with Turbo Tax for completely free “Deluxe” tax filing (including state) for its customers, I switched to Turbo Tax and have been with them ever since.
Still being rather young and not near high income, my tax situation is rather simple and it’s a breeze for the most part doing them on my own. However, like others here, as I advance professionally my situation is getting gradually more complicated, and I have a feeling that especially by the time (if it happens) I start itemizing deductions, I’ll probably pay someone to do it.
That is surely just one of the consequences of getting rich slowly!
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I’ve used an accountant since I bought my house. I think I was paying around $100 or so until moving to a different state for half a year and having my house a rental (and I had a few 1099s). That year I paid $325, but he got me every deduction possible. Before getting married I told my husband we’d be using the accountant. I used to watch him spend time over weeks sweating the tax process, and it was just too complicated. We paid $765 last year which seems high but I think well worth it. He reviewed my husband previous returns and found major red flags in his returns (turbo tax and tax act) that I’ve got my fingers crossed we don’t get audited for. I don’t think we will pay that much this year since I’ve taken over all bookkeeping for my husband’s freelance work and our rental property. I think it’s worth paying for the accountant for peace of mind and to save our sanity.
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I’d be interested in hearing from someone who found that a CPA got them a better refund than TurboTax/etc. I use TurboTax and my taxes are somewhat complicated (for example, this year we lived in 2 states, I ran a sole proprietorship in both states, my husband was a student, we rolled over 2 401ks and made qualified IRA withdrawals).
I wouldn’t mind paying someone if I thought they would get me more money, but TurboTax seems very thorough and in all my reading I’ve never come across a deduction I think they missed.
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I make that exact offer to my clients. I have them bring in their TurboTax (or any other software) prepared return. If I can’t save them at least the difference between my fees and what TurboTax costs, I tell them that they don’t need me and that they are capable of doing it themselves. I find that on average around 80% of the people either substantially overpay or grossly underpay.
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We use a professional tax preparer. My husband is self employed and we have investments that are too complicated for me to sort through. I don’t want to spend 15 hours trying to do it myself and perhaps missing a few deductions or making a mistake. It’s well worth the money to have a pro do it–and I can spend that time saving money in another aspect of my life.
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Good information. I wait till there is a sale on H&R Block Federal & State with free eFile. It usually runs me around $25 each year.
This year I got it for $25 again in January.
Slickdeals.net posts the tax software deals.
I go with tax software because its easy and quick. I would be worried to do it all by hand and make an error that would cost me. Plus the time that would go into doing all that.
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Good information. I wait till there is a sale on H&R Block Federal & State with free eFile. It usually runs me around $25 each year.
This year I got it for $25 again in January.
slickdeals.net posts the tax software deals.
I go with tax software because its easy and quick. I would be worried to do it all by hand and make an error that would cost me. Plus the time that would go into doing all that.
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I used to do my taxes by hand on paper. When I moved in with my parents, I started using my dad’s professional tax preparation software, but I kinda missed knowing “why” I was getting a certain amount in deductions. It does require some trust in the program, but mostly I enjoy accounting and doing taxes. The last two years I’ve done TaxAct online and have been very happy. I do their free 1040 filing then take my AGI numbers over to my state website (Utah) and submit that information online free.
My taxes are not too complicated, though I do have a small side business that I’ve gotten a little bit of a business loss from the last couple years and am getting a depreciation on some equipment. TaxAct walked me through the process better than the professional software had, and I’m happy with the results.
That said, I ENJOY doing taxes. If mine were any more complicated or if I didn’t enjoy doing them, I’d take them to a professional in a heartbeat. Not to H&R Block, though; I haven’t heard good things about them. I’d go to a CPA (which H&R Block employees definitely are NOT).
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I’ve gone back and forth over the years- when I was younger it was pretty straightforward with only W2s and minimal interest income. Then, as I started investing and purchased a home I started going to H&R Block and was quite satisfied. However, as I started investing more, and dealing with workplace stock options, ESPP, RSUs etc. I realized it was just as much work getting all the information together to provide to the tax accountant, so I started using Turbo Tax 4 years ago with no issues. No matter what method you choose, you are still on the hook to provide accurate information to the “preparer” and review your return. Most of the “peace of mind guarantees” have small print that only applies if they make a mistake.If you provide incorrect infomation or omit information and you get audited, you’re on your own to consult an attorney.
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I think people are putting a little too much stock in the “audit protection” offered by H&R Block and others. This is more accurately described as “audit support.” In other words, if you get audited, they will make sure they saved a copy of your return, provide you with a 1-800 number you can call with questions, and give you a nice shiny brochure that talks about IRS audits.
Need an attorney? Hire one yourself (though they will be happy to make a referral). Turns out you underpaid? It’s coming out of your pocket. Get hit with a penalty? You’re on your own.
The only “guarantee” they provide is against mathematical errors generated by the software or themselves. If you gave them the wrong number or claimed something you shouldn’t, you are on your own.
My advice: self-educate and do your own taxes (knowing the risk but pocketing the savings), or hire a real CPA. H&R Block people are usually just high school graduates who input your data into a computer program that’s just like TaxCut (or others). If you think that is “protecting” you, you are in for a rude surprise if you ever get audited.
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This is just my own experience, and my tax situation isn’t that unique, but I’ve been pretty happy with cheap tax software. I use TaxCut (now H&R Block at Home), and have managed it to get it for free or extremely inexpensively via SlickDeals for the past several years.
When my tax situation was more complicated (and I had to file in 3 states due to consulting work), I hired a family recommended CPA to do my returns. I double checked his work and found some mistakes that necessitated me having to redo them, so I don’t buy the notion that you always get what you pay for.
YMMV.
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I did our taxes back when we were both employed by other people and had an out of state tax return (live in Washington, worked in Oregon) with itemized deductions. Then hubby started his own business. Depreciation on equipment, payments on a non-compete agreement… I barely UNDERSTAND our tax returns anymore. We pay an accountant a lot of money each year to do the business and personal taxes, but I would have no confidence in doing otherwise.
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My father-in-law owned his own business and did his own taxes to “save money”. At some point after a few years of that he had to consult a CPA on his taxes and was told he had been doing some things wrong. The CPA reviewed and refiled on some previous years and was able to get my father-in-law more money he had been entitled to.
I have no trouble paying a person that knows what they are doing.
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I have my CPA prepare my taxes. I have used him for 25 years. I generally create a spread sheet and fax the information to him along with the W-2s, 1099′s etc. In the long run, it is cheap money because I can ask him questions during the year for free.
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I did my and my partner’s taxes using TurboTax free edition online. Unfortunately, I didn’t buy the audit protection and since we filed my partner received a W-2 that we weren’t expecting, postmarked on February 8th.
I went into TurboTax and it says we will have to file by paper. We can update the forms and print them and send them in, my partner only got an extra $50 on the return and we haven’t spent it all yet so it’s fine… I’m just worried about what happens if we get audited. (My tax returns of course won’t be included since we’re not married, but it’s still a hassle.) I guess I’m wondering if there’s any way to tack a note on that says “HEY! Sorry this income didn’t get included, it wasn’t earned in 2011 therefore wasn’t expected AND was late from the company, oh so sorry, promise it wasn’t intentional, please take this money.”
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You need to file a 1040X with the additional W-2 income. File by April 17 and there will be no penalty and no need to worry about an audit! It’s unlikely they would audit you over that though, they would probably just send a notice saying that you left off $50 of income and asking for the additional tax, interest and penalties.
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What Ritz says — don’t worry at all. Just file an amended tax return and pay any difference. I work for lots of different places, and two different years saw me not getting/forgetting about a W2. You only get dinged if the IRS catches the mistake after mid-April.
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I agree with ritz and Leah. File an amended return (Form 1040X) on paper and rest easy. Don’t forget to file an amended state return as well.
I have a question about what you wrote: “it wasn’t earned in 2011 therefore wasn’t expected”. When was it earned? If it wasn’t earned in 2011, it generally doesn’t go on the 2011 return.
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Brigitte –
This is a fairly common thing, and no need to worry. You just need to file an amendment to your return (http://www.irs.gov/taxtopics/tc308.html). This process has its own form. DO NOT just correct and resend the original return. That will screw things up.
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I do my taxes by hand. If you are filing an 1040EZ, there is ZERO REASON WHATSOEVER to purchase software or pay anyone for the federal taxes. It takes about 10 minutes.
The first time I did my own taxes, I educated myself on how they worked and what different tax situations were. The IRS has a useful tutorial site with simulations and once I did all of them, I had a good understanding on how things worked.
http://www.irs.gov/app/understandingTaxes/student/simulations.jsp
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I do my own taxes, but I am a CPA.
However, my husband did his own taxes before we even met, and I did mine before I became a CPA. We don’t really have very complicated taxes to begin with.
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I always do my return in two different tax preparation software packages to try and catch errors. It seems like one package will always have some sort of small problem that shows up obviously in the other. Asking the same questions in different ways also seems to jog my memory about some deduction I forgot about. For the past few years I have done my taxes in both TurboTax and TaxAct (both the online additions) and filed with TaxAct because it’s cheaper. Don’t worry, the second time you type your taxes into a tax preparation program ends up being much quicker than the first time through.
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For the first 14 years of my marriage I did our taxes. Then we had a complicated situation come along–we were selling my grandmother’s house that was left to myself and one sister, but wanted to include the third sister who came along after the will was written, and I also needed to be paid back for expenses related to upkeep of the house. We started with an accountant that year, and for the last 4 years he has done our taxes. We pay $150 and I must say for me it has been very freeing letting someone else worry about getting every little detail right.
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I do it on free online TurboTax and also by hand, and usually end up filing the by hand version because I’m cheap. I’ve learned more and understand it better after going through the instructions manually, but TurboTax has caught a few errors here and there.
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My father-in-law owned his own business and did his own taxes to “save money”. At some point after a few years of that he had to consult a CPA on his taxes and was told he had been doing some things wrong. The CPA reviewed and refiled on some previous years and was able to get my father-in-law more money he had been entitled to.
I have no trouble paying a person that knows what they are doing.
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I have used TaxAct online for the last several years because it has no income limit for the free version, and the free version allows you to itemize deductions. My state (Ohio) has free electronic filing on its web site.
At the beginning of each year, I make a new file folder for all of my tax-related documents and receipts so I know where to find everything when I need it. I also keep a running checklist of all the forms I should receive (W-2, 1098, 1099′s) and add to it if I open a new account. I can knock out my federal, state, and local returns in just a few hours, so I don’t really feel like it’s worth it to pay someone to do it.
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When you compose a list of Canadian solutions, let me know. I wish we had half the tax breaks that Americans have. Write-offs on mortgage interest and mileage for volunteer activities?? Paradise.
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The huge and seemingly random list of write-offs and exceptions is what makes our tax code so complicated.
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Absolutely. My mother’s birthday was January 1, and the year she turned 65, she got to take two deductions for herself. Explain that in a rational world.
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This article was interesting, but doesn’t really help me decide how to do my taxes. Has anyone done multiple options for the same year, and had them come out differently?
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You could take your return to 10 places, CPAs, H&R Block, Software and I bet most of them would come out different. =)
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Steve, I realize you posted your comments months ago but wanted to address your post – this will be a long one… I have done my taxes two ways for the past 6 years — first by hand and then using Turbo Tax. I have always found TurboTax to come up with the same exact numbers and refund/amount owed as I found by hand and generally trust their product. That being said, there were a few times this year and in the past when their numbers didn’t match up with mine, and that is because of improper wording on the state tax forms which TT (like so many other online sites) just doesn’t put as much attention to. In general, I find Turbo’s interview questions for the federal forms to be most accurate as much of what they ask you is exactly what you’ll find on the official IRS tax documents (but much easier to understand), but if they or another software word something weirdly you can miss out on deductions you otherwise deserve. This is where doing taxes on your own and learning the tax code, as annoying as it might be, will come in handy as I was then able to go back into the program and get the numbers to match up. If you don’t have time to do this on your own, then I would say go to a tax pro but like anything do your research and make sure they have a good reputation as this article suggests so you aren’t putting your tax info into the wrong hands or someone who just doesn’t care enough to get you your proper refund.
This year, I also used TurboTax’s new online chat and phone service which is free to all users and even if you choose not to file your taxes with them. They were very helpful with some situations and sometimes not so much but it taught me something new: go with an EA, which means the individual went through the most testing and is the highest authorization for a tax pro (even higher than a CPA). Sometimes I disagreed with what the CPAs on TT suggested, but the EAs there were always 100% accurate and gave me the answers I needed quickly and efficiently. Actually, if TT hadn’t raised their prices and if I didn’t have to file taxes in two different states this year due to working in two states, I would have gone with them. But their prices rack up if you file a federal plus two states. So this year was the first time ever that I did not use Turbo Tax — but only because of financial reasons. Having tried out four other options this year, I have to say TT is still by far the most accurate and user friendly.
Additionally, Steve you asked another person to post if they had compared different softwares. I actually have. Since this year my tax situation was more complicated (I had capital gains plus moving expenses for my spouse’s job and had to file in two states for the first time — none of which we’ve dealt with before), I checked multiple options to ensure we were doing our taxes right. After using TT and filing by hand, I also went to a local H&R Block, using their Free Second Look service in which they look over your current or past year’s tax forms to see if you missed anything — this service is free. They also got the same exact numbers I already had found on TT and by myself, BUT only after I disagreed with the agent on a few points and she looked it up and realized I was right and knew more about the specific tax rules on that issue than she did (again only because I had done my research and read the tax code before; she then offered me a job lol). So essentially, they just plug in your numbers and as she said “rely on their computer” to find all your eligible deductions. But if they input something in the wrong field, they too can overlook something. So I would have to tentatively agree with what others here have said about H&R Block just because my person was knowledgeable, but would have made a costly mistake if I hadn’t urged her to look again at a few forms.
Aside from H&R Block, I also saw a tax pro who specializes in my line of business to get another opinion. After looking over my tax forms, he gave me valuable advice that neither TT or H&R Block had: that because this year I had both W2 income and 1099 income for my business as a sole proprietor, I would need to split my expenses between the two incomes and report some on my Schedule C and some on a Schedule A. In doing research on my own, I had only come across this issue once online and didn’t realize it applied to me. So going to a tax pro who knew what he was doing was extremely helpful as I learned something new that I will need to do for now on. In that process I also learned that the going rate for tax pros seems to be about $200-$250 to file everything (including your state taxes and federal forms, no matter how complicated your tax situation) and this applies to both NY and CA — by the way, the lowest phone quote per this article for CA says $50; would be curious to know who that was as everyone quoted me much higher but maybe that was for a 1040EZ return and I was filing a 1040. For my fairly complicated tax situation this year, I received around the $200 quote from three different sources; a friend of mine sees a tax pro every year and has a much more simple tax situation than mine with only one W2 and is single, and she was quoted $150. Turbo Tax this year, with filing two state returns plus federal, would have cost me approx. $130 plus another $40 for their audit support so $170 total — which was almost as much as just going to a tax pro. This is why I chose not to go with TT this year despite still using their software to double check my numbers.
Because I needed to file in two states, I looked up all my options to find some software that didn’t charge upwards of $20-40 per state as to me that seemed ridiculous. So I guess you can say I turned to the more reputable cheaper software sites that allow you to just file state-only returns as I was planning to prepare my federal return by hand, given that I had to also include a statement showing how I allocated expenses between a Schedule C and A. See? Very complicated this year.
I tried out OLT.com (On-Line Taxes, Inc.) and OnePrice Taxes. Both were priced similarly but while OnePrice Taxes had a more user-friendly interface closer to TurboTax, the site lacks customer service and aren’t as quick in responding to emails — they say they have a chat option but every time I clicked on it, I got the message “Sorry, we’re not here right now but send us an email” – I sent them two emails and got no response to either (believe me, I checked my spam messages and nada). I also could not enter interest from a government bond on their website as it says it is “not supported,” yet nowhere on their site, prior to my signing up, does it tell you that you can’t enter that data. A bit of a let down actually. So despite the good PR on OnePrice Taxes, where everything on their site is advertised to be the same price, I ended up using OLT, which has free customer service via online chat or phone, just like TurboTax, supported everything I needed and was also fairly quick and easy to use. I found just two glitches in their software where info wasn’t automatically transferring over to my forms (problems I didn’t experience with TurboTax), but I do have to say within 24 hours OLT had the issues fixed and were prompt in sending me an email to correct the problem. And both of those glitches had to do with the state forms, which again, from my having tried out several online software programs, I found on all of them — including the godly TurboTax — that the questions asked for the state forms are not as specific and if you don’t read the actual state instructions yourself, you could potentially miss out on situations that apply to you or input the wrong info. This is where a service like OLT’s or TurboTax’s free chat or phone support helps you out, for you can inquire exactly what a specific question is asking for and ensure you are entering in the correct amounts.
Overall, I would say go with whatever option seems best to you but always do your research. By comparing different sites/resources and going to a tax pro in person, I was able to maximize my refund and ensure I was doing everything right. I also learned a lot about taxes in the process and things to look out for in the coming years. For instance, by my having prepared my taxes through TurboTax last year, I knew this coming year we would stand to claim a moving deduction as the move was for work. I wouldn’t have known that option existed had I not prepared my own taxes and thus learned that this particular deduction existed. I know I was crazy to try so many options but I found that all these tax comparison sites just didn’t delve into each process deeply enough for me and I am the type of person that has to learn for myself. So I hope by my sharing this info here, it is at least helpful to some.
Bottom line, in my opinion the best user-friendly software out there is TurboTax but they can be expensive. Tax pros are good but only if you trust them. If something seems iffy, walk away. H&R Block has a lot of mixed reviews out there so be wary. Turbo also has some negative reviews, but I’d bet those are from people that didn’t input their info correctly and didn’t realize that TT has the free resources in place to help you — both through their software itself and the extra tools of free chat guidance. If you do all that, the software itself works and I can say this firsthand having used TT for 6 years and I’ve never been audited (continuing to knock on wood). OLT is a great alternative if you are looking for something cheaper — but if you need more guidance within the software itself and something more user friendly, than go with TurboTax. One extra cool thing about OLT: they are the only online software program I found — and I looked into at least four other options than the ones I mentioned here — that allows you to include a personal statement with your federal taxes. So if you’re someone like me who has to include a supporting statement showing an allocation method or something else you think will be helpful for the government to know, OLT will allow you to type one up and efile it with the rest of your return. I wish I had known this before as I had already filed my federal forms by hand, which will now take more time to get my refund. Lastly, can’t vouch for OnePriceTaxes as I ended up not using them.
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Thanks for the excellent and detailed writeup!!
It seems to me that if you have to do your own taxes by hand anyways, paying someone (or something) else to do them too kind of defeats the purpose. But then again, “Nobody cares about your money more than you do.”
I am lucky in that my state does not have an income tax. Numerically it makes some sense that state taxes are more expensive – the biggest cost is developing the software, and that cost only gets spread across 1/50th of the population. It’s not quite that simple (since some costs are the same, e.g. advertising; and most state forms/tax codes are simpler; and not all states have income taxes and some states are bigger than others).
I spend only about $15 per year on TT (Basic edition with 25% discount code). Still, the layer of abstraction between the tax code to TT software writers to me is disconcerting and confusing sometimes.
Someone told me that the difference between TurboTax and an accountant is that TT plays it safe on deductions because they have so many people who would sue them if it goes wrong, whereas an accountant would be more agressive because a) s/he is taking the time to actually understand the situation and can be surer the deduction is legal and b) the client is probably only going to come back the following year if the accountant got them a higher refund.
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I think one year I used Turbo to do my taxes first and then did it by hand anyway to double check. For me, it’s about ensuring that the product is doing its job properly so I don’t mind doing it by hand also, and probably would still do that even if I was paying a tax pro to file my taxes. Using a software gives me the benefit of e-filing as there is nothing better than peace of mind in getting your confirmation in 48 hours. But that’s just my preference. I wish my taxes only cost $15. I use the 25% discount as well but it is more expensive since I file for two people. I look forward to next year when I go back to only filing one state!
As for whether Turbo plays it safe with deductions I wouldn’t necessarily think so. I agree with whoever posted here who said that the software found them additional deductions than a tax pro did. When I went to H&R Block, the person tried to convince me I might be eligible for a deduction I knew I was ineligible for. And when I put in my info to TurboTax, it automatically told me that deduction didn’t apply. I think if you use the software and answer the questions exactly as they pertain to your situation, people should come out exactly where they should be. It’s only when questions are worded in a confusing manner that you run into problems — and for that reason I hope it wasn’t just a fluke and TurboTax and the other software programs keep offering free chat in future years and the ability to talk with a live CPA or EA as that was most helpful for me. That one-on-one service almost makes using the softwares a no brainer for me.
But this blog has been most helpful – next year I am definitely checking out Slickdeals!!
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If you have a W-2; 1099-R; 1099-INT; 1099-DIV I suggest free/cheap online software!
If you feel the need to go to a professional–go to a PROFESSIONAL! Professional designations are CPA & EA.
I think EA’s can work under an H&R block name. However, make sure they’re doing the work, not someone who is preparing taxes as a 2nd job off the street. It’ll normally be a home office or small office if they work this way.
H&R Block/Liberty Tax/Jackson Hewitt type places are a rip of in my estimation. They make too many mistakes. Especially if you have a small business. Also, if you walk into an H&R block type of place and purchase their “gold guarantees” or other liability packages they will pay for their mistake (tax, interest & penalty) but you get a 1099 for it the next year and pay tax on the amount.
As far as audit protection goes even if you have a CPA the audit isn’t free.
CPA’s have liability for errors they make. If it’s their error they’re supposed to pay for the interest & penalty. A nice CPA will pay for the error too. If it’s your mistake(i.e. forgot to bring in a form) they might correct it for free but you owe the tax, interest and penalty.
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I used freetaxusa this year. Liked it. Was able to do everything I needed to for our family (adoption credit, deductions, charitable donations, etc.). It didn’t take too long. Then I used it to proof check my state taxes – I do state taxes by hand to be free. As a stay at home mom with just enough extra time, it’s definitely worth it to file taxes for free. Tax fees aren’t in our budget.
I do prefer turbotax for how dummy-free it makes everything. I never worry that I’ve missed something when I use turbo.
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If you are going to start a business, I strongly recommend “penciling” your taxes by hand, before you open your doors. READ the regs, do the paperwork, do the whole drill. KNOW the tax code!
If you don’t, you soon will not be in business!
The tax code is one of the core components of any business, and the key component in all of your bookkeeping. If you know what to track and categorize up front, taxes aren’t that hard – well it’s the difference between heck and hell!
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An accountant’s nightmare is when the client comes in and says, “guess what I did” after the fact. You can save a lot of money by doing the tax research or calling your CPA BEFORE making a decision that you don’t know will affect taxes.
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After being self-employed for 37 years, I find that my CPA is the professional that I trust to do my tax returns. We have never been audited and get expert information which helps us with financial planning.
Our current CPA has helped us by eliminating qurterly estimated tax payments and we now get a small refund check each year.
Should we be audited, our CPA would represent us. She is easily worth what she charges us for our tax returns.
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There is a free version of H&R block online for both federal and state if you made less than $57k at http://myfreetaxes.thebeehive.org/
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I’ve used TurboTax for the past two years and I have received what I thought two decent refunds. After speaking to a friend of mine who showed me his $5300 federal and $700 Louisiana state return, I was perplexed (He belongs to the electrical union) Perhaps, I am going with the wrong tax preparer.
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Your friend got a higher refund than you did because he overpaid his taxes by more than you did. If your goal is to get a big refund, you can get a W-4 form from your employer and request some additional money get withheld from each paycheck. I don’t actually recommend this because it’s giving the government an interest-free loan, but my point is that the amount of your refund has little to do with your tax preparation method and everything to do with the amount of tax that is withheld from your paychecks throughout the year.
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I have been doing my taxes with Turbo Tax for four years. Last year I decided to use HR Block software as well as Turbo Tax and HR Block gave me a much higher return. This year again HR Block gave me $2000 more than Turbo Tax. So I would have to agree with the person who said that “software algorithms are geared toward keeping the company out of disputes”
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Sounds like you need to talk to a CPA!
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Why was H&R blocks higher? Can/will you share what the overlooked deduction or credit was?
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How different are the tax systems between the United Kingdom and United States.
I live in the UK. Most people here don’t need to do a tax return (payroll taxes only) and for those that do the tax paperwork has been getting simpler year on year.
Just wondered if US taxes have been allowed to become overcomplicated.
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In theory, everyone wants to simplify the tax code. (Even many accountants and the IRS!) In practice, whenever somebody proposes eliminating some deduction or other niche that benefits a particular group, people start flipping out. That includes people in that group, people not in that group that dream of being in the group someday, people who never expect to be in that group but are afraid it’s one step towards eliminating their niche benefit of the code.
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I work for an international organizatiion and so do not pay taxes. That’s nice for me but I don’t think that’s good for my Government!
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Every US citizen must file a tax return. You’d better talk to a CPA! It doesn’t mean you necessarily owe tax.
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Since I started my first full-time job, I’ve used a wonderful CPA in my home state in the US. Over the years, he’s seen me get married, have a child, buy rental property, go to school, and now, move abroad. I’m grateful for his expertise!
All US citizens who live abroad are required to file tax returns in the US. The first $92,000 of overseas income is excluded from US taxation, but after that it gets complicated. We’re working on our taxes now, and I’m glad that I have a qualified professional who knows the US tax laws inside and out.
Has the fee for his services increased over the years? Yes. But our tax situation has grown increasingly complicated. I trust his expertise – and that’s worth the expense!
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