Tax prep costs: What’s it worth to you?

This is a guest post from Richard Barrington, the senior financial analyst at our sister site MoneyRates.com. Richard 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.

Ever tackle one of those do-it-yourself projects, only to have it go terribly wrong?

It’s important to remember that type of experience as tax season approaches. You can spend thousands of dollars on tax preparation, or you can do it yourself for free, with plenty of other options somewhere in between. While it is never good to overpay, the cheap way out often isn’t the best choice when it comes to tax preparation.

To help you make sense of the options, GetRichSlowly.org has conducted its third annual survey of tax preparation costs. Below you will find a discussion of recent trends, a summary of major types of tax preparation assistance, and some examples of specific options that are available.

Why so many choices? Because the best option isn’t the same for everybody. The information presented here is intended to help you get a feel for the best approach for your needs.

Recent cost trends in tax preparation

Researchers for GetRichSlowly.org looked at over 100 different tax preparation options, including paid preparers and various computer-based approaches. Two divergent trends emerged: costs for paid preparers have gone up on average, while costs for computer-based approaches have declined. This widened an already-existing gap between the two methods. The starting cost for a federal and state return is now about $100 more if you use a paid preparer than if you use software.

Looking first at the average cost for paid preparers, the combined state and federal total rose by 11.4 percent, to an average of $141.39. Note that the state figures tend to be a little more erratic from year to year, since preparers sometimes just include those costs in the price of doing a federal return.

As for computer-based approaches, which include both software packages and online preparation, the average cost declined by 15.7 percent, to $41.05. Here again, the state figures tend to be a little unpredictable because they are sometimes simply included in the cost of a federal return.

A hybrid approach is a live video conference with a tax preparation professional. This allows you to do your return via the privacy of your home, but have personal interaction with the preparer. However, the cost of this approach is comparable to the cost of having a preparer do your taxes in-person, so the reason for choosing this option would be convenience rather than cost.

A special wrinkle for this year

Getting professional help with tax preparation may be more important than ever with respect to the 2012 tax year, because the tax code wasn’t completely set until the passage of legislation to avoid the fiscal cliff. While most of the discussion of the fiscal cliff focused on tax rates for 2013, some changes, such as reinstating certain energy-efficiency tax credits, were made retroactive to 2012.

This means that the tax code for 2012 wasn’t even set when the year ended. Unless you have the time and resources to keep track of the final changes, some assistance – either via software or a paid professional – might be crucial this time around.

Why pay more — or at all?

Should you be willing to pay $100 more to have your tax return prepared by someone else, as opposed to using software to do it yourself? Come to think of it, why pay at all when you can do your taxes online for free at the IRS website using Free File?

The reason you might opt to pay up is that not all the costs of tax preparation can be measured up front. Here are some other considerations:

• According to IRS statistics, more than 110 million tax refunds were issued last year, averaging $2,803 apiece. So, getting what you’re entitled to can more than pay for the cost of tax preparation. Even if you don’t get a refund, the difference between paying too much and paying the right amount can similarly outweigh the cost of paying for tax preparation.
• The cost of making a mistake on your taxes could add more to your tax bill in penalties than you would have paid to have a professional prepare your return.
• A paid preparer might be able to give you advice on actions you could take now to reduce your tax bill in future years, so there could be a payoff beyond just this year’s return.
• You have to weigh the cost of having someone else prepare your taxes against the amount of time it would take you to do it. After all, your time is valuable.

When you choose…

When making your final choice of which method and which provider to use for tax preparation, here are five things to factor into your decision:

1. The approach should match your needs. If your income is straight wages from employment and you have no itemized deductions, then doing your tax returns yourself or using simple, low-cost software should do the trick. However, if your tax situation is more complicated due to investments, expenses or business reasons, you probably could benefit from a more personalized approach.
2. Consider the source. If you use software, make sure it is up-to-date, well-supported and comes from a credible source.
3. Check a paid preparer’s qualifications. For starters, a tax preparer should have a Preparer Tax Identification Number (PTIN), issued by the IRS. Also, the individual responsible for preparing your tax return should either be a CPA, a tax attorney, or someone who meets the IRS requirements to act as an Enrolled Agent or a Registered Tax Return Preparer.
4. Research your preparer’s history. When using a paid preparer, find out how much experience they have, and check with your local Better Business Bureau to see if there have been complaints about them.
5. Ask about audit services. It helps to have assistance from your tax preparer if you are audited. Some preparers include this in the price of your return, others charge extra, and still others don’t provide this service at all. You should know whether your preparer will back up their work if you are audited, and how much it will cost you to get that assistance.

Finally, to give you a feel for the range of pricing for different approaches, here are some of the figures the GetRichSlowly.org survey found:

Software approaches:

Paid preparers:

GRS is committed to helping our readers save and achieve your financial goals.Savings interest rates may be low, but that’s all the more reason to shop for the best rate.Find the highest savings interest rate from Ally Bank, Capital One 360, Everbank, and more.

This article is about Choices, Taxes