Tax season is usually focused on one thing- am I getting a refund, and if so, how big is it going to be?
According to the latest numbers, $452 billion in tax refunds were issued for fiscal year 2019. That’s a LOT of money. Even when people understand that this was a result of overpaying on their taxes all year long (therefore, they gave the government an interest-free loan), they still really like the idea of getting a tax refund.
But just because you’re getting a tax refund does NOT mean that you’re paying the least amount in taxes. It simply means that you overpaid your taxes throughout the year. AND you could still be missing out on strategies that could potentially lower your tax burden and decrease the overall amount of taxes that you owe.
Optimizing your finances will require that you have some working knowledge of how taxes work and/or you decide to hire someone to figure out your taxes for you.
But is it always best to hire someone to do your taxes?
The tax code continues to get more complicated with each passing year, so it’s very tempting to simply hand your tax documents off to your nearest tax preparer and cross your fingers that you won’t get a huge tax bill that you can’t afford.
If this is your strategy, then I propose you rethink that strategy going forward. We’ll go over the role of tax preparers, tax planners, and whether you may be better off doing this yourself.
A tax preparer is someone who files your tax returns for you for a fee. The only qualification is that this person has a Preparer Tax Identification Number (PTIN). Their credentials and education levels can vary widely. In fact, the application to obtain your PTIN does not require that you have any credentials or baseline educational qualifications at all (!).
Typically, your tax preparer will have one of the following credentials:
Enrolled agent: An enrolled agent must pass an exam and meet continuing education requirements in order to maintain enrolled agent status. This credential is obtained through the IRS.
CPA (certified public accountant): Requirements are state-specific, but typically includes a bachelor’s degree in accounting, passing the Uniform CPA Exam, and meeting continuing education requirements.
Attorneys who specialize in taxes and tax law may also provide tax preparation services.
The Annual Filing Season Program is open to those who do not currently hold any credentials, but they can earn continuing education credits in order to elevate their level of professionalism. They are referred to as Annual Filing Season Program participants.
Who should use a tax preparer? If you have a relatively simple tax situation, and you don’t mind spending some money in order to save time and have someone assist you in preparing your taxes, then a tax preparer would be a good fit.
Of course, you should be thinking about your taxes all throughout the year, not only during tax season. This is where your tax planner comes into play. Your tax planner should be helping you optimize your taxes so that you’re not unwittingly paying more in taxes than necessary. They are the ones who will strategically help you lower your overall tax burden.
People typically turn to CPA’s, accounting firms, and tax attorneys if they want tax planning advice. Some financial advisors may also offer this service. Tax planning involves looking at your finances in a more comprehensive manner, taking into account any financial goals that you have and ensuring that you are taking any available opportunities to lower your taxes. Rather than a one-time event where you meet with your tax preparer during tax season, you should be communicating with your tax planner throughout the year.
Tax planners are best suited for those who have more complex tax situations (like owning real estate or businesses), and those who are self-employed. This service will be more costly compared to a tax preparation service since it requires much more time and effort throughout the year.
Are you the type of person who loves digging into your numbers? Then perhaps the DIY method is best for you.
Yes, the tax code can get frighteningly complex. But if you’re a W-2 employee with an uncomplicated tax situation, then taxes can be as simple as using the free file option on the IRS website. Many tax software programs, such as Turbo Tax and Tax Act, have free options as well.
And of course, these tax prep programs have paid options. You simply plug in some numbers, and voila! OK, so perhaps it won’t be quite so instantaneous, but as a Turbo Tax user myself, it does make the process relatively easy for us non-accountant folks. As long as you keep good records, your financial life doesn’t go through any major transitions (marriage, divorce, job loss, unexpected windfall, etc), and you’re organized about your taxes throughout the year, you’re good to go until next year’s tax season.
The DIY/Tax Software method best suited for W-2 employees who don’t mind the extra time to file their own taxes. In fact, these people may even find the tax code fun and interesting (yes, people like this exist)! This is the least expensive option, but it will probably be the most time consuming.
As you can see, there are several options available to you when it comes to your taxes. It’s not enough to think about your taxes once a year, or assume that as long as you get a tax refund, you’re good to go. Take stock of your financial situation and determine whether it’s best to pay for a service (either a tax preparation service, a tax planning service, or both), or whether this is a task that you’re ready and willing to take on yourself. If you plan to outsource your taxes, be sure to find a professional that you can trust. You work hard for your money, so be sure that when it comes to your taxes, you’re doing this right!