It’s tax time! January 31 was the first day that you could file your taxes. I know it’s hard to admit, but the April 15 deadline will be here before you know it. Now is a good time to start thinking about how you are going to prepare your taxes – paper forms, tax software, CPAs, and other hired tax preparers are all options.
I have already been bombarded by ads in my mailbox offering to save me hundreds of dollars on my taxes. It can all be a little overwhelming. How do you know what method to choose? At the end of the day, you should only do what you are comfortable with, but here are a few things to consider:
IRS Free File
If your income is below $58,000, the IRS offers you free federal tax prep software on its website. Some of the participating Free File companies offer free state tax prep and efile as well. If your income is above $58,000, you can still use the fillable forms available on Free File, but you do not have access to the free software to assist you with the preparation.
Who it’s good for: People who do not have complicated financial situations (think one employer, a few investments, and a few deductions). If you are using the fillable forms rather than the software, then you need to be comfortable inputting all the numbers in the correct fields because you will not have software to ask you questions and do the math for you.
Tax Prep Software
There are many different brands of tax software available that all do a similar job. You will probably pay anywhere between $10 and $120 depending on which product you buy, and whether you buy a version that also does your state tax return in addition to the federal return. You can either buy the software online and download it directly to your computer, or you can buy it in a box at the store and install it.
The software will ask you a lot of questions about your financial life to make sure you aren’t missing anything. There is usually a FAQ section to answer basic tax questions such as "how do I claim a mortgage interest deduction?" The software will check your return and will not allow you to file if it determines that your return is incomplete or if it finds discrepancies.
Who it’s good for: People who do not have complex tax situations. If you own a business then this might not be the route for you. Similarly, if you are in a high income tax bracket and want some tax planning assistance then you might not want to use the software. As always, if you are uncomfortable then it is better to consult with a professional.
The costs associated with using a tax professional vary widely. Tax professionals, such as CPAs, are able to customize the support they provide to each individual situation, whereas tax software will ask each person the same exact questions. If you have a complex situation, then a tax professional may be able to provide better advice to make sure you aren’t missing anything. One huge benefit to using a professional is tax planning. Tax year 2013 has ended and you can’t really change what you will owe. However, a professional will be able to look at what happened in 2013 and provide you with guidance to better plan for future tax events in 2014. Also, if you end up getting audited by the IRS then you know you have the backing of a professional who can help you through the process.
Who it’s good for: People who own businesses, have complex financial situations, or who are in a dispute with the IRS. Even if you don’t think your situation is complex, but you are not comfortable using tax software on your own, then this may be the best option for you. When in doubt – talk to a pro.