Complex filings may call for tax professionals
By Hope Yen
The April 15 deadline is fast approaching for filing taxes. If you haven't started yet, you may be tempted to pay for a professional service. Is that the wise thing to do?
While preparing a tax return can appear daunting, in many cases individuals and couples can handle the task on their own, particularly if they earn most of their income from wages and take the standard deduction.
However, those who recently bought a home or refinanced their mortgage, hold significant investments or anticipate having many itemized deductions should consider a professional to maximize savings and avoid the hassle of filling out several forms, experts say.
"In general, if people have been doing their taxes for a number of years and haven't had a dramatic change in their lives in terms of their filing status or employment, they should be able to handle the taxes themselves," said Mari McQueen, associate editor at Consumer Reports magazine.
McQueen said in those situations, people generally know what to expect based on their calculations in previous years, and would likely take less than the estimated average of 13 hours to prepare a federal tax return. Using tax preparation software also can help, she said.
"Certain errors are very common and result in either (the return) being kicked back or having a delay in the refund," McQueen said. "These are things like omitting Social Security numbers or arithmetic errors. That is one thing software is good for, because it cuts down on those problems."
Going it alone isn't always the best option, however.
Individuals may miscalculate or lose out on significant deductions, especially if they own a small business, had a sudden windfall such as an inheritance, are self-employed or have significant capital gains or rental income, said Gerry Voss, an enrolled agent in Hazel Park, Mich. Enrolled agents are tax experts licensed by the U.S. Treasury.
For instance, problems might arise for homeowners who refinanced their mortgages or paid points a point is a lender's fee equal to 1 percent of the loan principal since points can only be deducted in certain situations, Voss said.
In addition, taxpayers won't get the benefit of a professional's long-term advice, such as reducing tax bills by increasing before-tax contributions to 401(k) accounts or 529 College Savings Plans, according to Consumer Reports.
Experts advise those interested in hiring a professional to get a referral from friends or family, since levels of experience can vary widely. Individuals also must remember that they are the ones legally responsible for paying the taxes they owe no matter who prepared the return.
Among the choices are tax attorneys who can cost several hundred dollars and typically cater to the wealthy. Enrolled agents may charge $100 or less, depending on the number of forms filed.
Storefront operations such as H&R Block and Jackson Hewitt are other popular options, but in some cases might not be much better than using self-help software. Taxpayers with potentially complicated returns should ask about their expertise, McQueen said.
"There's a wide spread among them as far as how much training they have," she said. "You might get someone who's had 20 hours of classroom instruction and basically just knows how to use the company's proprietary software and input data."
Finally, experts caution against procrastinators who believe they can put off paying taxes by filing for an extension.
Voss said an extension doesn't really make sense for those expecting a refund since that only delays it. And for those who owe taxes, they still must estimate their tax liability and pay that amount by the deadline.