Why Aren't You Doing Your Own Taxes?
Beverly Goodman
01/29/03 - 01:45 PM EST
More than half the taxpayers in this country pay to have someone else prepare their return.
That shouldn't be.
Frankly, we all should do our own taxes at least occasionally. Only by doing them can we really understand how even seemingly small changes in the tax code can have dramatic results ... and how sometimes the big newsmaking changes won't affect us at all.
"Doing your own taxes forces you to read and get a sense of how your tax liability is calculated," says Martin Nissenbaum, national director of personal income tax planning at Ernst & Young. "If you understand how it works, you can minimize your liability, plus you'll have a better understanding of how the tax system works."
And that doesn't even address the fact that tax preparation can be very expensive -- and because the average refund is less than $2,000, paying anywhere from $100 to $500 to file isn't very cost-effective.
Do It Yourself
Most taxpayers can easily complete their return using readily available tax software. The two most popular are TurboTax and TaxCut. Both use a Q&A format to ensure that you take advantage of any tax breaks you're eligible for. Both can be bought on disc or used on the Web, and they offer an array of services and information for less than the cost of going to the major chains.
"If you're a midlevel taxpayer, earning $100,000 in income and the complexity of your return consists primarily of wages, dividends, itemized deductions and investments, you can do your own taxes," Nissenbaum says. "There's a lot of good information out there. Virtually everyone should be able to come up with a decent return."
You can make it easier on yourself by approaching the process methodically through a few simple steps. First, find all your records. That means receipts, bills and any documentation needed to back up deductions or other claims, as well as last year's return. While this may sound onerous, you'll have to do this even if you have your return prepared professionally.
Second, determine which form you need to file -- 1040EZ (the simplest), 1040A (simple) or the full 1040. Read it over and keep in mind the overall order of the form; it's essentially the same order as the tax calculation. You start with income, subtract adjustments (like pretax contributions to an IRA or 401(k)). That's your adjusted gross income (AGI).
Next, you'll whittle your AGI down through whatever deductions you're eligible for. The number you eventually get is your taxable income. Determine the tax you owe, subtract the tax you've already paid and subtract any credits you're eligible for. The forms are numbered, and each number corresponds to an explanation in the instruction book.
You'll probably have to file schedules, which are separate forms for common tax issues, such as itemizing deductions (Schedule A), running a side or home business (Schedule C) or reporting capital gains (Schedule D).
When You Need Help
Now, we're not saying doing your own taxes is
easy. It can be tough to slog through at times, but there's a wealth of information at your disposal. A particularly good source is J.K. Lasser's
Your Income Tax, and of course there's the Internal Revenue Service's Web site,
www.irs.gov.
The chain preparers are certainly a viable alternative for those looking for the easy way out, but if you have a complicated return or require some strategizing and planning, you're likely better off with a CPA.
If you own a business that has a lot of assets and a sizeable payroll, for instance, a CPA is probably the way to go. The same is true if you're dealing with estate issues. Major life changes such as a divorce, first child or a major casualty might require more careful analysis that CPAs specialize in.
If you decide you need help, make sure you understand the interpretations and decisions your preparer is making. You also need to be comfortable with your preparer's level of aggressiveness. After all, you're the one ultimately responsible for your return.
All the more reason for you to understand what goes into it.
