Should you tackle your own taxes?

Tax refunds may be bigger than usual this year, but the process of actually doing your taxes is tougher — thanks to all the changes in the tax laws. The IRS estimates it will take investors (on average) 23 hours to complete their 1040 forms along with schedules A, B, and C. And if you’re an investor filling out Schedule D, you can tack on an additional eight hours. It’s enough to make you wonder: When should you be doing your taxes yourself? And when should you be farming out the work.

How many people do their taxes themselves? How many have their taxes done for them?
In 2002, about 60 percent of people paid to have their taxes done. The remaining 40 percent did the work themselves, some with pencil and paper, some on the phone, some using tax software programs like Turbo Tax. Interestingly, despite the advent of tax software — which makes the job easier and less error-ridden — the number of people not doing their own taxes has grown considerably over the last 20 years.

According to the IRS, people who did their own taxes in 2002 were two times as likely to have errors in their returns and to overlook legitimate deductions. In other words, the money you spend on a tax preparer may save you money in the long run.

How do you know if hiring a pro to do your taxes makes sense for you?
In general, the simpler your situation, the less you need to worry about hiring out. This year in particular, though, with the changes in the tax code, there are some things you should think twice about handling on your own. For example: Capital gains. Capital gains for 2003 are going to be taxed at two different rates. Those incurred on or before May 5 of last year are taxed at 10 percent or 20 percent, depending on your tax bracket. Those incurred after May 5 are taxed at 5 percent or 15 percent. If you’re an active investor, that math alone may be enough to send you to a tax preparer. 

Another scenario: If you suspect you may be subject to the Alternative Minimum Tax. The AMT was originally devised to make sure that the very rich — who had access to smart accountants savvy at finding loopholes — paid at least some tax. This year, it has its claws into a much bigger share of the middle class. You may be in those ranks if you have a large family, high income or receive a good share of your compensation in stock or stock options.  

Finally, if you or your spouse is in the military. The Military Family Tax Relief Act of 2003 creates new deductions for National Guard and reserve troops, doubles military death benefits and allows military families to apply for retroactive tax refunds back to 1997. There’s a lot of detail there you won’t want to miss out on.

And how do you know if you don’t need a pro?
If your tax situation is pretty simple — if you receive most of your income from wages (on a w-2) and you take standard deductions, or even if you have a few simple itemized deductions (like mortgage interest and charitable contributions) you shouldn’t have much difficulty going it alone. But understand the downside. According to the IRS people who did their own taxes in 2002 were two times as likely to have errors in their returns and to overlook legitimate deductions. In other words, the money you spend on a tax preparer may save you money in the long run.

Let’s say you’re the person who is willing to go it alone. What’s the best way to do your taxes yourself?

Do-it-yourself:
Pencil and paper
If you’re tax situation is very, very simple, you can pick up a pencil and paper and have at it. The good news is that all the tax forms you need are now available online at the IRS’s excellent Web site: www.irs.gov. That site is also a wealth of, believe it or not, easy-to-read information should you have questions. The IRS also has a toll-free hotline to help you at 1-800-TAX-1040. But you should understand if you’re planning on using the helpline that the closer you get to Tax day, the tougher it will be to get through. 

Tax software
Personally, though, I’m a very big fan of tax software. The two leading programs on the market are Turbo Tax and H&R Block TaxCut. The reason I’m such a big proponent of tax software is that many, many tax returns get sent back each year due to errors in math or because you missed a digit in your social security number. The software programs won’t allow you to make these sort of mistakes. (Once you do your taxes using tax software, you should also file electronically by the way. If you’re expecting a refund, it will make its way to you in days rather than weeks. Certainly the money is better off in your hands than in Uncle Sam’s.)

Hiring help is no guarantee of an error-free return, nor is it a guarantee that you’ll catch every deduction. The key is hiring well.

Web-based tax preparers
The third do-it-yourself option is hiring a web-based tax preparation service, which likely uses a program like Turbo Tax or Tax Cut to do your taxes for you. There are many of these services springing up. Some are undoubtedly fine. But make sure before you use one that you’ve checked out with the Better Business Bureau and that it has privacy and security policies that state your personal information will be protected.

And what if you’d rather have someone do your taxes for you? What are your options?

Hiring tax help:
Understand, that hiring help is no guarantee of an error-free return, nor is it a guarantee that you’ll catch every deduction. The key is hiring well.

Tax preparation chains/stores
Generally, if you go to an H&R Block, or another tax preparation store, you’ll pay a fee for each form you ask the preparer to fill out. That means, the more complicated your return, the more the transaction is likely to cost you — just as it would be if you’d hired an accountant. The good thing about storefronts (unlike some accountants) is that they specialize in taking on new business this time of year. You’re not going to walk in and be turned away, generally, or told that you have to file for an extension. They’ve staffed up and they’re waiting for you. If you do go this route, make sure that you’re dealing with a person in the office who has at least a few years experience. And ask what happens if you get audited. In some cases, the tax prep firm will send someone to back you up. In some cases, they won’t. Of course, the former is preferable.

Enrolled agents
Enrolled agents are the only federally licensed tax specialists. They cost more than tax preparers, in general, less than CPAs. Many worked, earlier in their careers, for the IRS and because of that they’re able to handle tougher forms and tougher tax challenges than a tax preparer fresh out of school. They’re well qualified to represent you should you get audited.  The downside to enrolled agents is that there aren’t many of them, but you can find one near you by going to that National Association of Enrolled Agents Web site at www.naea.org

Certified public accountants
CPAS are more expensive than either tax prep services or enrolled agents. Their fees start around $100 an hour and can run triple that, depending on where you live and the accountant you hire. If you decide to go for a CPA make sure you find one who has experience dealing with returns like yours — in other words, if you own a small business, you want a CPA who specializes in small businesses, if you’ve got a slew of stock options, you want a CPA skilled at dealing with that. One good way to find one who would know a lot about a return like yours is to ask colleagues for their recommendations.  Or to find a CPA in your area, go to the American Institute of Certified Public Accountants at: www.aicpa.org.

Tune into "Today": On Monday, March 8, Jean Chatzky will be talking about items in the tax code that can benefit you if you’ve got kids — or older parents — that you’re taking care of financially.

Jean Chatzky is the financial editor for “Today,” editor-at-large at Money magazine and the author of “Talking Money: Everything You Need to Know About Your Finances and Your Future.” Copyright © 2004. For more information, go to her Web site, www.JeanChatzky.com.

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