When Should You Seek a Tax Preparation Service?

Kacie asked the following question:

When is it a good idea to seek a tax professional for filing taxes? What are some scenarios that are too complicated for filing taxes yourself? Case in point: 2007 is my weirdest tax year yet. I got married, moved to a new state (and have income in both), freelance income from a third state (nothing withheld from that), and have six different jobs between DH and I during 07. Do you think I could still figure my taxes (and not overpay) using TurboTax or something similar? Or should I see a CPA this year?

There are two things to consider when thinking about doing your own taxes:

  1. Time: If you have the time to work on your taxes and like dealing with math and details, then doing your own taxes could work for you.
  2. Level of Complexity. Do you own a part-time business, have sold a home, own rental properties? All of these situations result in more complicated tax returns. In Kacie’s case, the difficulty won’t be in putting her federal tax return together but the state tax returns. Even though Kacie and her husband had more than one job each last year, they will each get (or should anyway) a W-2 for each of those jobs. Kacie should get a 1099-MISC form for her freelance job. This takes care of income. She also got married last year. The IRS doesn’t care when you got married last year, what matters is whether you were married as of 12/31/07 or not. So even if you got married on the last day of the year, you get to file as a married couple for the whole year. The same situation happens if you had a child. Even though our son was born at the end of the year last year, all the IRS cares about is that as of 12/31/07 we had two dependents living with us. So for Kacie, she gets to file as married (filing jointly or separately, their choice but jointly is almost always more advantageous), enter as many W-2s as they had jobs last year, and if she uses any tax preparation software will help her figure out how to take care of her freelance income. But like I said the difficulty of her tax return will be in the state income tax return because she needs to file taxes possibly with three states: two returns for the states they were partial residents last year and possibly another one for the state where her contractor is located. Kacie will need to contact the Department of Revenue for the state where her contractor is located and determine if she needs to file a state return with them.

So, in Kacie’s case she needs to determine how much time she can dedicate to putting her state tax returns together. Most state’s Department of Revenue provide guidance on their website as to how to prepare and file their state tax returns. I can’t tell how hard or easy it will be to prepare her state tax returns but I would suggest looking into it. Most states piggyback from the federal tax return, meaning a lot of information to put your state tax return together comes from your federal tax return.

She also asked:

  • Can you deduct the cost of the tax prep/filing service? Or does that apply only if you itemize?

In most cases you can only deduct the cost of tax preparation if you are itemizing. However, because you have freelance income you are able to deduct this cost as part of expenses from your freelance income.

  • What are the benefits to itemizing deductions or just taking the standard deduction?

Itemizing makes the most sense when your itemized total is larger than your standard deduction. For example this year, because of our payments for mortgage interest, our total itemized is around $23K. Our standard deduction would only be $10,700. Because we are itemizing, we are able to shave around $2,000 from our income tax liability. Unless your amount is lower than the standard deduction, you should always choose to itemize. However, some individuals choose to always take the standard deduction because it simplifies their tax return and also lowers the chance of getting audited by the IRS. But you shouldn’t leave money on the table just out of fear. If you have support for every item in your tax return, there is no reason to fear an audit by the IRS.

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