Understanding Your Personal Tax Situation
In your lifetime you will likely spend more money on taxes than on anything else. However, if you are like most people, you really don’t know how to control and minimize that expense. It doesn’t have to be that way. Through self-education or hired-help you can pull back the curtain of the tax code and understand the key principals that can have a significant effect on your personal pocket book.
Should You Hire a Tax Preparer or Do It Yourself?
Taxes (and their hired hand, the IRS) invoke fear and trembling into the bravest of souls. People deal with that fear in different ways. Some act like an ostrich, bury their head in the sand and pretend that taxes don’t exist (not recommended). Others act like a frightened bull and face it head on, charging ahead on their own, determined to take on the problem. Many, if not most, are like sheep – timid, careful, and mostly following what they see everyone else doing. However, with knowledge and guidance, I believe that the fear can be removed from the equation and that you can make an educated decision that will bring you piece of mind.
There is no exact science to determine whether or not you would benefit from the help of a tax professional. However, with a little education it can quickly become clear. In just the last week I spoke with three individuals who thought they needed my services. During our 30-minute conversations it was obvious to me that two of them did not need my help – they had been doing things on their own for years and only needed my reassurance that they were not missing anything. With that guidance they felt confident that they could continue to do it themselves without messing things up or giving up more money than they should. On the other hand, it was clear to me that the third individual could really benefit from using my services because his situation had many opportunities that could be taken advantage of, but which required a level of expertise.
While there is no clear formula that will give you the answer to whether or not you should prepare your taxes, here are some questions that you can ask yourself that will help you decide.
How Complicated is Your Tax Picture?
When tax time comes, do your documents only include a W-2 from work, a 1099 for some interest in your savings account and a 1098 for your mortgage? If your taxes are that simple, chances are that you will be better off by using a do-it-yourself software system than by using a professional. On the other hand, if you own a business or rental property, have employees, have itemized deductions, trade stocks or have a fairly high income, you may have a need for assistance.
Is Your Income Fairly “High”?
A high income brings out the “devil-in-the-details” of the tax code. And, by the way, the tax-code thinks your income is “high” long before most people think it is. Once your income exceeds certain thresholds you quickly begin to lose deductions and credits. 
That, in turn, makes your tax burden begin to increase rapidly. To top it off, the Alternative-Minimum Tax will kick in at similar income levels, compounding the effects of these negative changes. If your income puts you within range of phase-out thresholds, good planning could help you avoid a lot of taxes. That is where a professional earns his money and the do-it-yourself software often fails.
Do You Own a Business or Rental Property?
Once you become a business owner (including rentals) your tax return can become a lot more interesting and complicated, and it can happen quickly. There are so many things that come into play in the tax code when you own a business. Unless your business is very simple I would recommend getting qualified help – whether that be through an on ongoing relationship or only for occasional guidance. The good news is that the greatest number of tax strategies (and often the greatest savings) can be found in businesses and rental properties.
How Comfortable Are You Doing it Yourself?
That may seem like a silly question. However, some people are petrified of doing their own taxes. On occasion I will prepare a tax return for someone whose taxes are very simple (maybe a W-2 and nothing else). I explain to them that they could easily do it themselves for free, but the idea of doing so is unthinkable to them. For that person, it could be worth paying someone to file for them just to not have to worry about it and to bring them peace of mind.
On the other hand, for many the uncertainty is only rooted in a lack of knowledge about taxes. For someone with a fairly simple tax situation and a willing mind, reading a couple good tax books or a one-time consultation with a tax professional might be all it takes to feel comfortable and confident in preparing their own taxes and not worrying that they are missing something important.
What’s Next?
Education is your key to knowing what you should do to improve your tax outlook. In my book, Tax Insight, I delve into more detail about the decision to work with a tax professional and how to get the most out of that relationship. More importantly, I help you understand the key concepts of tax strategy as well as some of the most common strategies. Even if you hire a tax professional, understanding the tax strategies that fit your personal situation will make your relationship much more beneficial, ensuring that you get the greatest bang for your buck.
In Summary
If you want to begin to take control of your taxes and be proactive about the greatest expense of your life, do something about it today. You could start by signing up for our free (and quick and easy) Tax Insight course here.
Or, if you really want to dig in, you can invest in our Tax Insight book here. Whatever you do… do something today to begin to understand your personal tax situation better. Don’t be an ostrich or a sheep. Use that human intellect and overcome your instinct to run from the tax code or pretend it’s not there.
It may not be as fun as finding your favorite item on sale at the store, but it could prove to bring you the financial windfall of thousands of sales in one sitting. The choice is yours.
Casey Murdock is a professional tax advisor and the author of Tax Insight. Feel free to contact him at [email protected].
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