I have always considered my ability to prepare my own taxes a side benefit of my CPA license. I work in industry, so I don’t prepare anyone’s taxes other than my own, butfelt I was proficient enough to prepare my own return. This year was different than prior years in that my husband had pension and social security income for the first time, we sold investments and I was hoping to use the personal energy credit for the water heater and gas furnace we had purchased in 2015. I spent three weekends preparing our returns and in hindsight think perhaps I should have used a professional preparer. Here are a few things I learned:
Only 85% of social security benefits are included in taxable income.
My husband started receiving social security last year, since I work full-time I knew we would pay tax on this income, but was surprised TurboTax included only 85% of this benefit as taxable income. According to the SSA website:
No one pays federal income tax on more than 85 percent of his or her Social Security benefits based on Internal Revenue Service (IRS) rules.
Pensions are taxable, but not according to my husband’s 1099-R.
On the form 1099-R my husband received for his pension, the taxable amount box was blank and the taxable amount not determined box was checked. When I entered the 1099-R exactly as provided, TurboTax concluded the pension wasn’t taxable. After reading TurboTax guidelines concerning pension income, I decided the pension income had to be taxable and entered it accordingly.
Remember the personal energy credit I was so excited to take advantage of:
From my post Appliances Don't Qualify for Energy Credit:
The $500 lifetime credit (10% of cost up to $500) for energy efficient improvements has been extended until 12/31/16. I am excited about this one since we installed a new furnace and water heater in 2015 – although $500 doesn’t come anywhere close to covering 10% of what we spent.
It turns out:
The energy credit for natural gas, propane, or oil furnace or hot water boiler with an annual fuel utilization rate of 95 or greater is capped at $150.
TurboTax did not ask for any information onwater heaters, so we did not receive a creditfor the new heater. Today I found the following on the Energy.gov website:
Natural gas, propane, or oil water heater which has either an energy factor of at least 0.82 or a thermal efficiency of at least 90 percent: $300.
Perhaps I missed something for the water heater, but at the time I determined we were only eligible for the $150 credit.
Establishing cash basis for our sold investments was kind of nightmarish:
The 1099-B I received for our sold securities included basis for only a portion of our sold investments – there was a section for transactions for which basis is reported to the IRS and another section titled transactions for which basis is not reported to the IRS.
My boss, who prepares taxes on the side, informed me there was a law change about four years ago requiring brokerage firms to provide basis information for mutual funds purchased after January 1st, 2012. Since the assets we sold included mutual funds purchased both before and after January 1st 2012, the 1099-B provided basisonly for the assets purchased after this date.
I called our brokerage firm who was able to provide the original cash basis for all our sold investments. I then had to reconcile the basis by each individual asset by date (there were several pages of these). The final cash loss I calculated did not equal what was on the 1099-R. In the end, my husband pushed me to file with the information I had. The loss wasn’t off by a lot only about a hundred dollars and I did use the lessor loss. If we are ever audited and I was wrong at least the IRS will owe us money.
Taxable losses can be deducted up to $3000 and the excess can be carried over to future returns:
According to the IRS website:
Generally, realized capital losses are first offset against realized capital gains. Any excess losses can be deducted against ordinary income up to $3,000 ($1,500 if married filing separately) on line 13 of Form 1040. Losses in excess of this limit can be carried forward to later years to reduce capital gains or ordinary income until the balance of these losses is used up.
Okay I am sure I knew this when I took the CPA exam, but didn’t make the correlation when we sold the assets. I deducted the loss and am not questioning this one further.
Our taxes are filed – I paid $92 for the federal and state TurboTax Premier. I know of a tax preparer who sets her fee based on the number of forms she prepares, so I imagine I would have paid $250 or more if I’d have hired someone to prepare this return. My co-workers tell me my boss’s fees are reasonable, but I didn'twant him to know my entire financial situation. I think I will be okaypreparing my return next year, but if we ever sell securities again I will strongly consider seeking professional help.
Do you prepare your own tax return? Are you sure you took advantage of all the incentives available?
FAQs
Tackling the job yourself can save you money on tax preparation fees but it could end up costing you if you make a mistake. Hiring a professional may mean shelling out serious cash but it could be worth if you're able to lower your tax bill or fatten up your refund.
What are the pros and cons of preparing your own tax return? ›
Speed - Filing your taxes online is generally faster than filing with a professional. You can complete your tax return in a matter of hours or even minutes, depending on your situation. Cons: Complexity - Filing your taxes online can be complicated, especially if you have a complex tax situation.
Can you prepare your own tax return? ›
Use IRS Free File
The software does all the work of finding deductions, credits and exemptions for you. If you're comfortable preparing your own taxes, you can use Free File Fillable Forms, regardless of your income, to file your tax returns either by mail or online.
What does Dave Ramsey say about tax refunds? ›
If you get a big tax refund, you've just allowed the government to use your money interest-free for a year. When the IRS sends you that refund check, they're just giving you your money back. That's why it's called a tax refund. By adjusting your tax withholding, it'll feel like you gave yourself a raise!
When you shouldn't do your own taxes? ›
It might be worth reaching out to a tax professional if: You are using itemized deductions but aren't sure about the qualifications and limitations of those deductions. You're not sure if you're making the most of your itemized deductions. You own a business.
What is the best way to do my taxes by myself? ›
Choose an IRS Free File option, guided tax preparation or Free File Fillable Forms. You will be directed to the IRS partner's website to create a new account or if you are a previous user, log in to an existing account. Prepare and e-file your federal tax return. Receive an email when the IRS has accepted your return.
What is the potential con of using a professional tax preparer? ›
While professional tax preparation can offer convenience and expertise, it can also come with potential drawbacks such as high fees and the possibility of errors or omissions made by the tax preparer.
How many people do their own taxes? ›
Overall, a third (33%) of Americans say they do their own taxes while 56% say someone else prepares their taxes. About six-in-ten (61%) of those who say they hate or dislike doing their income taxes have someone else do it for them, compared with 52% of those who say they like or love doing it.
What are some cons of tax preparation websites? ›
When tax preparation software isn't worth it. If you itemize your deductions, have lots of investments or earn non-W2 income, tax software may not be the best option, as it could mean missing valuable write-offs or reporting your income incorrectly.
Is filing your own taxes hard? ›
The bottom line. Tax preparation doesn't have to be difficult. In fact, with today's software solutions, filing your own tax return can be relatively simple. Compare today's leading software solutions to file your own taxes.
When does it make sense to hire a tax pro? Anytime your taxes are complicated. Hiring a pro is a prudent choice after a major life change like getting married or divorced, having a baby, buying or selling a home or business, experiencing a major health issue, or retiring.
Is it better to claim 1 or 0? ›
Claiming 1 reduces the amount of taxes that are withheld from weekly paychecks, so you get more money now with a smaller refund. Claiming 0 allowances may be a better option if you'd rather receive a larger lump sum of money in the form of your tax refund.
Why do some people get large tax refunds? ›
Why is my tax return so big? In most cases, a big refund indicates you aren't taking all of the withholdings and tax deductions you're eligible for.
What is the Ramsey problem tax? ›
A simplified version of the Ramsey rule is the “inverse-elasticity rule.” This rules states that tax rates on goods should be inversely related to their elasticity of demand.
Is it worth it to do my own taxes? ›
Deciding whether to prepare your own tax return isn't always straightforward. In some instances, doing your own taxes is the best option. For example, if you have only one W-2 and no deductions, the best do-it-yourself tax software may be the way to go. But in other cases, you may need more guidance.
What are the cons of a professional tax preparer? ›
The Disadvantages of Professional Tax Preparation
While professional tax preparation can offer convenience and expertise, it can also come with potential drawbacks such as high fees and the possibility of errors or omissions made by the tax preparer.
What is an advantage of hiring a professional to file your taxes? ›
Helps You Avoid an Audit
Since a tax pro is less likely to make mistakes on a return and is more likely to know which deductions and credits you're eligible for, hiring someone to prepare and file your tax return can make you less likely to be audited.
Why would someone use a tax professional rather than do their taxes on their own? ›
A tax professional can look at your past returns to see if any deductions were missed and, if so, amend them for you. You can reduce your risk of an audit. And, if you are audited or the IRS starts asking questions you can't easily answer, a professional tax preparer knows how to deal with the IRS.
