Ignorance is bliss. But, goofing up on your taxes can be costly. Let's go through the main reasons to do and not to do your own taxes.
When you don't know your boss is getting a huge bonus for saving the firm money by screwing your bonus, you're happy. When you don't know the reason why you didn't get into the fellowship program is because the managing director is a woman who hates men with different political ideals, you're happy.
Finally, when you have no clue your boyfriend is hooking up with your best friend, you're happy to carry on!
I'm generally a very happy go lucky type of guy. My facial expression seems to have “smile” as a a default setting. But there is one time a year where I get angry and randomly shout obscenities while no one is looking. The one time of year is during tax season.
Reasons To Do And Not Do Your Own Taxes
As a proud financial masochist, I decided to redo my taxes a second time online just to make sure I didn't make any errors. I've got a five figure tax bill for the first time in my life thanks to AMT, some one off incomes, and retroactive tax law changes in the state of California.
Lo and behold I found a five figure error where I inadvertently input my property tax bill amount instead of the mortgage interest for one of my rental properties. My error makes me wonder what else I've done wrong. Despite my mistake, I'm a big proponent of everyone doing their own taxes. This post will highlight the most important reasons to do and not do your own taxes.
The Main Reasons To Do Your Own Taxes
1) Flexibility.
Doing your own taxes gives you the flexibility of going at your own pace. Although it takes me on average 2.5 hours to do all my taxes in one sitting, I like to draw out the process over a one month time period. Tax documents are always late and I expect last minute law changes.
Not needing to meet with an accountant is a nice benefit. So is only paying $50-75 for easy to use tax software vs. $500-$1,000 for a professional CPA.
2) Optimization.
The greatest benefit about doing your own taxes with online software is that you can play with the numbers to see where you can optimize your tax liabilities for next year. For example, I've made steps to eradicate expensive W2 income and increase dividend and passive income sources to minimize tax liability.
3) Easier To Cheat / Fudge Some Numbers.
It's hard to fudge numbers or cheat on your taxes if you get someone to do your taxes because CPAs put their reputation on the line when submitting your returns. You can find an aggressive accountant, however, who knows your own risk tolerance better than you?
If you want to fudge some numbers because you can't track down a tax document or receipt, it's easier when you file yourself. Just be prepared to get the smackdown if you live too dangerously and intentionally try to evade taxes. I do not advise breaking the law. However, as you'll see below, if you cheat on your taxes you could win one of the most powerful jobs in the land!
4) Knowledge.
If you love to learn, you'll love doing your own taxes. After doing my own taxes for close to ten years, I've got a solid understanding about maximum mortgage interest tax deductions, income phaseouts, expense strategies for small businesses, income types not subject to FICA taxes,and average donation amounts per income that won't draw red flags.
To make remembering the benefits easier, just remember the acronym FOCK from the above 4 reasons. FOCK = Flexibility, Optimization, Easier to Cheat, Knowledge. If you can FOCK to reduce your tax liability, that's what it's all about. Tim Geitner FOCKed the government out of $32,000 with TurboTax by claiming ignorance. He eventually got caught and still was appointed the US Treasury Secretary!
Nearly 312,000 federal workers and retirees are FOCKing the government by owing more than $3.5 billion in back taxes for 2015, according to the IRS. The year before, about 279,000 workers and retirees owed $3.4 billion.
The Department of Housing and Urban Development had the highest delinquency rate, at 4.4 percent. Meanwhile, the Department of Defense has over $1 trillion in accounting errors in 2016! Such incest, FOCKing each other. It would not surprise me if those numbers surpassed $4 billion in 2021.
Before you decide which path is best for you, you have to analyze all the reasons to do and not do your own taxes. Given how rampant delinquency is in our own government, it behooves everyone to do their own taxes right? Wrong. Let me share with you the reasons why you don't want to do your own taxes.
Main Reasons Not To Do Your Own Taxes
1) You cherish happiness.
The number one reason why you do not want to do your own taxes is because you enjoy being happy. You will get so pissed off at doing your own taxes, you might end up seriously hurting the economy by becoming a traitor. You learn about all the infuriating tax policies which discriminate among different types of people. You will learn about why you can't deduce your student loan interest or receive a child tax credit.
You will witness retroactive taxes that pillage you for thousands of dollars because a certain set of voters who don't make as much as you voted to raise your taxes for their benefit. Then, you will start despising the government for their chicanery. You will feel helpless because if you don't give the government your money, you will pay fines or go to jail. Doing your taxes makes you aware of how much of slave we all are to the government.
2) You're going to make mistakes.
With the code is tens of thousands of pages long, you will undoubtedly make a mistake or three. When you make a mistake large enough, the IRS will hunt you down. Even though every experience I've had with the IRS has been pleasant, it's still a disconcerting feeling getting an IRS inquiry letter in the mail.
They love to fish for more income in a heads they win, tails you lose situation. Then again, professional tax preparers make mistakes all the time too.
3) You want a long lasting career.
I planned on working for 18 years until I was 40. But, I decided to pull the rip chord after 13 years partially because I was so sick of paying way more than my fair share. I knew I would never be able to defeat the government's discriminatory ways. So I decide to join the movement by going John Galt.
My blind quest to pay less than $100,000 a year in income taxes has short-circuited my career. If I worked just five more years, I would have that much more money. But then again, it's not all about the money. It's about happiness.
4) You love your country.
If you become angry, lose your happiness, and ruin your career, you become less of a patriot. When you become unpatriotic you start protesting everything. Once you start protesting everything, it's very possible you end up denouncing your citizenship because you realize resistance is futile.
You leaving means one less taxpaying citizen and one less person to help replace our aging population. Once our demographics go, so too does the wealth of our nation.
5) You don't want to be alone.
Nobody wants to be with an unhappy, angry, jobless, deserter. As a result, you will likely end up spending many years alone. I'm not sure if anything is much worse than loneliness.
This is why prisons punish nonconformist inmates through solitary confinement. I'd much rather spend my days with someone I love and be poor than be rich and all alone.
Fock Or Be Focked
There is no way out when it comes to paying taxes. Review all the reasons to do or not do your own taxes above and figure out what resonates with you. The best thing you can do for your finances is weigh the pros and cons to decide which way makes you the least unhappy.
The folks who tell you they are happy to pay taxes don't pay much at all. Don't listen to them. You are a fighter who plans to build great wealth through knowledge. Just be careful what you wish for.
Related posts:
- When Should You File A Tax Extension?
- How To Pay Little Or No Taxes For The Rest Of Your Life
- What’s Your Largest Ongoing Living Expense? Taxes Of Course!
- How I Beat Economic Armageddon Using a 1031 Exchange
- Understand Why A Temporary Payroll Tax Cut Extension Is A Mistake
- When It Comes To Money, Shouldn’t We Trust Rich People Who’ve Been Poor?
Tax Savings Recommendation
Start A Business. A business is one of the best ways to shield your income from more taxes. You can either incorporate as an LLC, S-Corp, or simply be a Sole Proprietor (no incorporating necessary, just be a consultant and file a schedule C).
Every business person can start a Self-Employed 401k where you can contribute up to $54,000 ($18,000 from you and ~20% of operating profits). All your business-related expenses are tax deductible as well.
Simply launch your own website like this one in under 30 minutes to legitimize your business.
Here's my step-by-step guide to starting your own website.
As I have started to make more money, and lose deductions, because of it, I use tax time a good reason to be pissed off and find more ways to keep my hard earned money in my bank account, not the governments. In the event someone else was doing my taxes, I would not know any of the reasons why my tax bill was increasing. I would have simply believed it was because of raised income. Not always the case my friends. You start to lose deductions, and you need to wrap you head around this.
For those who feel like they make enough to simply have someone else do this work for them, well, I have an ocean front property in Arizona to sell you, oh yea, and I will throw in the golden gate for free (Sawyer Brown). Just know, there are a lot of people who make good income off those who have the mentality of having others do things for them.
Hilarious! Sign me up for the ocean front Arizona property!
The more you understand your taxes, the more you can maximize your earnings after taxes. So many complicated things to manage. But once you know, you can shoot to make a certain amount of money for maximum benefits. That number for me is $200,000.
Sam,
What do you suggest for an American living abroad? Should I attempt to file my own taxes myself, or is this best left to a tax pro?
I have always wanted to try and do my own taxes, but every year I end up at my accountant’s office. I work with money and numbers all day as a Financial Planner, I just can’t bring myself to do it for my taxes too. I don’t mind paying a fee to have a professional take care of my taxes…especially since I get a refund. Great post Sam, I am going to share it next Friday on our Dinks Finance weekly roundup.
A lot depends on the complexity of your taxes. Most people can do it themselves, either on paper or with an online service. With an online service you just need to follow all the steps. But paying for a tax service is not much different than paying to have your oil changed or lawn mowed. Some people would rather pay than do it themselves, even if they can. If your taxes remain relatively the same from year to year, you can pay once, then replicate it yourself the next year.
I having been doing taxes for my wife and I on line with TurboTax (I might change that next year…. see below). But a recent article I read about some IRS studies convinces me to continue to do my own: The IRS found that returns prepared by paid preparers had *more* errors than returns prepared by the individual doing their own taxes!
About TurboTax: recently (after I filed this year’s taxes) I read that TurboTax had lobbied Congress to *not* allow the IRS to simplify how we do taxes! They like it complicated and difficult because that keeps them in business.
So next year I might look for a different on-line company.
Very interesting and so true!
Who is more careful about our money? Ourselves or someone we pay who does hundreds a year?
Is lobby for Congress to extend the tax code to 1 MILLION pages too. Tax firms would be on fire and make investors rich!
I used to do my own taxes when I just had W-2 income but switched to using an accountant when I threw in the various entities like LLC for blog, LLC/LPs for real estate and an LLC for the outsourcing business. I wasn’t up for generating K-1s and had partners to consider. All-in though, for just my personal return, he collates the returns from the other ventures and it’s like $300 something each year. Not too bad considering it would take me hours and complete all the crap. It’s totally worth it to me. For me the threshold is if you have stuff outside the normal W-2 and a couple routine deductions which can all be done easily in Turbotax, then pay a pro.
This is one of the last frontiers for me. In my defense I have only lived in the US for the last 3 years, and have several S Corp businesses; so its been a little tricky doing my own. But each year that goes by I learn a little more and will man up to the task eventually.
At the end of the day everything else I do I take accountability for, and don’t trust others- there is no reason that Tax should be any different.
The biggest error I caught this year for filing was from one of my Brokerages that omitted a trade Cap Loss of $6000 in their Schedule D, which I caught before passing onto the accountant, so I am getting close to taking the stabilizer wheels off the bike!
I used to do my own taxes with the help of Turbotax, but once I got married and inherited The Wife’s business (with quarterly estimates) I prefer to use a CPA. This has only been compounded with 2 more businesses in the recent past.
I like having the option of someone to yell at if something goes wrong.
I’ve always done my own, and now as a tax professional, it’s much better, but I definitely missed out on some tax return money. I got audited once, but it wasn’t too bad. Just forgot to fill out my schedule D for reporting capital gains on investments sold, but I just reached out to my advisor, got the info, filled it out and sent it in. Not too bad. The worst is when small businesses get audited. The IRS usually starts with “we’re disallowing everything”, and compromises with “well, we’ll allow half of your expenses”, even if they’re all legitimate. That’s when you NEED a professional to fight on your behalf.
Relatively inexpensive for an accountant who does a good job. Doing your own will probably cost $50 or so.
How much is your accountant?
I’ll be interested in hearing how much your accountant costs. H&R Block is like $40-$60 bucks depending package vs. $500+ if someone was to do mine.
I agree. Leverage the expertise of others.
Indeed. It’s sometimes better to walk in a fog of ignorance.
Just like if everybody became an entrepreneur by starting their own business, they’d never vote for tax increases again.
Fear of the IRS is a totally legitimate reason, especially given all the movies that portray evil agents knocking on people’s doors, and the stories we hear in the news.
The thing is, most IRS folks are really, really helpful and nice. They understand our system is focked.
Understand taxes yes. Do my own taxes… ummm no.
I do my own taxes using an online program. It’s worked out fine so far (second year doing them with a program) and there seem to be less errors. However, speaking with a colleague the other day, I realize I missed out on some deductions I didn’t know I could take (they use an accountant). But, if I compare the $80 I pay versus the $400 my colleague pays, surely it wouldn’t make up the difference, right? I don’t think so.
Your accountant could easily miss errors as well, especially if s/he is overloaded during tax season as they always are! With your income streams, I’d just do it yourself and save money.
It’s better to let someone do our taxes, but I think it is also good to have an idea of where our money is going, so even if you don’t do your own taxes, it is better to keep yourself well informed when it comes to financial matter, taxes being one of them.
I did my own taxes until I bought my first home. I hired a professional for that year, asked a bunch of questions, and learned enough to do it myself the following years.
Every 4-5 years something large changes in my finances and I go back to a pro to figure out how things work.
It’s not the most economical option but I find having a professional walk me through a significant new aspect of my taxes once takes far less time than me trying to interpret IRS documentation and do it myself.
Bingo. Hire a pro, ask lots of questions, take notes, and do it yourself. Software nowadays makes things incredibly easy.
I did our taxes online for the first time this year and all went well. We don’t have a complicated return so it made sense to tackle the job on my own. I think if we started to add rental income, business income etc we would hire someone to do them. So, for now I’ll keep doing it and see where it takes us. Great tips!
Good stuff. Keep on doing them and keep on learning. It’s not that hard. At least you guys get free health care! Well, I guess the USA does too now :)
I’ve done my own taxes since I was 16 years old (in 1970). I picked up the 1040EZ forms from the local bank and read it all to understand it. That took a lot initially, but I’ve been happily doing my own taxes since then.
I don’t see a reason to stop doing them myself because as you point out, you can put your energy where you need to in order to minimize taxes. One that you didn’t mention is that doing one’s taxes can also keep one’s mind on track so that you don’t run the risk of getting iforgethowtodobasicmathitis.
The only problem I’d have doing my own taxes would be regarding taxable investment (i.e. not in a 401k/IRA). After all, once you start with the simpler taxes, you simply add on deductibility – or not – of property taxes and/or mortgage interest.
The IRS rules and their PDF documents for filling out the forms are readily searchable and easy to use.
I also use TurboTax to do what-if scenarios for the following year.
Increase 401K, decrease Roth, vice-versa. Effect of child tax credit and if we were to loose 1, 2, 3, or all 4 of our Child Tax credits.
Chris, you don’t look old enough to be doing them since 1970! Well done mate.
The scenario analysis is definitely something I love doing so I know what to do in the future to save on taxes.
#1 and #2 seem like different ends of the same point. I don’t do my own taxes for the same reason that people hired me as an advisor: my taxes are uber complicated and I didn’t want to miss anything. For some of my clients, it wasn’t worth the money to hire someone else to do their taxes….for others, they made far more money handing them off than struggling with them alone.
You are right. Yin Yang. I’ve changed it up! The biggest thing is TRUST. I don’t know if I can trust an accountant to work harder than me on my own taxes.
My tax situation is still relatively simple and I actually enjoy doing them myself. So unless I reach a point where I think an accountant will be of a great use, I’ll continue doing my own taxes.
Heh. Another chuckle-worthy post! Soon you will also be in a shack writing manifestos! I do my own taxes because I refuse to submit to a tax code that encourages us to have to pay a preparer because it is so gawd-awful convoluted that we should all demand that it be changed immediately.
Then again, I’m apparently in the minority with this view.
Samurai Bomber! J/K.
This whole blog has a manifesto section called BIG GOVERNMENT to help folks see the light to STOP feeding the government beast and voting to raise taxes on others.
I have my taxes done. There is a local company with several branches that only charges $65 for a personal return and an additional $5 for each of my children’s returns(as long as they still live with me). The perk is that, as long as I provide correct information, the preparer will go with me to an audit if the need arises.
That’s cheap and worth it for $65 +$5! Too bad mine costs $500-$1,000. WTF.