I’ve been doing my own taxes for over 10 years. I didn’t do them when I first graduated college in 1999 because I didn’t know how. Further, DIY tax software wasn’t as easy to use as it is now. But after paying some accountant over $500 to do my taxes one too many years, I finally took the plunge and was surprised how simple doing your own taxes was after gathering all my documents.
The only downside to doing your own taxes is the potential for more mistakes compared to a CPA (although CPAs make mistakes too). Some of the most common mistakes include: forgetting to deduct certain expenses, inputting the wrong figures, and forgetting to input the cost basis for your stock sale.
One time, I got a surprise $250,000 tax bill because the IRS thought I had made ~$1M from stock sales that year! In reality, I just forgot to input the cost basis of each purchase. After I sent them my cost basis in the mail, all was good and I didn’t have to pay a penalty. Phew!
Doing Your Own Taxes To Change Your Life
The biggest benefit of doing your own taxes is that you get to viscerally see how much you pay and how many different ways the government gets you. There’s the state income tax, federal income tax, city tax, Medicare tax, Social Security tax, franchise tax, property tax, sales tax, net investment income tax and more. Those who don’t do their own taxes tend to just look at their net paycheck with blissful ignorance.
From 2002 – 2012 I paid well over $100,000 a year in federal and state income taxes alone. Every time I did my taxes, I felt a little ill. Although I was fortunate enough to make a good income, I was working 60-70 hours a week, felt stressed all the time, and didn’t like how the government wasted our tax dollars. What’s more, there was asymmetric tax laws that left me scratching my head.
There was this one bill in California that imposed an extra 1-3% tax on everyone to help fund public education. The bill would have raised ~$8B. There are very few things more worthwhile to fund than public education. But instead of the bill passing with ease, it was shot down and replaced by a new bill that only taxed those who made over $200,000 a year, whether you had children or not!
The new bill was estimated to generate only ~$3B, to the detriment of our kids. It passed no problem. I understand nobody wants to pay more taxes than they need to. But come on. What's wrong with EVERYBODY pitching in for the sake of our children?
After paying a retroactive $5,000+ in public education taxes due to this bill, I started imagining how nice it would be to retire early or at least take things way down in order to make less and pay less. I wanted a more care-free life. It would be one thing if I had three or more children in public school, but I had none. I was already paying $30,000 a year in property taxes at the time in addition to my ~$100,000+ in income taxes.
Realizing that ever increasing taxes would never end, I began reverse engineering how much I felt was patriotic enough to pay my fair share as an individual. I came up with the handsome sum of $50,000.
Paying what the median household makes each year in taxes meant that I would pay ~5X what the median household would pay in income taxes. That felt like a fair amount given I was lucky to get a decent job right out of college.
In order to pay $50,000 a year in income taxes, I’d have to earn roughly $200,000 a year in adjusted gross income, which so happened to also be the most frequently cited income cut off figure to define rich in America. Paying a 25% effective tax rate felt about right. Any more and killing yourself at work to make more money didn't seem as worthwhile.
Life Is Much Better Now
Even though my taxable income is less because I no longer work for Corporate America, I feel so much happier because all my work stress and work-related physical ailments have gone away. I no longer grind my teeth, suffer from debilitating allergies, or get any migraines. I’m also much more pleasant to be around because I'm always smiling.
As an entrepreneur, I decide how much or how little I want to work. If my adjusted gross income is closing in on $200,000 I reduce my work load. And if my income is fortunate enough to go far above $250,000, I put my e-mail autoresponder on and go on an extended vacation.
There’s only so much in itemized deductions I can take. My goal has always been to work to live. Now I just want to work a couple hours a day whether at home or while traveling.
Analyzing your own finances will help bring you out of the Matrix. Instead of trying to make as much money as you can and then pay ever increasing taxes on your spoils, consider figuring out how much you think is a fair amount of income taxes to pay each month and then see if you can adjust your work accordingly.
I feel paying ~$50,000 in income taxes plus ~$50,000 in property taxes a year to support our federal government and the local communities of California is about enough. I hope the Federal government and the state of California are happy with my ~$100,000 annual contribution as well!
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It is very empowering to do your own taxes and understand how everything fits together. I learn something new each year and try to get more familiar with the forms and deductions. I did my mom’s taxes this year for the first time to help her out so I got to learn a little bit about retirement forms.
I’m always amazed by people who are too afraid to file their own simple tax returns. It’s certainly one thing to have a myriad of different income streams, and consequently a myriad of taxable expenses/deductions, but it’s a whole other thing to have a salaried job and basic itemized deductions.
Personally, I’m not quite to the point where it’s pragmatic for me to hire an accountant – although I’m working hard to get there. So the best I can do is encourage my colleagues to do their own, otherwise I view it as throwing money away!
I do my own taxes as well. It really helps you understand how much taxes you really spend (otherwise it is taken out sneakily from your paycheck and you may not realize the amount). It also gets you thinking of creative ways to lower your taxes, increase take home capital, and brainstorm about creative life style designs. Someone can make $200k a year in the rat race and another person can have a relatively small passive income stream set up and leverage currency differences to live like a king.
Doing taxes isn’t that hard with currently available software as long as your tax situation is simple. I have been doing it myself and it makes you take control over your taxes. No one knows better about your tax than yourself. Right? Thanks for sharing!
BSR
Impressive amount of income coming from the FS audience. Looking at the poll results, I feel so poor since I’m on the lower portion of your audience’s tax bills. It also shows that there is incredible wealth and income in this country. You just have to find out where to obtain it!
My accountant e-filed my income tax but there was a small mistake in the FSA amount that is costing me an extra $160 in income tax. Is it worthwhile to get him to amend the return or would I be at an increased risk for an IRS audit?
One thing that later turned out to be extremely useful, was to take an H&R Block training course when I was younger.
Shortly after graduating college, I was looking for work and stumbled into an H&R Block office. They offered free training and licensing to everyone who would be working for them during the subsequent tax season (or reasonably cheap for anyone who would not – I think it might have been about $150 to cover the cost of the printed materials).
I thought to myself, “Hey, maybe I’ll get a job out of this, or at least I’ll learn a valuable life skill”.
I didn’t end up working for them, because I found a different job, but I’ve been using the knowledge ever since For the last 10 years, I’ve been very comfortable understanding and preparing my own taxes, saving me lots of money and headache.
I would recommend anyone who is reasonably competent, and who has anything but the most complicated tax situations, to prepare their own taxes using software at home. Not only will you save money, but you’ll also gain more understanding and control of what’s going on with your finances.
Hey Sam,
Similar to my other comment, I’m surprised you want to do it yourself when you could get someone to do it for save, save a heap on time (to therefore do other money-earning things) whilst they also have the tax knowledge that could get you more (legal) deductions.
Tristan
My taxes became too complicated for me to do on my own pretty early on. However, my accountant has given me suggestions that saved me around $100k in taxes last year that I would not have done with TurboTax. Saving $100k in tax is like earning an extra $166k before tax!
I’ve always done my own taxes, usually with TaxCut.
While I prefer a simple life, it would be interesting to reach the point where I felt it necessary to have an accountant, e.g. self-employed via my own llc.
I hire a CPA to do my taxes for $350-$400 per year and it’s the best money ever spent. I send him all my forms and he does the rest. No hassle for me and it frees my mind of worry. Plus it goes to your other blog Sam about looking up. I’m happy to pay the money to have the freedom and go enjoy my life.
Yep, agreed. I hope people read: How To Save More Than $100,000 A Year Pre-Tax Through A SEP IRA and Solo 401k
I hired H&R Block the first year out of college, they charged me ~$200 and they forgot one entry. I had to go back to ask them to amend and resubmit my taxes. After that I have been doing my own taxes. No audits so far. Keeping my fingers crossed.
I’ve done my own taxes from the beginning but they’re really simple. Thank goodness a year after I started working, the govt. simplified our tax return from a 12 page document to 4 pages (for me) and e-filing came online.
Now it only takes a few minutes (just to double check all the figures because it comes pre-filled :D ) and it even has a calculator so if you’ve typoed, you can check the calculation and fix it before hitting “File” instead of getting a shocking return!
This is one of the very few govt. systems that works right, I can brag about and is an absolute pleasure to use. In addition, the tax website now includes calculations to teach you how tax is calculated. So now you can figure out which tax bracket you fall in, how much overtime you can work before moving into the next tax bracket and how much tax you have to pay on your income. So no more crossing fingers and toes as you hit “File”. It helps with my financial planning as I can calculate my tax for the year and set it aside to pay the govt.
Their call centre and email service though is terrible. One year I was selected for an audit and had to submit supporting documents and they didn’t mail/notify me. Instead it sent a message to my e-filing profile only.
I found out when I enquired why my return wasn’t returned to me and then the consultant told me I had outstanding documents and sent me the notification.
But we pay a lot of tax (I’m looking at you fuel tax!). My uncle worked his entire life in a shoe factory and as a result suffered from occupational illnesses. When he was alive I often wished that I could just give my tax straight to him since it was way more than what he was making so he could stay home and rest instead of slogging. I was very proud of him, earning as little as he did and still being frugal enough never to have debts or short of anything (house, food, clothes, car).
It would be nice if the govt. worked like that and we had more control over how our taxes are spent.
I wonder if Intuit(TurboTax) and others would consider making their full program free sometime after April 15th? This would let people try it out and see it work vs what their CPA computed for the year and prove to themselves that it would compute their taxes correctly. There seems to be all this up front cost for Intuit to develop the program and they presumably must extract its value up to April 15th (save anyone who files for an extension), so maybe there is little to be gained for them by continuing to charge for its use after that, and if they gave away for free (and maybe somehow prevented anyone from printing out the forms) after that, people can try it out and see it work and so next year they might be swayed to use TurboTax instead of their tax preparers.
turbotax every year. effective tax rate less than 5%. everyone in America should use tax software – and I say that as a CPA who doesn’t do his own taxes.
I paid about $50k in taxes for 2015 and it stung like hell. I feel like we need to make more money (and I will this year). I just dread the thought of paying more.
Ps. I know a family that was surprised by an additional $150k tax bill after paying all year. They can “afford it” but I’m sure writing that check was no fun.
Not sure how one can ever be SURPRISED w/ a $150K tax bill. That’s like being surprised w/ $500K in gross income! What was the surprise from?
They sold a lot of investments to fund a house investment. And they generally make a lot of money.
I did my own taxes for a few years once I realized how bad H&R block was with more unique situations. I’m getting income from multiple sources right now and want to make sure they’re done right, so for the 2-300 dollars a year I pay someone else to do them.
I totally do my own taxes. With tools such as Turbotax it’s super easy even in a complex situation. People just don’t know how easy they have it.
When I had to do my taxes in Japan, with the whole thing on paper and 100% in Japanese, now *that* was hard.
Taxes in the US, where I actually understand the content, and software does most of the job for me? Easy as pie. And I had 5 sources of income in 2015, so no excuses for others ;)
In Japanese? With different laws? Now that does sound much harder indeed! Reminds me of trying to take a history exam all in Chinese while I was studying in China. Hard enough to understand Chinese, but to then add another fold to it… uh oh. Wo bu zhi dao.
Hi sam,
What were you grossing when you were paying 100k plus in taxes? I would think you would gross around 400k to 700k a year. what kind of work was this? could you link me to an article about your earlier days?
love this approach of reverse engineering.
it’s not about what you make it’s about how much you keep.
look forward to your reply
You must be new here. He talks quite often about his past as an exec at GS. I don’t remember the specifics but if you read through some of his early posts he alks a lot about those days, and how he came to be where he is now.
Check out this post: The First Million Might Be The Easiest
I have always done our taxes, and do them for one of my family members (who has an intellectual disability) too. When our taxes started to get a bit more complex, I took a tax preparation course so that I could have a better understanding of the big tax picture. Nowadays it’s so much easier thanks to on-line programs.
Many years I have an “aha moment” when I do our taxes. This year it was the realization that it was time to switch from a SEP IRA to a solo 401(k) for my husband’s business.
Just today at work I think I was able to help a colleague due to a basic understanding of taxes and personal finance. We were talking about our 401(k)s and I said something about RMDs. He had know idea what I was talking about; he is 75 years old and has never taken one! I told him that it was something he really ought to look in to. He doesn’t want to have to take money out and have it taxed as income, so I suggested that he just increase his 401(k) contribution to offset any required distribution.
Sorry to ramble, but I kind of geek out about taxes! :D
“A-ha moments”! Yes indeed! I have them every year too. This year, my A-ha moment is in using a car as a MONEY MAKER! Check out upcoming post.
Have you seen this post? How Much Can I Contribute To My Solo 401k?
I agree that for the majority of us with fairly complicated returns a CPA is worth the money. After all, “You don’t know what you don’t know” applies to taxes as well as other specialized areas such as law, medicine, and so on. I would have left plenty of money on the table if I had not gone over things with our accountant. And I learn new things each year we sit down to talk. I suppose there comes a point when one has learned enough confidently to do taxes independent of a CPA–I just haven’t hit that point yet.
Maybe you’ve already written about the topic but it would be interesting to lay out the tax differences for a business owner/or employee who could operate from anywhere. What would the actual % differences be to domiciled in Nevada vs. California for example. I know many people set up their residence in Incline Village, NV for example but still spend considerable time in California. (up to legal limits for tax reasons)
If the business was in Nevada, the business would save roughly 8-12% in taxes every year since there are no state income taxes.
Incline Village prices are more expensive by 20%+ around Lake Tahoe b/c of this arb.
I just got my tax bill today, so this one hits home. I’m an entrepreneur and I live in California, it’s ridiculous what I ended up owing.
I agree with you that people need to be aware of what they’re paying – I get the privilege of paying unemployment taxes on myself, even though it would be borderline impossible for me to claim unemployment benefits as someone who is self-employed…
I disagree that people should do their own taxes though. My CPA saved me $16,000 this year. It would have taken me a ridiculous amount of time to file my taxes myself. I was far better off spending the time working to pay the bill, and the ROI was huge.
Still… I feel like I was punched in the gut by the fed, then the state of CA kicked me while I was down!
I might take your advice – if my income gets to a certain point, I might just throw the away message up and take off for a vacation.
Isn’t it amazing that a business owner has to pay unemployment tax, but can’t claim unemployment benefits if the business shuts down? Truly one of the bewildering tax laws we have.
So what did your CPA do that allowed you to save $16,000 that someone couldn’t do on their own? I’d love to learn, b/c that is a huge amount!
I have an LLC which I use to manage my business, and then took the S-corp election. I take part of my earnings out as income, part as capital gains. In doing that, I avoid certain taxes I’d pay on “employment income” (both as an employer and an employee)
The administration behind this, as well as the need to file two returns (corporate & personal) has an increased cost. It’s not something I would want to manage on my own, more focused on growing my business – and again, substantial ROI as far as what I pay my CPA to take care of it.
Have you read this post? What’s The Right Balance To Pay In Salary And Distributions As An S-Corp?
Dang! I got a lot of great material on FS that covers so many things people think about! :)
I did my own taxes for many years. As they became more complex, I began going to a CPA and having them review my efforts. I paid for an hour of their time ($35 originally!). The second year I went to her, she saved me 4x’s what I paid for the consult. Through the years sometimes she saved me money and sometimes not, but she also gave me good financial advice – after all, I bought an hour and it took 30 minutes to look my taxes over and advise me on them. For the last few years I have had the accountant do them after I complete a lengthy questionnaire – a real pain but it is comprehensive! It is worth every dime of her time and she gives me good financial advice during/after the review. Often I go with questions for future actions of a tax and/or financial nature. We discuss them and I walk away better educated and in a better financial position. I believe that properly used professionals can greatly enhance your financial position. However, don’t abdicate everything to them, learn, understand and be the final arbiter. YOU sign the tax form saying it is complete and correct!
It’s definitely a good idea to ask all the questions possible and learn from a CPA before doing one’s own taxes. That’s what I did for the first several years back in 1999. Always be learning!
Thankfully, the tax software preparation business is very competitive. Hence, the software should be smart enough to know about the latest rules and should provide a lot of education to the client.