If you aren’t intimidated by numbers, spending a few hours inputting data into a tax return can be a good opportunity to review your finances, with the bonus of saving on the cost of professional tax prep (minus, of course, the imputed value of your time).
“For ‘run-of-the-mill’ returns, a DIY approach may potentially lead to cost savings,” says Lou Gentile, regional vice president for Fidelity Investments. “Just be on the lookout for tricky situations that suggest a paid tax professional would be better suited to prepare a return.” That can include common circumstances such as owning multiple homes, running a small business, or holding investments besides traditional stock and bond mutual funds. A professional can also help manage and defend a federal or state audit, notes Gentile, should that become an issue.
When to consider filing DIY
While everyone has their own threshold for what may feel intimidating, most filers with a simple return can likely handle tax prep without help. “If you are filing in a single state, with only W-2 income and maybe a few regular 1099s, chances are your return is fairly straightforward,” says Gentile.
When to consider working with a tax professional
The risks of going solo on a complex return include the potential to make errors, miss deductions, or unintentionally underpay, resulting in penalties. Below is a list—by no means inclusive—of common situations that may require help:
- Multiple state filings. Having to file in multiple states may be confusing. Typically, your state of residence provides a credit for taxes paid in another state. “This actually happened to me one year—my tax software incorrectly calculated my credit, and I had to amend my return to get back taxes I overpaid,” says Gentile.
- Changing residency. Changing residency from one state to another where both states have an income tax will require you to count days in each state and prorate income accordingly. Even a bonus or equity compensation paid out at year end must be sourced to the state in which it was “earned.”
- Moving abroad. US citizens are taxed on their global income, regardless of where earned. Cross-border issues are extraordinarily involved and dependent on complex tax treaties between the US and the country the taxpayer is resident, if applicable. If you live abroad part or all of the year, you may need professional assistance with both your US and foreign country return.
- Multiple 1099s and K-1s. While a few basic 1099 forms can be easily managed, there are over 15 versions of Form 1099, including the newly added 1099-K (merchant card and third-party network payments). “Some 1099s can be quite complex and may require a tax professional to decipher and enter correctly,” says Gentile. “In addition, if you have K-1s from investments like hedge funds or private equity you surely want a tax professional to prepare your return as these forms can be quite difficult to understand.”
- Home offices. If you meet the requirements for this deduction, you can deduct $5 for every square foot of your home office up to $1,500. The IRS has made it easier to deduct home office expenses by providing a simplified method to calculate this deduction. If you choose not to use the simplified method, however, the calculations can be cumbersome and may be best handled by a professional.
- Schedules C or E income. Returns with Schedule C income (for example, if you have a small business, such as a single member LLC) or Schedule E income (which includes rental income) tend to be more heavily scrutinized by the IRS for audit purposes, so you may want to take additional steps to ensure accuracy.
- Foreign bank accounts. Reporting on foreign bank accounts is required by filing a Report of Foreign Bank and Financial Accounts (or “FBAR”) on Financial Crimes Enforcement Network (FinCEN) Form 114. These are heavily scrutinized by the IRS, so it’s important to be certain you’re reporting these accounts properly.
- Complex transactions. Calculating the tax impact of selling investment properties, selling a business, trading crypto currency, 1031 or 1035 exchanges, Roth conversions, and depreciation recapture, to name just a few, likely require professional help.
- Trusts and estate tax forms. Several of these forms, such as Forms 1041 trust and estate income tax return, Form 709 gift tax return, and Form 706 estate tax return, can require significant expertise in estate and gift tax law to understand correctly.
Other potentially tricky tax situations
While the following situations don’t necessarily require professional help, they can add an additional layer of complexity to keep in mind.
- Mortgage interest deduction. While this is a fairly ubiquitous deduction, the rules have changed recently: The 2017 Tax Cuts and Jobs Act capped mortgage interest deductions at principal levels above $750,000 (married couples) and $375,000 (single filer). It should be noted that if the debt was incurred prior to December 16, 2017, the amounts are $1,000,000 and $500,000, respectively, and if it was incurred prior to October 13, 1987, the entire amount is deductible. If you’ve borrowed more than these amounts, part of your Schedule A interest deduction will start to phase out and you’ll need to calculate how much you can deduct.
Also keep in mind that mortgage interest is only deductible for a main home and a second home, and the limits apply to both properties combined. Mortgage interest deduction on additional personal properties is not allowed.
- Charitable deductions. You’ll need to file Form 8283 to report noncash contributions when the amount is over $500. If you donate property, however, consider getting help, since you’ll need to complete Section A or Section B (depending what kind of property you donated), and those sections can be complex.
The bottom line
Ultimately, the choice of whether to get help with tax filing comes down to whether you have the expertise, time, and interest in handling your exact needs. “Assess your personal situation and consider whether you’re comfortable with the risks and consequences of making a mistake,” suggests Gentile. Looking for ways to reduce your tax bill? Consider working with a financial professional to see if there may be ways to incorporate tax-smart strategies into your overall financial plan.