Common Cents # 41 - Tax Time

 

Tax Time

 

Between now and April 15, the vast majority of Americans will be filing their tax returns. All US income is subject to tax whether the earner is a citizen or not.

Not long ago we had two choices, we could get out a pencil and paper or we could go to a tax professional. Today there are a variety of choices in between. We can buy software in a box or download software that will walk us through the steps, or we can do the whole thing online. We can get as much help as we need by having a tax professional check the return before it is filed or doing it virtually with a real person at the other end of the computer.

The amount of help we need depends on our willingness to read and understand the updates and nuances in the tax code and the time we want to spend. Sitting down with an experienced tax professional is certainly the easiest and quickest way to insure an accurate return.

For many years I did my own taxes with a pencil, paper, and calculator. After I became a tax pro, I reviewed the previous three years, discovered changes that were needed based on my new knowledge, and received a $5,000 refund. Doing my own taxes may have cost me $25,000 to $50,000 or more over forty years, and this was after I had taken income tax and accounting in college.

Computers have made life simpler for Do-it-Yourselfers by asking appropriate questions and doing the math. Still, there can be significant complexities that only a professional could sort out. As a general rule, if a person is tech savvy and all of their income is reported on W-2’s, they should be able to do their own returns online. Complexities that might require a professional are self-employment or contract work, rental income, unusual stock trades, disposal of business assets, income from more than one state, farm income, and so forth. Farming is the most complicated businesses imaginable when it comes to taxes. If we received a 1099-NEC or a K-1, we might want to consult a pro unless we know exactly what we are doing.

Every year there are changes in the forms and the tax code in general. Some years there are major changes and some years the changes are small. An odd one was last year when, under pressure from AARP, Congress mandated a simpler 1040 form for people over 65. After considering that seniors often have the most complicated tax returns because of pensions, Social Security, medical expenses, selling a home and host of other issues that occur after retirement, the only thing the IRS really could do was make the type larger on the form. Considering that about 90% of filers e-file online or with a tax pro, the size of the type on a paper form did not solve anything. We now have a special form for people over 65 with bigger type and less white space.  The late night TV hosts certainly had some fun with that “improvement”!