DIY tax filing is all the rage these days. Online tax filing programs are widely available, and many of them are free.
But should you really do your own taxes? And what do you need to know before you do?
Before You DIY Your Taxes: Things To Consider
Online tax programs are designed to make DIY tax filing easy. However, if you make a mistake on your do-it-yourself tax filing, you could set yourself up for a closer-than-desired relationship with the IRS — and the potential for stiff penalties.
What do you need to know before you do your taxes yourself? Here are seven tips.
Weigh the Pros and Cons for Your Situation
It’s a good idea to assess your individual tax situation before you decide whether you should do your own taxes.
Do you have a fairly simple tax situation? Or is yours more complicated? Look at your prior tax returns to get some idea of how simple your return is.
For example, the tax return for a single or married filer with the standard deduction and basic W-2 income should, in theory, be pretty simple to do on your own.
However, if you’ve got a few sources of sole proprietor income, share custody of your kids with your ex or have an abundance of itemized deductions, you may want to put your return in the hands of a professional tax preparer.
This can be especially important if you have little experience in accounting or tax preparation.
Time is another factor to consider. Do you have several extra hours to set aside to do your taxes? If so, DIY tax filing may be a good idea.
But if you’re struggling to get your to-do list done as it is, you may want to reconsider DIY tax filing.
If you’ve decided to do your taxes on your own, it’s a good idea to start with some organizational tasks. Gather all of your W-2’s and any information on investments, interest paid and potentially deductible expenses.
Keep your piles neat and orderly so they’re easy to understand when you need the information in them. And when preparing for next year, create an organizational system you can use throughout the year so that next year’s preparation tasks will be easier.
One great thing about DIY tax filing software is that it’s pretty good about prompting you when to put in which numbers. If you’ve got your tax documents organized, you and your DIY tax software program should get along nicely.
Choose the Right Filing Status
Knowing the right tax filing status is important. The answer to this question might be simple if you’re a single person living alone with no dependents.
But if you’re a single parent, do you file as a single person or head of household? If you’re married, is it better to file jointly or separately?
Choosing the wrong filing status can potentially cost you thousands of dollars. For instance, a single parent who is also the head of household doesn’t jump up to the 22% tax bracket until they reach $53,701 in income.
A single parent who is not head of household will pay 22% once they reach just $40,126 in income. This is just one example of why choosing the correct tax filing status is so important.
Read this IRS article for more on deciphering which tax filing status you should choose.
Know Whether You Itemize or Take the Standard Deduction
Knowing whether you should itemize deductions or take the standard deduction is important.
The 2020 standard deduction for a single filer is $12,400.
However, if you as a single filer gave $20,000 to your favorite charity last year and paid $8,000 in mortgage interest, you may be better off itemizing your deductions, depending on your individual tax situation.
Tax laws change regularly, and that means that the answer to whether or not you should itemize deductions or take the standard deduction can change as well.
Search the web for specifics on itemization or standard deduction tips, or see this IRS page for more information on whether you should itemize your deductions or take the standard deduction.
Use the Right DIY Program for You
Our best advice: research thoroughly. First, find out how much each program will cost given your individual filing situation (the more complicated your tax situation, the more the software is likely to cost you).
Then read reviews that discuss ease of use, customer support options, add-on features and pricing. And look at independent reviews to get third-party opinions.
It’s important to note that many online tax filing programs have add-on costs you may not find out about until you’ve already entered all of your tax information. Moral of the story: Keep an eye on the final cost before you agree to submit your return.
Most DIY tax software programs are set up to be easy to use — even for newbies. And many offer money-back guarantees. Choose the one that seems to have the best features, benefits and pricing for your situation.
If you find after you’re finished that you’re not crazy about the program, make a note to consider another program next year. Or simply don’t submit the return and go about filing using another software program.
Many online tax filing programs are free to start your return and will charge you only when you choose to submit the return to the IRS.
Double Check Your Numbers
While many tax filing software companies will take full responsibility for errors on their part, they can’t control — and won’t take responsibility for — numbers that you input incorrectly.
For that reason, it’s important to double-check all of the numbers and personal information you enter on the return before hitting the button that sends the return to the IRS.
Know When It’s Time To Hire a Professional
If you’re spending countless hours working on your taxes or if the tax filing terms and laws feel like they’re vastly above your level of knowledge, it might be time to hand the job over to a professional.
The IRS has a list of red flags that could result in your getting an audit notice, and I’m guessing that’s the last thing you want. Personally, I’ve had my taxes done professionally for the last two decades.
Every year I think about trying a DIY online tax program. I wouldn’t have to make the hour drive to my joyfully inexpensive and competent tax guy’s office.
And I’d save a bit of money on the actual filing too — if I filed everything correctly. But every year I end up deciding that, between having four kids and working a combination of W-2 jobs and sole proprietor businesses, I’d be best off leaving my taxes to a professional.
However, your answer might be different from mine. DIY tax filing could be the smart answer to your tax filing problems.