Tax Return Preparation: The Pitfalls of Going It Alone
With tax season just around the corner, you might be thinking about going it alone on your taxes this year by using a tax prep software program like TurboTax.
But is this really a wise move? If you operate a very small business that only requires a simple tax return, or if you only need to file a Form 1040EZ for you and your family, it might be fine. For most businesses and individuals, however, going it alone with do-it-yourself tax software can end up being a very troublesome and expensive proposition.
Despite promises by politicians to simplify the tax code, it has grown more complex than ever. The fact is, there’s only so much a software program can do to simplify taxes enough so that it’s practical to go it alone when preparing your tax return.
Mistakes and Lost Deductions
There are two big potential problems with going it alone on your taxes: Making mistakes that lead to additional penalties and interest (or worse), and missing out on deductions that can lower your tax bill. If you encounter one or both of these problems, completing your taxes could end up costing you much more than whatever you spent on a software program. It will probably even cost you more than you would have paid to hire an independent tax professional to do it right the first time.
Here are 5 of the most common errors that occur among users of tax prep software programs:
- Incorrect calculation of the home mortgage interest deduction — Homeowners often mistakenly claim the full amount of mortgage interest reported to them on Form 1098, unaware that there may be limitations on how much of this interest they can actually deduct.
- Claiming of non-qualifying dependents — The laws governing who can claim an individual as a dependent are complex, especially in cases of divorce and when adult children are supporting elderly parents.
- Inaccurate head of household (HOH) filing — The laws defining HOH filing status are also complex, especially the exception allowing some married taxpayers to claim HOH status. Missing out on HOH status can end up costing hundreds of dollars in lost deductions and credits.
- Errors in claiming the Earned Income Tax Credit (EITC) — There is an estimated 27 percent error rate associated with claiming the EITC. The most common EITC error is claiming a child who does not meet all of the qualification criteria in terms of relationship, age, joint return and residency requirements.
- Improper claiming of the home office deduction — Many people claim the home office deduction when in reality their home workspace doesn’t meet the very specific criteria spelled out in the tax law. Others don’t claim the deduction when they could, missing out on valuable tax savings.
Meanwhile, here are 5 of the most commonly missed deductions and credits by people who use tax prep software programs:
- State and local sales taxes: If you pay little or no state income tax, you can deduct state and local sales taxes you paid this year instead. Don’t worry if you didn’t save all your receipts — you can complete a worksheet and use IRS tables or use the IRS’ online Sales Tax Deduction Calculator here.
- Interest paid by parents on their children’s student loans: If you pay back your children’s student loans, the transaction is treated like the money was given to them. Your children can then deduct up to $2,500 of student loan interest you repay each year without itemizing.
- Job search costs: You can deduct employment agency fees; transportation, food and lodging expenses; and printing costs for resumes and business cards used in your search for a job if you itemize and they exceed 2 percent of your adjusted gross income (unless you’re looking for your first job).
- Child care tax credit: You may qualify for a tax credit worth between 20 percent and 35 percent of child care costs you incur while working.
- State taxes paid the previous year: If you owed state tax when you filed your return last year, you can include this amount in your state tax deduction this year, along with state income taxes withheld or paid via quarterly estimates.
Benefits of Hiring a Tax Pro
There are numerous benefits to hiring a TaxBuzz Verified Professional to prepare your taxes instead of going it alone using a tax prep software program. Not only will you not have to worry about making common mistakes and missing deductions like these, but you will save a tremendous amount of time and energy that can be better spent managing your business or your personal finances.
And when you consider the potential savings in penalties and interest that could accrue from mistakes like these, as well as lost deductions and saved time and energy, working with a TaxBuzz Verified Professional may end up costing less than going it alone. Save yourself time, money and frustration this tax season by hiring a TaxBuzz Verified Professional to prepare your tax return.