Tax Preparer vs. Software: How to Choose

You’ve been paying a professional – a CPA, attorney, enrolled agent or other paid preparer – to prepare your tax return. Many of your friends now use tax software, an online product or an app (in many instances you can now combine these, changing from your desktop to a mobile app and back at your option). Is one better than the other?

There’s no single answer for every taxpayer. Choose the tax preparation method that suits your situation. Here are some of the factors to consider in making your selection. 

As a general rule, the more complex your tax situation, the more compelling it is for you to bring in a tax professional. What makes complexity? If you have any of the following situations:

• You own a business, including a sideline business. This is because there are many complex rules and various tax elections that you may want to discuss with a tax pro. For example, if your business purchased equipment, you have several ways to write off the cost; the best way to do this depends on your current tax situation as well as your prospects for the future. You can, of course, handle complex situations with appropriate tax software (e.g., TurboTax Home and Business enables you to prepare a Schedule C for your sole proprietorship), but you won’t get personal advice.
• You had a major life event this year. For example, if you sold a business, went through a divorce, sold a home or had any other major life change, a tax preparer can alert you to the rules that you now have to handle.
• You were busy, busy, busy in the market. Software can automatically input the results from Form 1099-B, which reports securities transactions. However, you may need to work with a tax pro to make sure you have all the information required for your return (e.g., your tax basis); it may not all be on the 1099.

For some people, the very idea of numbers, taxes and the process of preparing and filing a return is daunting. For others, taxes have become a routine chore that needs to be done each year.

If you’ve been doing your taxes year after year and not much has changed in your financial or personal situation, you’ll likely be more than able to handle your 2018 tax return. Just familiarize yourself with the changes that came about as a result of the Tax Cuts and Jobs Act, last year's massive tax bill. For example, the standard deduction basically doubled, the personal exemption went away, and there were serious changes to how mortgage interest and state and local taxes are handled. And don't forget that you still have to file that you had health insurance to follow the mandates of the Affordable Care Act. Just follow the instructions on the return. Also, be aware that for the 2018 tax year, there will be a new 1040 return and no 1040EZ or 1040A.

If you’ve never done a return before, decide whether you’re up to the task. Recognize that you don’t have to be a math wizard because software or online preparation sites do calculations for you. And you don’t have to be a tax expert because you’ll be prompted to supply needed information to complete your return.

Time is always an important factor in deciding whether to do your return yourself or hire a preparer. Either way, you’ll spend the same amount of time gathering the documentation needed to prepare the return: information returns you’ve received (Forms W-2, 1098, and Schedule K-1s), your canceled checks for itemized deductions, logs and other substantiation for certain expenses.

So, the difference is in the time spent doing the actual return. Depending on your situation, that could be modest (an hour or so), or lengthy (6 hours or more). If you don’t have this time, then using a preparer is the better choice.

Cost may influence your decision about who prepares your return. According to the National Society of Accountants, the average fee charged this year for a return that does not include itemized deductions is $159, or $273 for a return with itemized deductions. Fees may be higher or lower, depending on the region of the country.

You can do your own return for little or nothing, and not just with pen and paper, by hand. If your adjusted gross income is less than $60,000, you can use FreeFile, which is the IRS’s free service to prepare your return online and submit it electronically at no cost.

If your income precludes you from using FreeFile, you can buy software or use an online solution; prices for a federal return start around $20. One bad change starting this year: If you itemize, you can no longer take the cost of the software as an itemized deduction on your 2018 tax return. That deduction went away with the new tax bill. There is still some software that lets you prepare your taxes for free.

Hiring a tax preparer – or using a software package or online tax site – can both work well, depending on your tax situation and your comfort with the process.

If you want to use tax software, recognize that there have occasionally been issues with certain products – for example, some fraudulent state tax returns were filed using TurboTax a couple of years ago, leading to a suspension of state filings for 24 hours and inducing Congress to investigate the matter. (Tax-related identity theft is an issue that everyone needs to be aware of, regardless of the method you use to prepare your return.) 

If you opt to use a paid preparer, make sure to find a reliable one and one who meets your needs for this tax year. You may need more or less elaborate help, depending on what went on in your life this past year. Take advantage of the IRS's tax return preparer directory listing those with valid IRS Preparer Tax Identification Numbers (PTINs). 

Either way, the responsibility to file a tax return is on you. Good luck.