Individuals living in the United States must file their taxes by the 15th of April each year. They start collecting their forms and documents on January 1st and prepare their taxes to file them before the due. This is a stressful period because income tax calculations and deductions can be complex, and some people may even have to pay additional taxes. Calculating the right tax amounts can feel overwhelming if people switch jobs or take up more than one job. One way to cope with this stress is to understand the different tax filing options and even outsource this task to a professional tax preparer. At the same time, tax preparation services can be expensive.
In such scenarios, should you file taxes by yourself? How about tax software? Read on as we compare DIY tax filing using tax software vs. CPA services.
Tax Filing Basics – What You Need to Know
Before starting the tax filing process, know the basics. Understand if you must pay taxes, and if yes, how to go about it.
Understanding the Tax Filing Process
The tax filing process can be overwhelming if you’re doing it for the first time. Read on to learn the steps involved.
Step 1: Gather the Documents
The first step is to collect the tax forms and other documents that serve as proof of your earnings during the previous year. Some common documents to collect are:
- Get a W-2 form from each employer you have worked with in the last year.
- Collect other earnings and interest forms like 1099.
- If you have made donations to charitable institutions, collect the receipts.
- Get proof for payments like mortgage interest, medical costs, and other tax-deductible expenses for both federal and state income taxes.
Step 2: Filing Status
Decide if you want to file single or jointly, though the latter option is available only if you are married. Note that the percentage of money you pay towards your household expenses also impacts your filing status.
Step 3: Standard Deduction or Itemization
The next step is to know which is more beneficial – a standard deduction or itemized deductions. There are many restrictions when it comes to applying for the standard deduction, and you must meet them if you choose this option.
Step 4: Decide How to File
The IRS recommends that you file online for faster processing, typically using tax software. But, you can also prepare your own taxes and file them online using the IRS Direct File if you live in one of the 25 participating states. Otherwise, you can also send your tax forms by mail, though this can take about four weeks for the IRS to process your return.
Step 5: Make a Payment
If you owe taxes, pay them online or apply for a payment plan. You can even pay by check or money order if you plan to send your tax forms by mail.
Step 6: Submit Your Returns
Once you’ve completed the calculations, submit your return before the due date.
Thus, this is the process for filing taxes in the U.S.
Who Needs to File Taxes?
In general, American citizens and residents who live and work in the U.S. must file taxes if they are single and have a gross income of $14,600 for those under 65 and $16,550 for those over 65. If married and filing separately, the minimum gross income is $5. If you are filing jointly with your spouse, the minimum income is $29,200 if both are under 65 years of age. This limit increases to $30.750 if one is over 65, and $32,300 if both are over 65 years. Note that these limits are for 2024.
Common Tax Filing Mistakes to Avoid
If you are required to file taxes as discussed earlier, know the common mistakes and try to avoid them as much as possible. Some common mistakes are:
- Incorrect personal information
- Wrong filing status
- Misreported income
- Incorrect deductions or credits
- Late filing
- Not paying the taxes due
You can avoid the above mistakes by being well-versed in taxation and taking care to report the right amounts.
DIY Tax Software – Pros and Cons
DIY tax software has become a convenient choice in the last few years because it is affordable and easy to use. At the same time, it may not work well for everyone.
Pros
DIY tax filing software works best for individuals with straightforward tax returns. Its advantages are:
- Cheaper than hiring tax preparation services
- User-friendly and intuitive interface
- Automates simple tax calculations and deductions
- Built-in error checking reduces wrong computations
- Some offer step-by-step guidance
Cons
Despite its simple and convenient nature, DIY tax software is not for everyone. Some of its drawbacks are:
- Not ideal for multiple incomes or complex tax situations
- Miscalculations, even if they are accidental, can lead to heavy fines and penalties
- The possibility of missing out on deductions, thereby leading to increased tax payments
- Limited audit support
In all, DIY tax software is a good choice for individuals with W-2 income or who have minimal deductions. For more complex calculations, it’s a good idea to get tax filing help.
Hiring a Professional Accountant – Pros and Cons
Individuals with multiple income streams and jobs can hire a CPA or an EA to help with their taxation. These professionals are well-versed in taxation and can help you get maximum deductions while complying with the tax requirements.
Pros
Professional tax preparers offer many advantages to individuals. Some advantages of hiring them are:
- They are experts in taxation and can identify deductions, credits, and other strategies that will save you taxes.
- Self-employed taxes and business incomes are complex to calculate, and they can help with these.
- They ensure accuracy, reducing the chances of errors.
- An experienced tax professional can save you time and effort.
Cons
Despite their advantages, tax professionals come with shortcomings as well. The key areas to watch out for are:
- These services tend to be more expensive than the best tax software.
- You must provide financial records and disclosures.
- Schedule appointments at the available time slots.
Thus, these are the pros and cons of filing taxes by yourself and hiring a professional. The choice will depend on your taxation knowledge, the complexity of taxes, and the available time.
CPA vs. EA – What’s the Difference?
When it comes to tax preparation and filing, you can get help from either Certified Public Accountants (CPAs) or Enrolled Agents (EAs). Both of them are authorized to handle taxes. Let’s take a closer look at CPA vs. EA to better understand how they differ.
Certified Public Accountant (CPA)
A CPA is someone who is licensed to take care of accounting for individuals and businesses. These accountants are experts as they must have passed the difficult State CPA exams conducted by the American Institute of Certified Public Accountants (AICPA). In their professional life, they are authorized to take care of all your accounting and reporting needs, along with preparing taxes. They can also conduct and sign off on financial audits.
Enrolled Agents (EA)
An EA, on the other hand, is a tax advisor authorized to operate across the country. This individual can prepare taxes and represent taxpayers before the Internal Revenue Service (IRS). Needless to say, they are experts in tax laws and IRS regulations. A key difference is that EAs cannot provide broad financial planning services like the CPAs.
Is It Worth Paying for a Tax Professional?
Whether you choose a CPA or an EA to handle your taxes, a primary question is whether you should even hire them in the first place. Are they worth the fees they charge?
The answer depends on the complexity of your returns. If your focus is only on filing income taxes, EAs can help prepare accurate returns. On the other hand, if you’re looking to maximize your savings and choose tax-saving investments for the entire year, CPAs are the right choice.
When DIY Software Is Enough
A DIY tax software is enough if your taxes are simple. Go for this option in the following scenarios:
- Only W-2 forms from employees
- No additional income sources
- Minimum deductions
- Ability to pay taxes or follow a payment plan
- Straightforward financial situation
When Hiring a CPA or EA Is the Better Choice
In all other cases not mentioned above, hiring a CPA or EA is a better choice. The following are some scenarios where a CPA or EA can help:
- Being self-employed or owning a business
- Have multiple revenue streams
- Have rental income
- Complex tax scenarios
- Facing an audit and need someone to represent you at the IRS
Depending on your specific situation, you can choose between tax software vs. CPA.
How Manay CPA Can Help with Your Taxes
If you’ve decided to hire a professional tax preparer, Manay CPA is a good choice as they have the experience and knowledge to handle even the most complex tax scenarios. Here are some ways in which Manay CPA can help with your taxes:
- Help take advantage of all available deductions.
- Stay on top of IRS regulations and guide you through the changes.
- Full representation in case of IRS audits.
- Protect your financial interest and resolve existing disputes most efficiently.
- Apply for ITINs.
- Offer tax-saving strategies based on your income streams.
- Help with financial and tax planning and long-term asset accumulation.
- Optimize your business financials from a taxation standpoint.
With these services, Manay CPA enables you to enjoy a stress-free tax filing season, as they take care of everything for you.
Choosing the Best Tax Filing Option for You
To conclude, tax filing does not have to be complex, provided you make the right decisions based on your tax situation. If you have W-2 forms and fewer deductions, tax software should do so. But, on the other hand, if you have multiple income streams and complex tax calculations, you are better off taking the help of professionals, as this will avoid paying taxes and penalties. More importantly, it will save you time and effort.
For further questions, schedule a free consultation with Manay CPA.
