This is a guest post from Richard Barrington, who has earned the CFA designation and is a 20-year veteran of the financial industry, including having previously served for more than a dozen years as a member of the Executive Committee of Manning & Napier Advisors, Inc. Richard has written extensively on investment and personal finance topics. Previously at GRS, he shared how to find the right CD or money-market account, tips for sound saving and investing, and last year?s discussion about tax prep costs.
You may be about to make your most expensive decision of the year.
With the U.S. tax season approaching, you face a range of choices for how to prepare your tax return. That choice could save ? or cost ? you a large sum of money. Tax rates are likely to continue to rise. Preparation fees alone can cost hundreds of dollars, overpayment of taxes can easily run into the thousands, and the price of filing a false return can be far greater still. That?s why choosing your tax preparation method may well be your most expensive decision of the year.
By outlining some of the issues involved in deciding how to get your taxes done, this article could help you avoid making a costly mistake.
How will you prepare your tax return this year?
GetRichSlowly.org, MoneyRates.com and MSN Money jointly conducted an online poll in February 2012 asking readers how they plan to prepare their tax returns this year. There were nearly 12,000 responses, and here?s how they were distributed:
- 49% said they pay someone else to prepare their returns.
- 38% said they handle returns themselves with the help of tax preparation software.
- 10% said they prepare returns themselves by hand.
- 3% said they have a friend or family member who will do it for free.
While using a paid preparer was the leading response, the next two answers combined for a similar percentage of the responses, making for a roughly even split between those who do it themselves and those who pay a professional. What issues should you consider when deciding how to prepare your taxes?
Weighing the options
GetRichSlowly.org researchers gathered information on a number of different tax preparation options. The results are based on advertised data on 98 online products from 27 different providers, as well as quotes from 28 offices of 12 professional preparers across the country. The following is a rundown of the major categories, and a summary of what these approaches might cost:
Free options. There are ways of getting your taxes done for free, including filling out forms by hand or using the online forms and instructions the IRS provides. There are also some options which offer a free federal return in combination with a paid state return, which will typically cost about $20. These free options are best suited to the simplest tax situations.
Online.These options include online tax preparation and software downloads. This will typically cost you about $27 for a federal return, plus about $22 more for a state return. These programs come with varying degrees of sophistication, though obviously they are unable to give personalized advice or help with highly complex situations. Be sure you are entering your data on a secure website (one starting with https://).
| Online Tax Preparation, Lowest Advertised Cost | |||||
| Product (Company Name) | Version | Federal 1040 Simple Price | State Price | State e-File | |
| 1040.com (Drake Enterprises) | Simple | $0.00 | $29.95 | $0.00 | |
| 1040Now | 1040EZ | $14.95 | $17.95 | $0.00 | |
| At Home (H&R Block) | Free | $0.00 | $27.95 | $0.00 | |
| CitizenTax | - | $19.99 | $29.99 | $0.00 | |
| CompleteTax (CCH) | Basic | $0.00 | $29.95 | $0.00 | |
| efile.com | Free Federal | $0.00 | $19.95 | $0.00 | |
| EfileTaxReturns.com | Free | $0.00 | $22.95 | $0.00 | |
| eSmart Tax (Liberty Tax) | Basic | $0.00 | $19.95 | $0.00 | |
| eTax.com | Free | $0.00 | $29.95 | n/a | |
| ExpressTaxRefund.com (RT Software Inc.) | Basic Return Package | $29.95 | $20.00 | $20.00 | |
| ezTaxReturn.com | Free Federal + State Return | $39.95 | $0.00 | $0.00 | |
| FileYourTaxes.com (Taluy California Corp.) | Free | $0.00 | $23.50 | $0.00 | |
| Free1040TaxReturn.com | Standard Return | $9.95 | $19.95 | $0.00 | |
| FreeTaxUSA (TaxHawk, Inc) | Free Edition | $0.00 | $9.95 | $0.00 | |
| IRS | Free File | $0.00 | n/a | n/a | |
| Jackson Hewitt | Basic | $0.00 | $29.95 | $0.00 | |
| KeyTaxx.com | Standard Return | $9.95 | $19.95 | $0.00 | |
| OLT OnLine Taxes | 1040EZ Simple | $0.00 | $7.95 | $0.00 | |
| OnePriceTaxes (AFJC Corp) | Federal and State Taxes | $14.95 | $0.00 | $0.00 | |
| OnlineTaxPros | Deluxe | $19.95 | $14.95 | $0.00 | |
| RapidTax (Rapid Filing Services LLC) | Basic | $9.99 | $19.99 | $0.00 | |
| TaxACT (2nd Story Software) | Free Edition | $0.00 | $14.95 | $0.00 | |
| Taxbrain (Petz Enterprises, Inc) | 1040EZ Tax Package | $14.95 | $29.95 | $0.00 | |
| TaxSlayer | Free Edition | $0.00 | $17.90 | $0.00 | |
| TaxHawk | Federal Tax Return | $0.00 | $0.00 | $0.00 | |
| TaxSimple (Thompson Reuters) | Basic | $0.00 | $24.95 | $0.00 | |
| TurboTax (Intuit) | Free Edition | $0.00 | $27.95 | $0.00 | |
| Notes: 1. Prices shown are lowest online advertised price as of February 2012. 2. Most ?free? services are limited to customers with a certain tax situation. 3. Information is provided for general guidance. Contact specific provider or visit official website for details. | |||||
| Software Download, Lowest Advertised Cost | ||||
| Product (Company Name) | Version | Federal 1040 Simple Price | State Price | State e-File |
| At Home (H&R Block) | Basic | $19.95 | $36.95 | $19.95 |
| Tax Act (2nd Story Software) | Free | $0.00 | $14.95 | $7.95 |
| TurboTax (Intuit) | Basic | $29.95 | $36.95 | $0.00 |
| Notes: 1. Prices shown are lowest online advertised price as of February 2012. 2. Most ?free? services are limited to customers with a certain tax situation. 3. Information is provided for general guidance. Contact specific provider or visit official website for details. | ||||
Paid tax preparer. A paid tax preparer can give you advice specific to your situation and may be the best approach for complicated tax returns and maximizing legal tax deductions. However, the personal service will cost you more: a federal return will typically cost between $112 and $191, with another $15 or so for a state return.
| Professional Tax Preparer, Lowest Phone Quote | |||||
| Company | Type | New York City | Kansas City | Los Angeles | |
| H&R Block | Federal State | $40 $39 | $119 $39 | $99 $39 | |
| Jackson Hewitt | Federal State | $75 $40 | $150 $40 | $80 Free | |
| Liberty Tax | Federal State | $200 Free | $250 Free | $150 Free | |
| Individual tax preparer | Federal State | $165 Free | $40 $40 | $50 Free | |
| Notes: 1. Prices shown were obtained through telephone interviews in February 2012. 2. Most ?free? services are limited to customers with a certain tax situation. 3. Information is provided for general guidance. Contact specific provider for details. | |||||
Videoconferencing. A hybrid of online preparation and the personal approach is a tax preparation video conference. H&R Block offers a variety of these programs, with total costs for a federal and state return ranging from $39 to $408.
| Live Video Conference, Lowest Advertised Cost | |||||
| Product (Company Name) | Version | Federal 1040 Simple Price | State Price | State e-File | |
| Block Live (H&R Block ) | Basic | $0.00 | $39.00 | $0.00 | |
| Notes: 1. Prices shown are lowest online advertised price as of February 2012. 2. Most ?free? services are limited to customers with a certain tax situation. 3. Information is provided for general guidance. Contact specific provider or visit official website for details. | |||||
Making the best choice
So which of the above is right for you? Here are some things to think about:
- Match the approach with your needs. If you file a form 1040EZ or a 1040 without itemized deductions, then a free approach or simple software should do the job. However, if you have several investments or deductions, or if you file in multiple states, you may need a more sophisticated approach.
- Choose software that is up-to-date and well supported. If you use software, make sure it is up-to-date both technologically and with respect to changes in the tax code. Also, find out in advance what kind of user support is available.
- Make sure a preparer has a Preparer Tax Identification Number (PTIN). The IRS now requires all paid tax preparers to have a PTIN, so steer clear of a preparer who doesn?t have one.
- Check your preparer?s professional qualifications. These may include being a CPA, Enrolled Agent, or tax attorney. For all other paid preparers, the IRS is introducing a new testing requirement: people who pass the new test will be called Registered Tax Return Preparers.
- Research your preparer?s history. Check with your local Better Business Bureau to see if there have been any complaints. Skim online reviews, remembering to take both highly negative and highly positive reviews with a grain of salt.
The IRS advises taxpayers that when using a paid preparer, never sign a blank return in advance. That?s a good reminder of the ultimate truth about any tax preparation approach: in the end, it is your name on the line.
Tax preparation costs are on the rise
GetRichSlowly.org researchers also obtained cost information on the various options and compared the data with last year?s survey to identify trends in tax preparation costs. The numbers show that costs are on the rise for both software and paid preparers, though software is still considerably cheaper. The following are average starting prices rounded to the nearest dollar, with the change from previous year rounded to the nearest whole percent.
| Paid preparer | 2011 tax year | 2010 tax year | Change |
| Federal Return | $112 | $90 | Up 24% |
| State Return | $15 | $20 | Down 27% |
| Combined | $127 | $110 | Up 15% |
| Software | 2011 tax year | 2010 tax year | Change |
| Federal Return | $27 | $23 | Up 16% |
| State Return | $22 | $20 | Up 10% |
| Combined | $49 | $43 | Up 13% |
Average state return costs for paid preparers appear to be coming down because more and more preparers are including them with the cost of federal returns.
Other ways to measure cost
What you pay to prepare your return is just one way of looking at cost. Here are some other things that can affect the cost of your tax returns:
- Paying the right amount. According to the IRS, the average tax refund for the 2010 tax year was $3,003. Adjusted for inflation and projected over 50 years of paying taxes, this would come to more than $300,000 you might have coming to you in refunds over the course of your lifetime. Those are high stakes, and even a slight miscalculation could mean a big difference in what you have coming to you.
- Paying the price. There are a variety of penalties for underpaying on your taxes, and cases of tax evasion can carry even stiffer punishment. According to IRS statistics, the number of criminal tax investigations increased by more than 26% from 2008 to 2010. When the IRS recommends a case for prosecution, it gets a conviction about 70% of the time.
- The value of your time. In most cases, the cheapest form of tax preparation is to do it yourself, but you also have to remember that your time is worth something. If paying $100 or so can save you hours of filling out forms and trying to understand the tax code, then it may be well worth it.
The takeaway
Before you make this momentous decision, it?s important to assess not just which tax preparation method has the lowest price tag, but also which gives you the best chance of filing an accurate return without taking up an undue amount of your time.
How do you prepare your taxes? How did you decide which method works best for you?
This article is about Taxes??
Source: http://www.getrichslowly.org/blog/2012/02/29/tax-prep-tips-is-cheaper-always-better/
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