It's Not Fun, but It Has to be Done Benjamin Franklin wrote a 1789 letter that states, “But in this world nothing can be said to be certain, except death and taxes.” Even at the United States’ early beginnings, federal taxes were a necessary evil to fund various public projects and administrative costs. Today, federal taxes serve much of the same purpose. While virtually no one likes to prepare and file their taxes, it is a necessity if you want to avoid fines and further hassle. It is no secret that preparing and filing your taxes is notoriously complicated. Many people lament that it should not be so difficult to pay the government. However, some of the complications allow people to save money if they discover specific tax benefits. Knowing how to file your own taxes may be a good option if your tax situation is relatively straightforward, or if you are willing to learn the process. Why Do You Need to File Your Taxes Every Year? The short answer is that federal law requires that most individuals file taxes annually. Income taxes are assessed every year based on your income earned during that period. You then pay a percentage of that income to the government, less any deductions, adjustments, or credits that you qualify to receive. If you do not file (and pay) your taxes, then you may be assessed penalties and interest. The Internal Revenue Service (IRS) can even go as far as garnishing your wages and repossessing your property if you do not file and pay as required. The Benefits of Filing Your Own Taxes If you are one of the 43% of Americans that are doing your own taxes, you are certainly not alone. Roughly 53 million people prepared and filed their own taxes in 2018. There are many benefits to filing your own taxes, including: Saving money: Hiring a tax professional is expensive, and many people can prepare and file their returns on their own, completely free of charge. Control: Some people like knowing the exact information that is included in their return and being able to control the data, and for some, knowing precisely how the numbers work out, is comforting. Gain helpful information: When you prepare your taxes, you can see what items saved you money this year or which issues you should address so you can save money next year. While filing your own taxes is complicated, it can be beneficial under the right circumstances. There are several programs online that walk you through the process to help ensure you are taking advantage of all of your available deductions and credits. The Drawbacks of Filing Your Own Taxes In addition to the benefits, there are also some disadvantages to filing your own taxes. These include: Time and effort: Preparing and filing your taxes takes time and work You have to sift through financial information and deal with concepts that you may not understand well. The process can be frustrating and take a considerable amount of time. Error risk: If you do not completely understand how your taxes work, you run the risk of making a mistake because of misconceptions. If that happens, it could lead to underpayment and audits down the road. Questions: Even if you use a tax preparation software, you may still have questions that will remain unanswered unless you do significant research or reach out to a tax professional. For some people, the risk of having a substantial error that triggers the IRS’s attention is enough to scare them away from preparing their own taxes. Preparing for Filing Your Taxes When you begin work on your taxes, you should have information gathered throughout the year. Some of the most common items that you will need include: Social Security numbers for you, your spouse, and any dependents Information about wages, such as W2s or 1099s Investment income information Documents that represent any other source of income Information regarding adjustments to income, such as student loan interest paid, IRA contributions, and health savings account contributions, just to name a few Information regarding potential credits, including, for example, child care expenses, education expenses, or retirement savings contributions Data about any tax payments that you may have made throughout the year Keeping good records will help make tax preparation easier at the beginning of the year. [youmaylike] The Basics About What You Can Claim When Filing You must pay income taxes on all your income earned throughout the year. However, that income is reduced by a few things. The further you can reduce your taxable income, the less you tax you will pay. There are three general categories of tax reduction methods: Standard or Itemized Deductions Everyone can claim either the standard or itemized deductions. Standard deductions are a set amount that is based on your filing status. Itemized deductions are based on actual expenses that you incurred throughout the year. You can choose to use the higher deduction. The higher the deduction, the less tax you will have to pay on your income because your income decreases on paper. Itemized deductions include things like medical expenses, state and local tax payments, and home mortgage interest deductions. Itemized deductions will only decrease your income by a certain percentage, or up to a specific point. Adjustments Some adjustments to your income may also be available. These include things like paying student loan interest or alimony. Adjustments are more valuable compared to deductions because they decrease your income dollar for dollar. Credits A credit decreases your taxable income as well. Some credits are refundable while others are not. For example, you get a child tax credit simply for having children that qualify for that credit, but that credit will not be paid out to you if you do not have any tax obligations. On the other hand, the Earned Income Credit, which is available for low-income filers, will be refunded to you even if you do not owe any taxes. There are a wide variety of deductions and credits available. Take a look at the federal forms and related schedules to determine whether you might qualify for any of these. How to File Your Own Taxes If You Live Overseas If you earned income in the United States as a U.S. citizen or resident alien, you likely need to pay taxes on that income. This is true even if you live overseas. You can still choose to e-file or mail your tax return to the IRS once you have it prepared, just as if you physically lived in the United States. In some cases, you will be taxed on the income that you earned throughout the world. However, you may be able to deduct a portion or all of the revenue that was not made in the United States in some circumstances. Filing Online The IRS offers an online filing option that is free for individuals that have an adjusted gross income below a specific threshold. Generally, your income must be below $66,000 to qualify for this service. You can also file online by using a commercial tax preparation software. Examples of this type of software include: H&R Block TurboTax TaxCut TaxSlayer There are many programs available that will file your taxes for you, often for a fee. Knowing how to file your own taxes can be a great way to save money, but it can be tricky as well. If you want to file your taxes yourself, be sure to read the form instructions thoroughly and get familiar with various tax saving opportunities before you begin preparing your return.
Make Your Job Easier
Online tax software lets you prepare your own taxes with the help of some automated questions and calculations. It often allows users to complete their taxes for a fraction of what it costs to pay a professional tax preparation company or individual, but not always. Although there are online tax software programs for individuals, professional tax preparers almost always use tax software to provide services to their clients as well.
Only a few consumer-based online programs offer the option to consult with a tax professional. Most rely on users to understand and answer questions to determine how to file a tax return. That is one of the many areas where tax professionals have a leg up compared to online tax software. This type of set up can be very daunting for individuals or businesses that may not know (or even want to know) the first thing about their taxes or finances.
As a tax professional, you need to choose a tax preparation software that will fit your needs and serve your clients the best. It also needs to allow you to go above and beyond what a consumer-based software can provide. Online tax software options may help make a tax professional’s job much easier.
The Basics: What Is Online Tax Software?
Many tax software options are making the switch to offering both online and desktop versions of their software. However, not every company has made this jump.
Online software is beneficial compared to software that is found on a disc for a few reasons:
It Can be Updated Regularly
That means that if there are problems spotted during tax season, they can be corrected as soon as those issues arise.
You Can Work On Returns from More Than One Location
If you have several places where documents are kept, such as at home and at the office, having an online software means you do not have to cart tax documents around — you can input information wherever it is located. You can also work from home instead of going into the office, especially if you have access to client data through a cloud-based online portal.
You Can File Returns Online from the Software
By using online software, you can connect to the internet and upload returns directly to the IRS. Some online platforms allow you to pay any amounts owed online on behalf of the client as well.
You Can Upload Tax Information
Some applications also connect to large employers so you can get tax information, like W-2s, automatically. This not only saves time because you do not have to type everything out, but also enables you to sometimes even start your tax preparation process before your clients have complete access to their tax documents.
Tax software for professionals is simply not as user-friendly compared to consumer-based programs. There is an expectation that a tax professional will know where certain information goes and whether it needs to be included in the system in the first place.
When Should I Use Online Tax Software?
Choosing between an online professional tax software and disc-based program or another option can be a difficult decision. Price is often the determining factor for many tax professionals.
In general, you can often use an online tax software if the following circumstances apply to you:
- You want the flexibility of doing taxes whenever, wherever. If your business is based on being able to work wherever you want, then having an online tax software fits right into that model. You never have to be tied to a desk. You simply need access to client documents and an internet connection to prepare taxes effectively.
- Your business structure incorporates cloud-based document deposits. Tax preparation services are becoming more and more streamlined, which can mean that the client never has to do an in-person meeting with their tax preparer. If your business allows clients to upload documents without ever setting foot into your office, having an equally flexible tax preparation option may make a lot of sense for you.
- You want bugs fixed immediately. Tax laws have undergone many changes in recent years. As those changes are happening, online tax preparation software is being updated with new information and new forms as they are created. If having up-to-date information is vital for you and your clients, getting an online software that updates quickly may be your best option.
Ultimately, your business model and how you obtain information will be big driving factors in whether your professional tax software should be online or not.
The Drawbacks of Using Online Professional Income Tax Software
Although there are quite a few benefits of having online professional tax software, there are a couple of important drawbacks that you should consider as well.
It Requires an Internet Connection
Your desktop software may not require that you have an internet connection to work. While having an internet connection often is not an issue, it can be a huge problem if the tax deadline rolls around and your internet connection suddenly crashes.
It Is More Susceptible to Hacking and Data Breaches
Online software is simply not as secure as software that you download to your desktop for the simple reason that it is always plugged into the internet. While professional income tax software has come a long way in terms of security, having a “hard” version of the software, which only connects with the IRS to upload information, is almost always going to be more secure than online tax software for tax preparers.
While the benefits are great, these drawbacks can still be serious concerns for professional tax preparers.
The Highest Rated Tax Preparation Software
Below are a few of the highest rated professional tax software options you may want to consider using for your tax preparation business.
Sigma Tax Pro
Sigma Tax Pro provides three levels of online tax preparation options. Each option has a desktop version that has more capabilities as well. Two of the options include a step-by-step interview option that allows the preparer to work with the taxpayer through some of the most commonly used tax issues. It also boasts great technical support and significant cost savings compared to similar products.
Free Tax USA
This online return preparation option is actually geared more toward consumers. However, tax preparers may want to use it as well because it allows you to do simple returns for no cost. You can often pass that savings along to your clients. However, Free Tax USA will only let you file simple returns free of charge.
H&R Block is somewhat unique because it actually offers several tax-related services. Taxpayers can meet with a tax preparer in person at a local H&R Block to have their taxes prepared. They can also use H&R Block’s taxpayer-focused software. In addition, H&R Block offers software that is geared toward professional business owners. Although they do not provide software for tax professionals per se, this type of software can be helpful for tax professionals’ use as well.
Although Intuit/TurboTax are well-known for their consumer-based tax software, they also offer professional tax software. However, their software is based entirely on a desktop application. The only “online” portion of their software is the ability to e-file with the IRS to complete returns.
Choosing the Right Professional Tax Software
Ultimately, choosing the right software for you and your business depends on your unique needs. Deciding whether to offer online tax help is also a significant decision that will affect what software you use. While the top-rated choices work great for some, they may not be as handy for others.