By Dr. Margaret Curtis, WCI Columnist
As I write this, we are in the middle of hockey season, the sun is setting a little before 5pm in Maine, and the 2022 tax forms are arriving in my mailbox. By the time you read this in April, both the backyard hockey rink and the tax returns will be done for the year, and we will be well into mud season. My husband builds and maintains the rink and I do our taxes, and we both agree that his job is a lot harder and more time-consuming than mine. We also agree that keeping our tax returns in-house has had benefits for our financial life. If you have been intimidated by the idea of doing your own taxes or are trying to figure out where to start, this is for you.
My husband and I used to have a CPA who did our personal taxes and the business accounting for my husband’s solo practice. We paid about $1,200 yearly for the service—which, back then, was itself a tax-deductible expense—and we were glad to do it. At the time we owned that practice, we had three kids under the age of 7 and no extra bandwidth. We both thought that while you can DIY a lot of stuff, taxes are best left to the experts. I didn’t even question when our CPA suggested that we could lower our taxes by refinancing our mortgage and deducting the interest (this is wacky, I know that now).
About 10 years ago, I decided to do our taxes myself. I hadn’t done them since I was 25 and my annual gross income was $23,000, but I was trying to whip our family finances into shape and I wanted to understand where all the money was going. I also wanted that $1,200 for myself. I’ve done them every year since then, and I’ve even helped my friends with their taxes. Nothing in this article should be taken as criticism of CPAs as a whole, and I would love to hear from CPAs in the comments. I’m going to tell you how I do them, why it isn’t that hard, and why I think everyone should do their own taxes at least once.
#1 How to Get Started on Your Own Taxes
First, I start a new tax file at the beginning of every year, and when I get a document related to taxes, I print it and file it away. This could just as easily be done by scanning documents into a computer file. I don’t sort or label them until it’s tax time, and then I put them into categories: employment income (W2s and 1099s), rental income and expenses, investment income, property taxes, and charitable donations. Now that I have a kid in college, I also have 529 account statements for his return. I put categories together with a paper clip and a sticky note. See? Not hard.
If you use a CPA, you will need to have at least this level of organization because they won’t come to your house and go through your files for you.
Which brings me to the first reason you should do your own taxes:
You Will Keep Better Records
If what I have described sounds worlds removed from what you are doing right now and if what you are doing right now involves shoeboxes full of receipts, I am here to tell you that you can do this. Your financial life will be better for it. You will know which documents are important and where they are located. You will have less digital and actual clutter: no more shoeboxes.
More information here:
#2 Entering Your Tax Information
Next, when I have all my documents organized, I enter all the information into TurboTax. In the first year, using an online service is a little more labor-intensive because you have to enter all the information for everyone in your household (Social Security numbers, employers, etc). Subsequent years are easier because the system saves your basic info, and you just update and edit.
I use TurboTax, but there are other online tax programs out there and they all provide a similar service. All offer a free version that is fine for basic returns, and all have additional levels of service (such as audit protection) for a fee. I have paid anything from zero to $70 to do my return online. I have paid extra to get advice from a CPA, although what they can offer is limited by the level of service. This is fair enough: I don’t offer advice on complex medical problems via a portal message, and I don’t expect guidance on complex tax topics for $70.
The second reason to do your own taxes:
You Will Save Money
CPA fees are a lot higher now (I was quoted $4,000 for a package that didn’t include any planning), and they are no longer tax-deductible (the deduction for tax preparation fees for personal returns was eliminated in the 2018 Tax Cuts and Jobs Act, which also capped mortgage interest and state tax deductions). Even if I spend 10 hours doing my taxes, I get a pretty good hourly wage for my effort (It actually takes me less than 10. Not bragging or anything). Of course, there is a tipping point at which the deductions I miss are worth more than the cost of a tax plan and a professionally prepared return.
One of the peculiarities of the tax code is that if you aren’t aware of a deduction, you can’t take it. This is the government saying, “Guess what I’m thinking.” Our taxes are a little more complicated than average (two W2 incomes, two side gigs, and one rental property), but I still feel confident in the returns I’m filing. How will we know when we have reached the tipping point? If we ever open another practice or get serious about real estate investing, we will hire a professional to make sure we get all the complexities right. Your tipping point might be sooner—or later.
More information here:
#3 Should You Itemize or Take the Standard Deduction?
The tax program guides you through entering your data and advises you whether to take the standard or the itemized deduction. A deduction allows you to subtract from your income before you calculate the tax. The standard deduction, which anyone can take, has been rising in recent years ($12,950 in 2022 for a single person; $25,900 married filing jointly). An itemized deduction is the sum of every tax-deductible expense you incurred, such as charitable donations, mortgage interest, and state taxes paid (up to a limit). You can use whichever is larger.
Another reason to do your own tax return:
You Will Understand Our Tax Code
Just kidding, you won’t really. The US tax code is notoriously complex, and tax software actually obscures a lot of the math for you. You could still miss some of the most important features of our tax system if you don’t spend some time figuring out what the numbers mean. Some of the concepts I think are most important (from least to most obvious):
1) Our federal tax system is progressive. Income is divided into aliquots (brackets), and each aliquot is taxed at a different percentage. Everyone pays the same tax rate on the first aliquot (10% on the first $10,275 for a single payer in 2022, and $20,500 for MFJ). Higher brackets have higher tax rates (37% on any money over $539,900 for that same single payer and $647,850 for MFJ).
If you are a single payer who earned a resident salary of $65,753 in 2022 (without taking deductions):
- Every dollar up to $10,275 is taxed at 10% ($1,027.50).
- Every dollar from $10,276 to $41,775 is taxed at 12% (31,500 x 0.12 = $3,780)
- Every dollar from $41,776 to $65,753 is taxed at 22% (23,978 x .22 = $5,275.16)
- You would pay a total of $10,083 (without any deductions).
In mathematics, this is called a “piecewise function,” or a function that has different formulas for different intervals. If you’ve ever calculated the maintenance fluid rate for a pediatric patient using the 4/2/1 rule, you’ve used a piecewise function. (Pediatricians do this stuff in our sleep. I’m explaining this for the rest of you.) The piecewise function for this taxpayer is: f(x) = 1027.5 + 3780 + (x-41775)*.22.
2) There is a difference between your marginal tax rate (the rate at the highest bracket you reached) and your effective tax rate (the percentage of your income you pay in taxes). Your effective tax rate will be lower than your marginal tax rate, because it is an average of all the tax rates across all the brackets your income falls into. The single payer earning $65,753 has a marginal tax rate of 22% and an effective tax rate of 15.3%.
3) Deductions are good, but credits are better. Deductions are subtracted from your income before taxes are calculated. If your marginal tax rate is 32%, a deduction of $1,000 will save you $320 (0.32 x $1,000) on your taxes. A credit is subtracted from the tax you owe. No matter your marginal tax rate, a tax credit of $1,000 will save you $1,000.
If you just handed all your forms off to a CPA, you might never understand these. You might think that deducting your mortgage interest is actually saving you money when actually it’s just giving you a discount on the money you are giving to the bank. You might embarrass yourself at the next WCICON by saying things like “no point in getting a raise, it’s just going to increase my taxes!” (if you don’t understand why that’s incorrect, reread the section above about marginal and effective tax rates). I wouldn’t want that for you.
#4 Review It and Hit Send
Now, I review my inputs a few times and the final return before I hit send. This is the point in the process when I see how much we have paid in combined federal, state, and property taxes. You would think after all these years I wouldn’t be surprised, but somehow I am. I will spend the next month in high dudgeon, which will gradually wear off until the next tax season when the cycle will repeat itself.
Reason number next to do your own taxes:
You Will See Where the Money Goes
My family doesn’t have a budget in the sense of “this is how we will spend for the next month.” What we do have is a retrospective of how we have spent money over the past year that we refer to so we can track our progress and plan for big expenditures. This information comes from two sources: our credit card statement (and more specifically, the end-of-year credit card summary) and our tax return. Our incomes, property taxes, rental property expenses— all items that show up on a tax return—vary year to year, some a little and some a lot. I use the tax-time reckoning to make sure I am operating with the correct numbers. This also serves as a reality check.
There is really nothing like cold hard numbers to make your financial situation clear. If you have an inflated sense of your own income, seeing all the money that gets taken out before it even hits your bank account will bring you back down to earth. You will also appreciate your pretax retirement contributions in a whole new way.
More information here:
#5 Finally Done
Once my taxes are submitted, dudgeon blends with pride for a job well done. I have never been audited, and I don’t really worry about the prospect. I report all our income and have receipts for every deduction I claim. Fear of an audit is one of the biggest reasons people use CPAs, but this fear is probably overblown if your return doesn’t contain any common audit triggers: wild deductions, crypto transactions, foreign assets, sketchy tax shelters that a good CPA would warn you away from anyway. Business taxes are more complicated, and they may be more likely to trigger an audit, which is why starting a business would be a reason we would use a CPA. Tax programs offer audit protection for a fee if that is important to you.
Which brings me to the last reason to do your own taxes:
You Will Be Empowered
Doing your own taxes is like learning any new skill: once you figure it out, you start thinking about other things that once seemed hard. Maybe you wonder if those are within reach as well. You might take on doing your own financial planning. You will definitely be able to engage intelligently with anyone you might consult with about your taxes in the future. You might decide that you would really rather do something else with your time (like build a backyard hockey rink), but it won’t be because you’re intimidated.
Do you do your own taxes, or do you offload it onto somebody else? Is working through your own tax return a worthwhile investment? Or is it not worth the stress? Comment below!