My Experience Switching from Hiring a Tax Preparer to Using Tax Software

save using tax softwareDid you do your taxes on your own, or did you hire someone to do it for you?

The answer to that question, in recent years, has been the latter for me. Up until this year, I went to see a tax preparer to help me get things done. I even wrote about this in the past, extolling the virtues of hiring a professional to do your taxes.

I still think it can be a good idea for many people, depending on your situation. In my case, it had been getting more expensive to get them done, which precipitated my assessing whether or not it was truly necessary to pay someone. After taking a look, I proceeded to take the plunge and do taxes myself this year.

Now, for many years I did taxes by myself. As in, the manual way using pen and paper. Getting free tax forms from the library (yet another way the local library can save you money) might still be an option, depending on the type of return you’re filing.

However, this year I decided not to go back in time, so to speak, to the days of pen and paper tax preparation. Instead I chose a happy medium: using tax preparation software.

We went to Costco, and I was able to pick up a copy of TurboTax at a good price. Paying under $100 for the version I needed seemed like a potential bargain compared to the $400+ fee I shelled out last year.

Yes, I realize $400 is quite expensive – hence the move to trying it out using Turbo Tax. Actually, the guy I went to in years past charged me just over $200, which seemed like a good price. He passed away, just months after preparing my return a couple of years ago. He was a great guy, and made getting taxes done an almost enjoyable experience with his sense of humor and joking manner. So last year I went to a totally different preparer and was a bit surprised by the $400+ fee.

What did I think of TurboTax?

The bottom line is that I found it to be pretty good!

What I liked about it were three things in particular:

  1. Super convenient. It’s not like you have to make an appointment to get taxes done with this approach! Whether its 7am or 7pm, you can work on it at your own schedule. You can also work on it at your own pace, and save it in progress. That’s an advantage over setting appointments with tax preparers.
  2. Easy to use. Really, it’s set up in such a way that you don’t need to know much about taxes at all. As a personal finance blogger, I’m naturally going to be more financially literate than the Average Joe or Jane out there. But still, it’s nice to have software walk you through the steps automatically.
  3. Inexpensive.  This cost me less than 25% of the prior year’s tax preparer expense.  That’s appealing to this Squirreler!

Those of you that have used TurboTax or other software for a number of years now probably know these advantages really well. But maybe you’ve wondered how things might be if you actually went to a tax preparer instead.

Well, in my updated view, for a return without a ton of complications, you might as well do it on your own with the right software (whichever that might be). Besides, by comparing to how the preparers did it in prior years, I think this turned out fairly consistent to past returns and was done without too much time being invested.

If your return has a lot of complications, I can still see great value to hiring someone though, no doubt about that! Expertise matters in those situations.

My Questions for You 

Did you get your taxes done this year, or did you take a DIY approach?

If you did your own taxes, what was your method?

If you hired out, do you think it’s worth the extra cost?

5 Things to Do With a Tax Refund – And 1 Not To Do

When it comes to tax refunds, I’ve heard a few things from folks over the years that have raised a few eyebrows.  At least for me.  While I tend to think in terms of saving and having future finances taken care of, some folks prefer to simply live for today and worry about tomorrow later.

This of course is related to the question of “what to do with a tax refund?”  Now, whether or not you actually get a refund or not can depend on a few factors.  To me, it helps to maximize chances of doing this by hiring a pro to do my taxes.  But however you handle tax preparation, you just might end up with the need to figure out what you’re going to do with a refund.  It’s a nice problem to have, compared to the alternative of having to pay an amount due when finishing your return. 

Of course, a look at tax rates by country indicates that the U.S. may not be so highly burdened compared to many other countries – despite a lot of complaining and hand-wringing over annual tax filings.  Regardless, if you’re fortunate enough to be getting a refund, there are a bunch of good things you can do with it.  And, of course, other things that can be avoided.

Here are 5 Things to Do With Your Tax Refund:

Pay off Debt

If you’re getting money back, why not apply it to existing debt?  Being in debt stinks, and can really hold people back from achieving life goals and having the quality of life one wants.  Instead of paying interest on big balances, why not take a tax refund and make a dent in your debt?  This particularly makes sense with higher-interest debt.

Save for Retirement

As we all should know, we can’t be sure that we’ll be able to work until old age.  Thus, it’s important to take retirement planning seriously.   Every little bit helps, and we just might be thankful later in life that we set aside some money from way back when as a younger person.   Ultimately, when you retire may or may not be under your control, but you’re responsible for the quality of that retirement when it does happen.

Invest it

Investing money is an important part of personal financial planning.  We can save money, as noted above, and that is of course vital.  However, if we actually plan to invest money, we just might see this money grow to something quite a bit more significant.  Rate of return is important, as we know.  So, making a smart investment can be a great way, in many cases, to utilize a tax refund.

Enrich Your Kids’ Lives

By this, I don’t mean just handing them money! Rather, I mean spending it on their education or extracurriculars that can help them develop and grow as people.  Investing in your kids can be a great way to put them in a little bit better position to succeed in life.  Kids are a noble use of funds

Be Generous

Generosity can be a great thing, and there are certainly many ways one can show this.  Of course, giving money or time can be very personal, and what works well for one person might not work as well for another.  If it’s possible to give money – or preferable to time, anyway – a tax refund might be a viable source of funding.

As for What NOT to do with your tax refund, there is one thing that comes to mind: splurging.  Now, of course life is to enjoy – and we should do so every day.  Life is short.  That being said, why not take care of actual needs first?  When I have heard people talk about taking vacations with tax refunds, or buying TVs, etc – I just don’t get it.  Maybe I need to lighten up about such things, and frankly I don’t judge people negatively who do splurge.  It’s just that I prefer to apply funds to things I perceive as bigger needs.

My Questions for You

What have you done in the past with tax refunds?

Do you have any other suggestions or comments to add?





3 Reasons to Hire a Pro to Do Your Taxes

During tax season, there are many different thoughts that go through the minds of taxpayers.  Some examples might be:

  • How much am I going to have to pay this year?
  • What am I going to get back?
  • What can be done to lower taxable income?
  • You mean I have to work so hard, only to have so much taken from me?
  • Ugh! Working on taxes is like getting a root canal!

Yeah, I think we can say that while some people might look forward to tax season, it’s not really a reason for excitement for most folks.  It’s not like the annual ritual of getting together for a Super Bowl party.  Tax return party, anyone?

Back to the list of examples above.  What resonates with me, after writing that, is that preparing one’s taxes can be a different experience for different people.  Some people have very straightforward, simple financial lives – and correspondingly simple tax returns.  Others who have various income sources and investments, property, and different dependent situations – well, their taxes can be much more complicated.

For me, it boils down to this:  I pay a CPA to do my taxes

Now, as a reader of this blog, you might be wondering: “What? Don’t you really like to save money?”  Well, even though I sure do like to save money, I will pay to have taxes done for me.  When it comes to the question of DIY or pay, I think that it can often be a worthwhile move to pay someone to get something done for you. 

There are a variety of reasons I think it could be worthwhile to pay a CPA to prepare your tax return.  Here are 3 reasons why:

Saving Time on Taxes

I don’t know about you, but I have the belief that time is more valuable than money.  We can have all the money in the world, but we can’t make more time.  That’s not to say money isn’t important, as you’re not likely to have me go that far, anyway :)  But our time isn’t free, and there is an opportunity cost to it.  If taxes will take you a long time to do, then it can be worth considering paying a professional instead.

Specialized Tax Knowledge

Tax professionals should, one would think, know more about the tax code than regular folks like us.  If we wanted to get a root canal – you know, that fun procedure to which I compared taxes earlier in this post – we would go to a dentist or endodontist.   It’s not like we would really know how to do that on our own!  So why not hire a pro to do taxes?  Sure, it may be more necessary for some than others.  When looking at tax rates by country, some pay more than others.  Some tax codes might be more simple that others.  Here in the U.S., it’s often complex enough for a lot of people and their own situation to make it worthwhile to see a pro.

Fewer Mistakes on Tax Returns

There is something about the power of practice and habit.  If you’ve never done something before, or only a few times, you may not be that great at it.  If you’ve done something 1000 times before, you should be less likely to make mistakes, all things being equal.  Along those lines, a professional might be less likely to make mistakes than someone not thinking about taxes for a living.

Bottom Line:  There can be times when it might be worth it to pay a professional to do your taxes.  I’ve decided that this is indeed the case for me.  What about you?

My Questions for You

Do you get your taxes done by a professional, or do you handle it by yourself?

Why do you take the approach you do?

If you do taxes on your own, how low would tax preparation fees have to be to get you to have someone else do the work for you?

You Just Got a 2% Pay Cut – How Do You Feel About It?

Many of us get our paychecks, and really focus on the bottom line: how much money we take home.  We accept that we will be taxed, and there are certain such expenses we can’t control.

One of these types of expenses is payroll tax. In the last 2 years, payroll taxes have been 4.2% for U.S. workers.  However, as of January 1, 2013, these taxes have shot up to 6.2%.  In effect, the average American worker has taken a 2% paycut. 

From what I understand, this tax break for the last 2 years was supposed to be temporary.  Or, at least that is how it was characterized.  Nevertheless, I’m convinced that most people paid no attention to this, or to payroll taxes in general.  My belief is that there have been a ton of people that have been surprised by this increase to 6.2%, to the point of frustration.  For some, you just know there is anger. 

I can certainly understand that it stinks to find out that you’ll be taking home less money on the same salary, even with no change in expenses, insurance, or anything else.  Honestly, I haven’t been thinking about this possiblity, so when talk about it started to surface, I immediately did the math.  Wow, I thought: that’s not exactly an insignificant amount of extra money that I’ll now be losing.  It’s almost like a week’s worth of pay over the course of the year, roughly speaking.  I’m sure there are folks out there for whom this might cause serious problems.  After all, we’ve seen that a significant percentage of people can’t cover unexpected expenses.

But then, I realized that there is really nothing we can do about it.  This isn’t the fault of anyone’s employer, nor is it our fault as individuals.  It is what it is, and we have to deal with it.  The bottom line is that things have changed a bit, and there is a 2% increase in taxes up to 6.2% on the first $113,700 in wages.

There are 2 other thoughts that come to mind:

  1. Instead of getting excessively frustrated by something like this, it’s good to be thankful to have a job in the first place.  If someone is unemployed, they would gladly take your job along with the 2% reduction in pay
  2. This further reinforces the notion that we must save as much we can all the time.  You never know what changes can come our way, whether it’s tax increases, bad health, accidents, or anything else.  Best to focus on living within our means, where we try to make sure our income exceeds our expenses at a minimum, and hopefully grow the gap between inflow and outflow of money.

My Questions for You

What was your reaction when finding out this news?

Were you angry, did you take it stride, or was your reaction somewhere in between?

How do you handle preparing for the unexpected?


Tax Refunds are Not Taboo

The following is a guest post from Michael at Money Beagle, who believes that a balanced approach to money management is the key to financial success. He blogs about many personal finance topics from getting out of debt to saving for retirement to tips on staying clutter free around the house, with an emphasis on ‘personal’.

There are many things that most personal finance bloggers agree upon: Saving is good. Credit card debt is no good. Retirement savings, absolutely. Borrowing from your 401(k), not so much.

One of the most commonly agreed upon pieces of advice I’ve seen is that you should strive not to get a tax refund. The rationale behind this advice is that you’re giving the government an interest free loan. The advice is to adjust your withholding so that you essentially divide your tax refund up among your paychecks throughout the year. If you stick that into savings, you get interest throughout the year.

Reading those items, it sounds like a no-brainer that everybody should follow this advice, right?

I say, not so fast.

If that’s the strategy you want to take, I say continue on. If you’re already taking this approach and have it down pat, then carry on.

But, if you’re getting a big refund on your 2011 taxes and are considering employing this strategy, I think there are better uses of your time.

Let me run through the reasons that I think having a tax refund is not a bad thing:

  • The interest rate benefit isn’t there – As recently as a few years back, the main reason for arguing for the ‘no refund’ goal was because you were losing out on a lot of interest. If you got a $4,000 refund rates were 5%, you were effectively losing out on around $100 in interest (I calculated this by figuring 5% on $2,000, which is the ‘average’ amount your fund balance would have over the course of the year). Nowadays, interest rates on even the best savings accounts are 1%, so you’re looking at $20 in interest. I’m not sure that’s worth it, especially when you consider…
  • Out of sight, out of mind – When you overpay on your contributions, you’re not only giving the government an interest free loan, you’re also preventing yourself from spending it. How many people would look at their growing balance over the course of the year, and give in to temptation and buy something at some point that you might not otherwise purchase? If the cost of whatever you buy is over $20 (using our example from the previous bullet point), you just killed the entire benefit of earning the extra interest.
  • The big bang theory – Again, looking at the example of the $4,000 refund, if you get that refund, there’s a certain psychological high that goes along with doing something big with it. I’m talking doing something responsible here, like saving or paying down a debt. Seeing your emergency fund jump from $1,000 to $5,000 all at once, or seeing your student loan balance drop by a third with one click of the mouse will give you a rush, and can give you extra motivation on hitting your positive financial goals.
  • You could miss – Tax codes and other things change all the time, so even if you adjust your withholding so that your expected tax refund goes to $0, you could end up with a change where you could get a refund anyways, or actually owe money. Granted, if you’re doing it right, you would have the money in an account to pay it, but what if you decided you were going to pay debt throughout the year and then had to scramble to get together the money to pay your shortage?

Don’t get me wrong. I don’t think that adjusting your withholding is a bad strategy. I just think there are better options of things that you can do with the precious time that you put toward improving your personal finances.

Do you typically get a tax refund? Do you take any actions in regards to your expected tax liability throughout the year?

How to Save up to $500 on Home Improvements While Helping The Environment

When it comes to taxes, we just have to deal with them as a necessary part of day to day life. After all, where would all of our public services come from if we all paid no tax?

So, contributing your share of taxes in some way helps the greater good. Of course, most of us still wouldn’t turn down an opportunity to legitimately lower our taxes, now would we? I didn’t think so.

Additionally, if you could lower your tax liability AND do something positive for the environment – might that be a win-win?

Well, if you have some purchases to make for your primary residence (as an owner of a pre-existing home), they might fall into the category of federal tax credits for energy efficiency. Based on your situation, you could get a tax credit of up to $500 for qualifying purchases.

Here’s an overview of the 2011 energy efficiency credits:

  • Biomass Stoves: $300
  • HVAC
    • Advanced Main Air Circulating Fan: $50
    • Air Source Heat Pumps: $300
    • Central Air Conditioning: $300
    • Gas, Propane, or Oil Hot Water Boiler: $150
    • Natural Gas, Propane, or Oil Furnace: $150
  • Insulation: 10% of cost, up to $500
  • Roofs (Metal and Asphalt): 10% of cost, up to $500
  • Water Heaters (non-solar)
    • Gas, Oil, Propane Water Heater: $300
    • Electric Heat Pump Water Heater: $300
  • Windows, Doors, and Skylights: 10% of cost, up to $500, but windows limit is $200

The limit is $500, which is also a lifetime limit. If you took this credit in the 2006-2010 tax years, you’ve used it up. Also, it’s a one-time credit – you can’t buy something one year and keep claiming it year after year.  The home must be your primary residence.

As you can see, there are some opportunities to save on taxes in 2011! The limit was reduced this year, as it had been $1,500 for 2010. However, despite being reduced, this credit still offers the opportunity to save money.

If you have a broader timeline, there are some tax credits for energy efficiency that expire in 2016:

  • Geothermal Heat Pumps: 30% of cost, with no upper limit
  • Small Wind Turbines (residential use): 30% of cost, with no upper limit
  • Solar Energy Systems: 30% of cost, with no upper limit
  • Fuel Cells: 30% of cost, up to $500 per 0.5 kW of power capacity

For complete details and requirements/restrictions (there are some), check out Energy Savers and consult with your own financial/tax professionals before making a purchase decision for these purposes.

Clearly, to summarize, there’s an opportunity to save some money on taxes and do well by the environment.  And as we know, more money saved equals more money for retirement! Anyway, with respect to the tax credits in particular, they may not be to the level that existed prior to this year, as legislation has changed that, but there are still ways to participate and save money, which is a good thing!

Tax Rates By Country

Do you like to pay taxes? I’m not sure many of us do. Nevertheless, most of us realize that taxes are a part of life in any country with public services.

That said, complaining that taxes are too high is almost “de rigueur” in many circles. There are myriad examples of ways people demonstrate how burdened they are with taxes:

  • “I could have gone on a fabulous two week vacation if I didn’t spend so much on those taxes”
  • “I worked until April 10 just to pay off my taxes”
  • “Once they take out taxes, there’s not that much left!”

Admittedly, I too have had similar thoughts at different times.

However, when you take a comparative look at taxation around the globe, it becomes clear that some are taxed more than others. For those of us here in the United States, as well our Canadian neighbors, the results may be enlightening.

Here is a look at the Total Tax Revenue by country, as a percentage of Gross Domestic Product:

Country Tax %
Austrailia 30.8
Austria 42.3
Canada 33.3
Finland 43.0
France 43.5
Germany 36.2
Italy 43.5
Japan 28.3
Korea 26.5
Netherlands 37.5
Norway 43.6
Sweden 48.3
Switzerland 28.9
United States 28.3

Source: OECD Tax Database

As can be seen, the tax revenue as a percentage of GDP is actually relatively low for the U.S. and Canada. Compare these figures with that of France and Italy, for example. It would appear that we have it better here.

Now, let’s layer in savings rates for the same set of countries:

Country Tax % Savings %
Austrailia 30.8 2.5
Austria 42.3 9.8
Canada 33.3 1.1
Finland 43.0 -2.2
France 43.5 12.3
Germany 36.2 10.6
Italy 43.5 6.8
Japan 28.3 2.6
Korea 26.5 2.5
Netherlands 37.5 6.4
Norway 43.6 1.4
Sweden 48.3 7.8
Switzerland 28.9 9.5
United States 28.3 1.2

Sources: OECD Tax Database and OECD Economic Outlook Database

The tax data was from 2007 and savings rates from 2009, close enough for a near apples-to-apples comparison. Overall, it appears that the U.S. and Canada are not only taxed on the lower end of this set of countries, but also save very little as well.

What’s the lesson from this excercise?

My take is that though we don’t want our taxes to go higher, they could be worse – and shouldn’t be preventing us from saving more than we are at this time.

List of Tips on How to Save on Taxes – Now

Yahoo! Finance just published an interesting list of 71 Ways to Save on Taxes Now.  There were some obvious ones, but some less obvious ones as well.

Many of us know a lot of these, and these are US-specific (apologies to those outside the US) but here are a few that I found interesting:

  • Job Hunting Expenses: Worth noting, with so many people out of work. Overnight travel-related expenses for position similar to what you were previously in
  • Moving to New Job: If you move to a new job fifty miles further than your prior one, you can deduct personal moving-related expenses
  • Alternative Energy: a tax credit exists for those employing alternative energy sources. Equals 30% of what homeowner spends on qualifying property. Think solar electric systems, wind turbines, etc.
  • Out of Pocket Expenses for Charitable Contributions: if you bake something for charity, drive to a charitable event, or make some other qualifying charitable donation – you might be able to deduct expenes.
  • Pay Attention to New Coverdell Rules: an education-savings vehicle, these accounts will see their contribution limits cut from $2,000 in 2010 to $500 beginning next year. This is one change I can say I wasn’t aware of.
  • Roll over an inherited 401(k): old rules required these inherited accounts to be cashed out with taxes paid within 5 years. Now, you can roll into an IRA and further stretch payouts and tax implications. Restrictions apply.
  • Pay attention to start-up costs: you can deduct up to $5,000 of start-up business costs in the year you incur them

Anything jump at you in their list, as something you will apply to your own situation in 2010?