Should you do your own taxes? Around 45% of Americans prepare and file their own taxes. Some do not do their own taxes because they are very complicated. I understand that. Once you have some rental properties, a business or two, and investment income, then it might make sense to have someone do your taxes for you. However, if you work one job, only own your primary residence or just rent, taxes are not complicated. Others want their refund on the spot and will pay 15% of a portion of their refund to have someone prepare their taxes. That’s ridiculous!
When I first started doing my own taxes, I realized a few things. I knew the amount of tax I paid, I realized I could do my own taxes, and it caused me to understand some of the tax code. When you take your paperwork to a tax preparer and dump it on their desk, you miss out on these things.
Know the Tax You Pay
The first thing you realize is how much you pay in taxes. When you do your own taxes, you see every number because you are the one entering them. You see your gross income, and you see the amount of tax you pay on it. Besides federal income tax, you see your state income tax and your payroll taxes. Don’t think that because you get a refund every year that you don’t pay taxes. You are most likely paying federal income tax the whole year because it is being withheld from your paycheck, and you are paying social security and Medicare tax on all your earned income. I am not going to argue here that taxes are too high or too low, but make sure you understand how much tax you pay.
The first time you do your own taxes, it will make you nervous. We all hear that the IRS is not a government office that you fool around with. We are scared that we will make mistakes and get fined if we do our own taxes. You need to understand a couple of things regarding this.
The first thing is that less than 1% of taxpayers get audited. I am not telling you this so that you cheat on your taxes, but I am telling you this so that you are not stressed when you do your own taxes. The chance of you getting audited overall is small.
The second thing regarding this is if you make an honest mistake, the IRS is not going to throw you in jail. There might be some penalties, and of course, you will have to pay any tax due. Don’t be careless when filing your taxes and don’t commit fraud. The IRS will come down hard on you for either of those and with good reason. Don’t lie, cheat, or steal, and you will be fine.
When you do your own taxes, you become more familiar with the tax code. There are provisions in the tax code that most of us will never need to know. However, you will end up understanding common ways to reduce your tax liability when you do your own taxes. When you can do things to keep more of your money by paying less tax, that money can be invested and earn you additional money. Saving on taxes can help you build wealth.
As of 2019, if you are married and make $75,000 earned income, you have a marginal tax rate of 12%. If you have been saving some of your income over the years and now have an investment portfolio and make $75,000 of capital gains on your investments, it’s taxed at 0% if this is your total income for the year. This assumes you meet certain requirements and income limitations. Social Security and Medicare taxes are only on earned income. You do not pay these taxes on capital gains. Once you realize some of these provisions in the tax code, it gets you to focus on saving and investing so that you can keep more of your money by reducing your taxes. Just remember that tax laws can always change, so make sure you always understand the latest tax laws.
Some people are afraid to do their own taxes because they’re not good at math. We’re just adding and subtracting numbers here, so the math isn’t that hard. Still, some people are afraid to make arithmetic mistakes. The tax software out there does it all for you. Most of the tax software goes through every common provision in the tax code that will affect most people. The software asks you questions like your name and date of birth, and you just type it in. If you work for a large company, most of the tax software can import your W-2 information. If you are not itemizing and do not own your own business, there really isn’t much for you to do. Even for the tax provisions that aren’t common, the tax software will ask you a few questions that you answer “Yes” or “No”, and it will display the appropriate information based on your answers you provide.
When you have a single W-2 job or a couple of W-2s per household, doing your own taxes is relatively simple. I suggest that you do your own taxes for the reasons listed above. Know how much tax you are paying. Know that you can do things like this. As you learn to do more things around your own personal finances, you will build more confidence in this area of your life. Building confidence in one area of your life will help you build confidence in all the areas of your life. When you do your own taxes, you can learn how to take advantage of the tax code so that you can keep more of your money. This can help you to build wealth.