Every now and then I get some curious emails. For example:
Hi, great blog! I was wondering, who does your taxes?
Strangely enough… I do. And I think you should too. (Yours, not mine.)
GCC tax history
Back when the Internet and I were both still a little wet behind the ears, taxes seemed a daunting task of monumental proportions. Audit! Penalties! Fear! Ahhhhhh!
I have H&R Block to thank for changing all of that. A harrowing experience in college sent me home with my shoebox full of receipts and a fist full of determination. This isn’t so hard… why did the “pro” have such a hard time?
Years later, the combination of a few too many economics books, the “specialization of labor” principle, the hubris of youth, and laziness, convinced me to outsource my tax return so I could invest those hours building my career.
$300 and untold hours of my time later, a “who does your taxes” referral produced a tax return I could have easily done myself. Once you get all of the paperwork ready for the CPA, the tax return basically does itself (*).
I’ve done my own tax return every year since.
Mistakes
One of my favorite things about doing my own taxes (besides the $ saved) is all of the mistakes lessons learned.
One year I joined a new project at work on January 7th. On January 8th, I got on a plane to Japan. Over the next 8 months, I would fly over 300,000 miles and achieve(?) Platinum status with multiple airlines and hotel chains.
Did you know that if the IRS owes you a refund (the opposite is much better), you can just file your taxes whenever? Me neither. But when I filed my taxes that winter after getting off another airplane, I found out.
The next year I delayed filing again… but this time, my assumption that I was due a refund was… incorrect. And I have the penalties to prove it.
With each new tax form came new learning opportunities and new mistakes. As my own experience has increased, I recognize that I’ve made other mistakes over the years. Which makes me appreciative of another aspect of the tax code to which I was unaware… the statue of limitations.
The point being… there are great rewards on the other side of fear.
The reason we’ve paid no income tax for the last 4 years while reporting more than $400k of taxable income is because I have the battle scars from tax returns of yesteryear.
Process
I think the best way to learn is to sit down with a pot of coffee, a pencil and eraser, and paper copies of the 1040 and i1040 documents. The instructions are incredibly dull, no doubt… thus the caffeine.
Ideally, one would start when taxes are relatively simple… before adding investments besides a 401k or IRA, rental properties, and/or side hustles. If you have those things, perhaps prepare a 2nd pot of coffee.
Then, proceed line by line through the 1040. The instructions are written with the assumption that we have no special knowledge or even math skills.
If you can read and use a calculator, you can do this.
My first few years of tax returns helped build the foundation of knowledge.
Later I had some gains and losses from trading stocks/bonds/options, and learned about investment taxes.
When I took a go at real estate investing, I learned about… real estate taxes.
Now I have Self Employment income, so my focus is there. I’m still learning.
Peel the layers of the onion one at a time, and eventually you get to the center.
Not everyone is interested in the details, and there are solutions that that as well. In fact, that is what I (mostly) use now.
What I Do Now
As I’ve matured, I’ve been unable to shake the hubris or laziness (or procrastination) that I developed in my youth. It’s a cursed existence. TurboTax helps. (affiliate link)
Now that I have side hustle and investment income, filling out all of the tax forms becomes a bit nauseating. TurboTax simply imports all of the investment information from my brokerage account, and all of the small business info from QuickBooks Self Employed (affiliate link.) An hour or so later, I’m done (I still drink coffee though.) Plus, the e-filing is easy.
I’ve filled out all of these forms manually many times, so tax time is fairly uneventful. And the 7 minutes I invest at the end of the year means I already know the outcome.
TurboTax does have its cons… mostly cost. Fidelity gives me a free copy for investment income, but I have to pay for an “upgrade” to process the small business forms (at least the cost is tax deductible.)
I’ve seen people comment online that they get TurboTax for free through their insurance company or employer as well. If you go the TurboTax route, those options may be available to you. And if your tax return is fairly simple, it is also free.
If not, this affiliate link gets you 20% off. Quickbooks Self-Employed is also currently 50% off for the first 6 months.
If anybody has other tips for free tax filing or other tools they like, please share in the comments.
(*) Full disclosure: a lot of CPAs disagree. Here is a comment to that point:
… you show you are an average person when it comes to tax knowledge… which is my main-point – don’t pretend to be an expert and give advice in a complicated area for which you are not an expert, but are merely average.
Personally, I’m cool with average. If an average person like me can do it, so can you.
Who Does Your Taxes?
I do our taxes on Turbo Tax (paid $29.99 this year – on the 5X Ink Card at Staples) and got some rewards for the purchase and cash back through BeFrugal. Not much – but an extra click or two adds up over time! And yep, it’s deductible too. About 7 years ago, I did them on Turbo Tax for the first time – then took them to an accountant. The $450 accountant made mistakes and I had to go back three times to get things straightened out! I am far from an expert on taxes, but I know a hell of a lot more than I did when I started because I took the time to learn. I have receipts to back things up – and if I make a mistake and get audited, I have my kids doing their own taxes now too. And I show them how we keep track of all of our paperwork, so it’s not a huge issue at tax time. I’m pretty damn average too.
You are a credit card rewards master!
Having a handle on your own taxes is going to give a huge advantage in minimizing your tax liabilities. I might as well do our taxes, because I already keep track of all our liabilities and optimize to minimize them.
I will admit however, we still use a CPA. Its not too hard for me to justify because in addition to doing our slightly complicated taxes, he has also served as our financial advisor for years – at no extra cost. He saved us from some pretty big financial mistakes, and has been a great sounding board for our wacky ideas once a year. He is also into financial independence and helped us on our early retirement journey. If it wasn’t for all the great additional advice, we would also be using turbo tax.
My side hustle is being an Uber driver, so I’m using a tax preparer who is also an Uber driver so I can benefit from her acquired knowledge about the tax intricacies of our shared side hustle. Probably go back to DIY next year after learning the ins and outs from her.
That is a really good match up… pay for the knowledge once, and then DIY.
I haven’t used it since I don’t drive, but QuickBooks Self-Employed has a phone app that automatically tracks all of your mileage. Does the Uber app do this for you, or do you track miles another way? I’m always curious how this stuff works.
Uber tracks my miles while on a paid trip, but that is only a fraction of the miles I drive. You have to drive to pick them up, take them to their destination, probably return back to an area of activity and/oron to the next request. Therefore, I reset my trip computer each day and take a picture for my records. Eventually I sit down and enter all of my miles into a spreadsheet
I do my own taxes and also prepare taxes for others as a side hustle during tax season. That way I (1) got training in tax prep, (2) make extra money, (3) get to use software to prepare and file my return for free, and (4) get lots of practice so that I learn the tax code inside and out, which helps both myself and my clients.
Better than free. We’ve been using HRBlock’s program the last two years and deliberately overwithholding in Nov/Dec. 10% rebate on the amount we direct to our amazon account. So, $500 credit (the maximum allowed), less the 25 or 30 dollar cost of the software. And yeah, we manage to spend the account down ….
Very nice!
Here in Canada we use http://www.simpletax.ca, you pay by donation, so you can pay any amount you feel in reasonable for using their online platform to complete your taxes including $0. I wonder if there’s a US equivalent. I’m a CPA by trade and do my taxes every year and feel most people should be able to DIY their taxes. Keep up the good work.
I’m still a pen and paper (well, computer PDF and laser toner) filer. Yeah yeah dinosaur I know. But I get to know exactly how the sausage is made. And how all the parts interact.
It’s usually not so bad but this year I had to do the iterative calculation for the self employed health insurance deduction vs advanced premium tax credit. Spreadsheets help, especially with the iterative process (there were only a few iterations so no biggie).
The end result was $0 federal income tax (no surprise there I suppose!) and a few thousand in self employment taxes mostly netted out by the additional child tax credit. Can’t complain too much given all the cruise missiles and fighter jets and really bigly walls Uncle Sam is buying/building to keep me safe and free!
Why not use Free File Fillable Forms from the IRS to efile for free?
I use the fillable pdf’s from IRS but print and mail them. So you’re saying you can file pretty much any form they have electronically for free? I’d hate to get halfway through the process only to find out I don’t qualify for free efile because I had a Form XXXX that I had to submit and it doesn’t qualify.
Yeah, you can eFile with Free File Fillable forms. As far as I know they have every form possible available for eFiling. There’s no exclusions listed on their site.
You can’t get “stuck” because there’s no questionnaire (don’t confuse the free file fillable forms, which works for anybody regardless of AGI, with the Free File Software, which does have a questionnaire). With the Free File Fillable forms you’re literally just filling in the forms online (though it will do the very basic math like add lines X to Y for you). If for whatever reason they’re missing a form you need (I sincerely doubt this possibility), then all you’d do is just print out the forms you’ve already filled out online, print the form you’re missing, and mail that in like you’ve been doing all along.
The FFFF opening page after you visit http://www.irs.gov/freefile has a link to a list of supported forms.
One caveat is that if you have any need to “attach” a statement to your return, such as for Foreign Tax Credit, or IRA recharacterization, then you can’t e-file using FFFF. You can still save your work as pdf and print and mail it though.
Otherwise, FFFF might work fine for you, and it has the advantage that it does the math for you on lines where it can, and transfers results among forms correctly. You would still have to do things like the Pub 974 SEHI APTC iterative calculation worksheet yourself. But things like capital gain and qualified div tax worksheet get prepared for you.
One advantage of FFFF is that you can at all times see and print your forms to pdf. So you can build your return over time, take a break, revisit, and always have a record of current pages. This is a strength compared to the many commercial vendors that use a “black box” approach and make it hard to see your forms.
Yup I’ve run into that attach miscellaneous statement problem before sadly. I’m not sure why they don’t have an upload miscellaneous PDF option, but oh well.
As you say, it’s still superior to filling out the PDFs of each form though because it does that math.
Wij and Fiby, thanks for pushing me to look at the free fillable forms. I think it’ll work for me. I usually don’t have to attach a statement (been a while since last recharacterization of IRA) so hopefully I can use this method in 2018.
Not sure why I was just now able to see these comments but better late than never! :)
I’m glad you are learning a lot but it’s probably costing you money. There have been several tax articles posted on your blog with mistakes where you are losing out on tax benefits and where people have corrected the omissions in the comments. For taxes its not what your know its what you don’t know that is costing you money.
Thanks Tim, always a pleasure.
You crack me up, man.
Agree completely about the value in learning the intricacies of tax law by doing a return on paper. You learn 1,000 times more doing taxes on paper versus a software program. After you gain a better understanding of your tax situation and the applicable laws you can use a program to speed the process.
The easy part of doing a tax return is filling in the boxes. The hard part is gathering the records and knowing WHAT and HOW MUCH to put in each part.
For example: can I deduct transportation and hotel costs for a medical appointment? Did you save the receipt? Did you know that the hotel cost per night is capped for this deduction? Can I deduct 50% of my meal expense for an overnight required stay for an early-morning outpatient procedure?
And always remember, YOU are responsible for what’s listed on your return even if you paid a preparer.
The hardest part I found in trying to move away from my expensive CPA was getting TurboTax to handle my many depreciation schedules. With several rental properties and various improvements over different years I could never get it to come up with same depreciation as in my previous returns. I eventually gave up.
I used the paper form a few times when I started working. It was a PITA. I hated it. Now, I use H&R block software. This year should be relatively simple, but some years were very complicated. I just do the best I can and deal with it if we ever get audited…
I get help from a CPA friend. But I did mine for a long time, using the free online tools. Then one day when I started depreciating rentals one of those online thingies did not save the previous year’s data the way I assumed it would and had to ammend it, which my friend helped fix. And I think everyone should try to do it at least once to know (or get a feeling of) the inner workings (to some degree), or try to do a trial for this year and see how different decisions may change the ammount owed, since you can save a lot more with decisions you make during the year (or earlier) and not the moment you file. Timely post!
I use a CPA out of fear basically. Fear I am going to get audited if I make a mistake doing it myself. I have a feeling a lot of people are like that. I am getting more comfortable with my return year after year, and at some point coming up, I will do it myself. I just need to build some confidence, get some scars, and buckle down with ample coffee and just do it. Wow, that almost turned into a Nike commercial.
Add the Rocky theme song as a backing track and you’ll be set.
Have always done my own taxes, over 40 years now and counting. Started out with paper that many years ago, but have used H&R Block s/w for many years now. Learned an incredible amount of the years and even now the s/w helps tremendously with my stock and option trades (an average of 100-200 per year).
Much of the work becomes second nature when you do them enough. For example, the wife and I have not been home for three months but I am not sweating it, since I already know most of what I need to do. The key is also to keep your records up to date and quickly accessible. Save yourself a tremendous amount of money over time, and do your own.
Records are key. I keep track of everything in our spending spreadsheet, but also Personal Capital and QuickBooks. Makes everything super fast and easy when filling out the 1040.
I’ve been doing my own taxes for years now. Fortunately, mine are super simple. I don’t have real estate or side hustles. I also get to do mine for free with free file. I used TaxAct last year, and I really liked that system. I’ll probably use them again this year.
I started using TaxAct one year, and then I discovered that it couldn’t import investment data directly from my brokerage so I went back to TurboTax.
I wholeheartedly agree. Everyone should do their own taxes….and I completely agree with your message that “lessons learned early in life pay-out later in life”. Especially when it comes to taxes!
When I first had to file taxes, my dad made me do it with pencil and fill out the worksheets and forms. Boy that was some dull and boring stuff…and my taxes were beyond easy at that point. I’ve come to enjoy understanding taxes and how it works because I like saving money. I used tax software now because I just don’t have the patience to do it with pencil and paper and my taxes are a lot more complicated now. (My dad still does that). My friends drive me nuts when they say that their accountant did a better job than my tax software because they got a big refund…as if that is the determining factor as to whether they did a good job.
I am a CPA, who has never done a tax return, and I highly recommend doing your own taxes and learning for yourself. I use taxact.com. I also recommend a product from Credit Karma if you wish to do it completely free. I haven’t checked it out yet, but it”s probably pretty good.
The problem with hiring someone to do your taxes is you don’t benefit from the knowledge gained, and can’t read cool strategies that the Mad Fientist posts. You will hard pressed to find anyone, who does taxes professionally, who actually is well versed in early retirement strategies. Mostly they cater to the high income, high spend crowd, that doesn’t want to pay a lot of taxes but ends up paying a lot anyway (due to lifestyle inflation).
Great post as always! I did my own taxes for the first time this year :). It was an awesome feeling. I ran around the apartment screaming “I AM A GOLDEN GOD!” – my boyfriend was not amused. Before this year I used TaxAct (and would leave the website and come back if they quoted me anything but their lowest cost of $15 – neat trick). My first year out of college my mother did my taxes…and 6 years later I received an $800 check from the IRS for that year. I thought it was a joke. It was not. That got me into gear and made me realize I need to understand my own taxes. So I learned.
afair, my mother did my taxes while I was in high school. Simple 1040EZ only back then…
I admire your enthusiasm :-D
I’ve found value in a CPA when my finances majorly change. In those years I’ll do taxes on my own and pay a CPA and compare results. After that I know what I’m doing and away we go. Most tax circumstances don’t change that drastically year to year and those that due are well publicized enough to understand.
Use to have an accountant do my taxes. The last year she did them (after she finished) I asked how’d it go. She said fine but I was going to owe a lot of capital gain taxes. I asked why and she said because I had a lot of cap gains on a property I sold. I explained to her that there was no cap gains at all because I lived in the property and I owned it for 2 years. She said I was wrong, and my attorney wife agreed with her. So I’m just the appliance repair dude trying to explain this simple tax code to a couple of professionals. Accountant called the next day and told me I was right.
I’d like to do my taxes this year but I’m stumped on a few issues. #1, wife cashed in her Roth IRA and we don’t know how much was money she actually put in the Roth. The bank she initiated the Roth with closed, so I just don’t know what to do. So even though we may end up owing the IRS ~$100 at most, I’ll be paying our tax man $300 to have the taxes done right. I don’t like it, but I want to make sure it’s done right.
When I cashed out the Roth principle in our IRA’s, I had to look at old records of contributions. My wife’s Roth was always at Fidelity, so call the broker that she has her IRA at and ask for historical records. The other thing you can do is look at your bank statements from past years, and look at the time and amounts you contributed. If you have a good online bank or online bank presence, the records should be pretty good. If all else fails, make some phone calls. It’s a hassle, but you will get what you need from the record keeping Gods.
Last year, I did my taxes with TaxAct, mainly because it was cheaper than TurboTax. This year, I’m going to switch over to TurboTax because when I filled out my friend’s tax information on it, it was surprisingly simple and intuitive. The interface was so easy to use that I would rater use that instead of TaxAct’s detailed interface. The unfortunate thing is that TurboTax would most likely cost double of what TaxAct would charge me.
I’ve been doing my own taxes since, forever! It’s a lot easier if you’re start doing it before it gets too complicated, as you mentioned. Instead of doing it all at once, I start once I get the W2’s and continue until I get stuck, meaning until I get records to fill out the following sections. We just finished ours last week.
We did our own taxes for years. Last year we needed to file an SDOP application (offshore moneys not correctly reported, plead for amnesty), and for that I felt I needed an expert. So we used a CPA for the SDOP process and our 2015 taxes. We’re using one this year too, and my plan is to learn exactly how she fills in those FBAR forms, so that next year we can go back to muddling through our taxes ourselves.
The overseas bank account stuff seems pretty nasty with insane penalties for doing it incorrectly.
I file my own taxes with Turbo Tax. I don’t think it is that hard, particularly considering our return isn’t that much. I just wish we didn’t owe the government money, but that has to do with employment issues than deductions.
I started using an accountant after making an error that almost cost me $3600. This year all my hustling brought me nearly 20 tax forms. I’m thinking of simplifying and using TurboTax in the future.
We file two individual returns, one company and two superannuation trust with the Australian Taxation Office (ATO). The individual annual returns and quarterly company and trust returns are quickly and easily filed on-line using ATO’s MyTax portal and Business Portal. Electronic filing of annual company and trust returns requires ‘Standard Business Reporting’ enabled software which is not cheap enough so we file on paper. The accounts are kept up to date in near real time during the tax year using Quicken (Aus edition Home and Business 2011) from which annually a journal for each entity is exported as a spreadsheet and massaged into a proforma return by another spreadsheet then manually copied onto a printed pdf ATO form, audited, actuarialised and submitted by mail to ATO. A separate journal derived spreadsheet monitors superannuation contribution and pension transfer caps. All of which results in accounts always being up to date allowing constant monitoring of financial position, saves several $k and is quicker, more accurate and little to no more extra effort than using an accountant.
Completely agree… doing your own taxes is a great investment on your financial education.
One year I used an accountant and discovered mistakes. He was so embarrassed when I told him.
Bottom line is “nobody cares more about your money than you”. Every year you learn something new… form 3520 when you receive gifted money, etc. I also use TurboTax because of the import and e-file functions.
Does anyone have any online resources they use to answer questions they haven’t come across before? Like the ins & outs of moving expenses/reimbursements/lump sums. Or state tax refunds from 5 years ago to decipher the horrible IRS documents on the subject? Any help would be appreciated.
Like most I’ve done my own taxes by hand for 25 years after paying the account $250 for the 1040 EZ because I didn’t know any better.
Isn’t part of FI got to be doing your own taxes? How will you ever take advantage of the tax code if you don’t know how everything interrelates?
I use Google and the IRS website. It’s not sexy, but it gets the job done.
I’ve always done my own taxes. It just seemed way to easy to pay someone hundreds of dollars to do it for me. Especially if you use a software program like H&R Block or Turbo tax. Just answer some questions and type in some numbers. I made the switch to Turbo Tax this year because I started investing in taxable accounts and all of them auto import investment transactions into Turbo Tax. For me, that was worth the additional cost.
I did my own for years, though there were a few years I got a major discount through my dad’s CPA friend but that may well have been as much because I would catch mistakes as it was any friends & family discount. I was good enough to do ours with multiple dependents and two incomes until I added the rental property, side income and it was taking too many hours. I haven’t got any fear when it comes to tackling tax code, it was just needing to get that time back with a small child, and two more than full time jobs between the two of us. We’ll see about doing it myself again one of these days.
We’ve been using TaxAct, but we *may* try out Free Fillable Forms from the IRS just for “funsies.” (https://www.irs.gov/uac/before-starting-free-file-fillable-forms)
That and the rebellious part of me wants to forgo tax filing companies since they lobby against an easier tax-filing process like pre-filled tax forms.
DIY is so dangerous. Once I forgot to report something called FBAR and I got a huge fine. Be careful.
I scrupulously avoid any transactions involving USA financial transactions such as bank deposits, bonds, shares to stay well clear of FATCA even though I am Australian and am not and have never been a USAn.
I’ve used TurboTax for years and been very happy with it. Last year, we bought a rental property and I paid a CPA to be sure it was done right. Short version of a long story: it wasn’t. Has anyone heard of/worked with an Enrolled Agent?
I filed my tax using HR Block this year, and it was for free for both Federal and States. I have always used Turbo Tax in the past 4 years and paid for it. This year I started to use HR Block because I see the Ad to file for free so I looked into on the IRS website and followed their link to free e-file and guided me to use HR Block. I have always do my tax on my own because my situation is quiet simple. But IRS website does provide some useful information on how to file your taxes, dull but useful. On the last note, Just want to say that I have learned a lot from your blog. thanks for sharing your story with us. I will continue to support you. Take care.
While I am a CPA, I feel most people with a basic understanding of their financial situation and tax code can do their own tax returns. Like many have pointed out, there can be added value that a CPA can provide in cases where the tax code gets complicated. But most people aren’t faced with that challenge. I do, however, believe business can greatly benefit from using a CPA for their tax prep.
I use Free Tax USA – no charge for federal file, then just take those numbers over to your state (mine is free) or use their state file for $15.
I did use an accountant the first year we had SE income – then copied what they did from then onward. The hardest part is in the details – mileage, collecting all the 1099 forms (if they paid you less than $600, they won’t send you one – but you still have to claim that income!), double checking the quarterly payments went through ok, etc.
I might be missing some funky tax breaks I don’t know about – but they are probably not putting $500 back in my pocket and that was the cost of the accountant.
I wish taxes were simple though!
Discovered your blog recently – lots of great material in recent weeks. I finished up my work last year and have been dealing with the “What do you do all day?” question of late, though i must say much less effectively than you.
But on to this article. I have been living and working abroad for a decade now and have learned a great deal by doing my own taxes over the years – handling the foreign earned income exclusion, figuring out IRA contribution possibilities when excluding foreign earned income, FBAR, and so on.
Now on what I expect to be my final tax submission with full-time employment I have been unable to solve one tricky tax question. The last few years my employer contributed 15% of my salary and I a mandatory 7.5% into a non-qualified, foreign “pension” plan. Since it was non-qualified I was unable to roll it over into my IRA when I finished working, so I cashed it out. I have not been able to figure out how to treat this money on my 2016 return — I assume I include the full amount of the distribution on line 16a, but then how do I figure 16b, the taxable amount? The tax code is incomprehensible to me. Any advice from anybody out there on where to get clear guidance on this, online or for a (reasonable) fee? I am currently based in a remote area of Timor-Leste with limited bandwidth (and no CPAs that I know of), but can usually manage Skype audio.
Thanks in advance if anyone has any ideas.
Long time lurker… THANKS for everything, Jeremy! (I’ve doubled back to your site after too much time away as I prepare to make my FI break this year)
Being my brother from another mother, I’m astonished you haven’t been using the workbook from excel1040.com! when I read through a bunch of your returns in years-past I just assumed you had been using it but now believe you don’t. It is amazing. I have no affiliation whatsoever. This greatly helped me to learn and become very aware of how my taxes work – I started by taking a return from TurboTax or CPA and inputting it in to duplicate it. Every year I download his new release and unlock it which allows me to do some simple goal-seeking as well as sensitivity analysis. Even without doing “what-if” analysis, it is still super helpful to figure out how things become affected and to trace where they originate and are delivered (dependents and precedents). I recently found out one of my other brothers separated at birth has been using this thing and literally printing it from the excel page and sending it in to the IRS for many years without any issue. I see the author even has form 2555 on there (FEIE) on there which you could use to cross-check your work.
I had initially hired a CPA to help me with my rental property while I got set up. Each year I would go over all the forms to understand what they did manually and with TurboTax. For the first couple years it was clear using them was still the way to go as they were saving me more than I was paying them; I told myself I’d still use them one additional year after I had my situation “figured out” (assuming no more life changes). Then, I got dumped into the “SALY” (Same as last year) pile and found myself correcting rookie mistakes from the part time help a couple years in a row. I told the owner I was just doing it in excel but may be back with life changes. He offered to look over my own work each year which I plan to do for FY2018 here in the next month on an hourly basis as he is very shrewd.
I’ll have to check out the spreadsheet, I don’t recall seeing it before. Thanks!
I have my own spreadsheet but it only makes sense to me