Tax software is great, if you have a scenario that works well within its confines.
For example, if you’re a college student who makes very little money annually, and you don’t have any investments or deductions besides the standard deduction – sure, use tax software.
But are your taxes that simple?
If you have deductions that are more complicated, significant income, or investments, tax software might not be the way to go. It may be better to go with a living, breathing tax professional.
Here are some things to consider before you decide whether tax software or a tax service is right for you.
Understanding your financial status
First off, to properly work with tax software, you need to have an understanding of your financial status.
By this, I mean that you have to realize consciously that you have income and/or investments, and then understand whether or not ‘taxable events’ have transpired.
For example, some monetary inflows that sound like they could be taxable actually aren’t, like certain gifts.
Meanwhile, other monies/property that sound similar to gifts are taxable, like contest winnings.
To complicate matters, some gifts are taxable, like gifts over a certain amount (not taking into consideration the lifetime estate allowance).
What this all boils down to is that you need to have at least a rudimentary understanding of the tax code if you’re using tax software. Otherwise, you might underpay or overpay your taxes – which are both undesirable outcomes – no matter how simple the experience of using tax software feels.
Inputting income and investments
When your taxes become more complex (like when you have more than one source of income and/or an assortment investments), the task of doing your taxes becomes more than just a ‘series of simple questions.’
The questions you have to answer on tax software can go on for a quite a while, and if you don’t have any background in taxes, you likely have no idea what’s going on.
After a long series of convoluted, interlocking questions, you have to eventually ask yourself: Do I want to ‘do’ my taxes when I don’t understand what the software is, in fact, doing?
If you’re smart, the answer is likely ‘no.’
Keeping track of annual changes
Tax software isn’t good at keeping track of tax consequences that are carried forward from tax year to tax year.
A good example of this deficiency is an upward or downward adjustment in basis.
Touching on this briefly, a basis can generally be thought of as the amount paid for an asset. When you take a tax deduction associated with such an asset, your basis decreases. When you go to sell that asset, a lower basis means that more of the proceeds from such a hypothetical sale are taxable. Therefore, because the basis of an asset adjusts over its useful life, you must keep track of such adjustments, and understand where the asset stands in any given year.
Tax software is not good at such a task because, by nature, it can only take you down one of a number of predestined paths (even if you imported data from a previous tax return).
To put it simply, tax software only remembers what happened in previous tax years at a superficial level.
Tax software might work for you if you have incredibly simple taxes. But if you have more complicated deductions, income from multiple sources, or a number of investments, working with a tax professional is probably your best bet to help ensure you get your taxes done right the first time.
With a tax professional, you can ask questions, and get a response from a real person that cares if you get your taxes right. And that beats working with a robot, or tax software.
Consider Dino Tax Co
If you think you need assistance with your taxes this year, and are located in the Kingwood or Greater Houston area, please consider working with Dino Tax Co. Click here to learn more about our tax preparation services.