Using a tax pro isn't cheap, but can save you plenty
Some entertaining ads running these days make the point that preparing and filing your tax return is as easy as taking a picture with your smartphone. However appealing that sounds, it's a stretch to suggest that preparing and filing taxes for most people would be that simple.
That might work for those who are single and have no kids, no house, no investments, no significant expenses, one job all year and no life changes. And it makes sense for anyone in this group because electronically filing and electing direct deposit is the fastest way to get your tax refund. That can also help guard against fraud where crooks use your Social Security number to file a phony tax return. If they try that after you've filed, the fraudulent return is more likely to be rejected.
But for most taxpayers, smartphone tax returns aren't appropriate. This is one area where doing something yourself isn't always a good idea, and it can actually wind up costing you more. The solution for many people is to use a tax pro instead.
To find out more about getting professional tax help, I talked with Mark Steber, chief tax officer for Jackson Hewitt Tax Services, and he put it this way: "Taxes are hard ... a lot of people have difficulty doing their taxes because the tax code is a big, complicated thing." According to Jackson Hewitt, billions of dollars of deductions and credits go unclaimed, and about 1 million taxpayers fail to request refunds totaling almost a billion dollars each year.
One reasons many people don't use a tax pro is the cost. That's understandable. The average price for preparing a simple tax return (Form 1040, Schedule A and Schedule B) starts at around $200. But it could double in metropolitan locations and even cost three to four times more when complex issues are involved (self-employed, investment or real estate transactions, rental property, etc.).
However, Steber pointed out: "If you use a tax professional who can find one additional tax credit or some additional deductions, the taxes saved can often exceed the cost of their services."
Here are a few such examples:
Use the correct filing status
A lot of unmarrieds think the only filing status they can use is single. But many single taxpayers can qualify to use the head of household filing status, which results in a lower tax liability. If you provide more than half of the cost of support for a child, a parent or any other family member, you probably qualify as a head of household. This status can be a real tax saver because more of your income is taxed in the lower tax rates and you get to claim a larger standard deduction ($9,250 versus $6,300).
Tax credits for a child or dependent
You can claim a credit of up to $2,100 for day care for a qualifying dependent, which include children under age 13 and parents who are no longer able to care for themselves.
How much can missing these two items cost you? According to Jackson Hewitt, if you're single with taxable income of $75,000, you'll pay about $11,975 in taxes by filing single and not claiming the child tax credit. But if you filed as head of household and claimed this credit, your taxes would be only $7,766 -- a savings of over $4,200!
Earned income tax credit
This tax credit is available to people with lower incomes ($14,820 to $47,747, depending on the number of qualifying children living with them). But nearly one in four people who qualify fail to claim it. This credit can save you as much as $6,242, so it can really pay to use a pro if you don't know how to claim the earned income tax credit.
Checking past returns
A good tax pro will ask you to bring your tax returns from prior years to see if they've been prepared and filed correctly. Jackson Hewitt says nearly half the self-prepared returns it reviews often have missed deductions and credits. Surprisingly, it says it also finds additional tax savings in about 25 percent of prior-year returns that were prepared by another pro.
While uncommon, it's not unheard of for some people to find out if their past tax returns are amended and refiled, they would receive as much as $5,000 or $10,000 of additional refunds. If that's your situation, expect the IRS to request plenty of documentation to support those changes. This is where tax pros can really help because they'll know what information to prepare and include with your amended returns.
If you suspect you've made an error that can be corrected in your favor, get to a pro right away. The statute of limitations on amended returns is three years.
