How much are you really paying for tax preparation?
What if I told you there was a hidden fee in your tax preparation cost? This hidden fee costs you serious money every time you file your taxes. This hidden fee shows up even when you prepare your own tax return. And it is totally avoidable. They sneak the fee in because you never see it and therefore never complain about it.
The hidden fee is hard to identify. It doesn’t show up as a line item on your accountant’s invoice or the online software payment page. Yet the fee digs hard into your wealth.
This same hidden fee looks different when you prepare your own tax return than from a professionally prepared return. The best way to expose this hidden tax preparation cost is to handle it separately from how it is applied to DIY tax preparation and professionally prepared return.
DIY Tax Preparation Costs & Hidden Fees
There are numerous online tax software packages to help you prepare your own tax return. Some are very expensive, charging more than low-cost tax offices. And they still have the same hidden fee the expensive software charges!
By now you might have figured out the hidden fee is overpaying your taxes. While it is understandable a DIY tax preparation can have problems because you don’t understand the tax code as well as a professional, it is good to know what it is really costing you when you file your return. Before you toss in the towel and hire a tax pro you will want to read how this hidden fee applies to DIY tax preparation and how even seasoned tax pros can be hammering your wallet with you none the wiser.
Should you prepare your own tax return? It depends. If your return is simple, you are comfortable with the computer and filling in tax forms, you are probably okay. Most DIY tax software has ample Q&A to help you file an accurate return.
However, no software in the world can point out every issue. Sometimes the issue deals with money outside the tax return or affects multiple tax years. Software is no substitute for tax knowledge and experience.
There is a simple way to determine if you need a tax pro. If you have a small business or own income properties you probably should hire the professionals unless you can answer these three questions:
- Do I understand the tangible property rules and know when to deduct rather than depreciate? At what level must I depreciate? And, do I know what election to make so I survive an audit?
- Do I understand the repair regulations? What is the limit? And the rules surrounding this juicy deduction? Do I understand the election allowing me to deduct, rather than depreciate, up to $10,000 of improvements per building? Do I understand when a roof or other major repairs can be deducted rather than depreciated?
- Do I understand the Qualified Business Income Deduction? Do I understand the rules surrounding the definition of a “trade or business”?
If you can intelligently discuss the above questions you can prepare your own tax return with a business and/or income properties. If not, you need a pro. (Might I suggest you become a tax pro if you can intelligently discuss these issues.)
Tax Preparation Cost Breakdown
Since many elections that save you massive amounts of money require the election to be claimed on an original and timely filed tax return, it is important to get it right. There are no amended returns to fix some problems, you just pay the extra tax.
Wages, itemized deductions, interest and dividends have fewer issues. Tax software handles most issues revolving around these items well. If you have complex interest expense issues and don’t understand interest tracing you might want to try a tax pro until you do understand the issues.
Before we leave the DIY arena I want to talk about which tax software to use. The big names have become so expensive while you do all the work you would be better off going to the cheapy deluxe tax offices because they are cheaper (and at least they do the work). There is one DIY software I recommend. This software is used in over 64,000 tax offices and had a hand in the original software the IRS used when e-filing was starting out. It is the same software I use in my office. The best part is they have a flat $25 fee, including as many states as you want. That is by far the best deal in DIY software currently. And for full disclosure, the link in this paragraph to 1040.com is an affiliate link.
Tax Professional Cost and Hidden Fees
It is understandable when a lay person doesn’t understand the tax code well enough to get all her deductions. But when you pay good money to a pro it is downright insidious!
Let me give an example from my tax office earlier this very tax season:
A new client this past week had her tax return prepared by one of those $95 preparation fee outfits last year. My fee this year bumped up against $300, but I was cheaper.
- Experience matters.
- The lowest fee isn’t the lowest cost to you.
- Don’t hire people who take shortcuts.
How do I know I have a good tax professional?
First, you can’t prepare a quality tax return for under $200. I know, I know. I can hear the vitriol already. But it is true. Low cost returns are prepared by data processors. They have the same skill sets as someone preparing their own return. In other words, they plug numbers and hope the computer got it right. Again, for simple returns this might be fine. But, as we saw above, as soon as even a modest complication enters the scene issues can arise that the data processor can’t handle.
The next step is finding a tax professional who can handle your tax issues and has a reasonable fee. A good tax professional, in my opinion, spends time with you AFTER the return is prepared. The before the preparation meeting is more about data processing; the meeting afterwards is about saving you money. Probably more money than you paid said tax professional. In effect, really good tax professionals are actually less than free since they return more tax savings and wealth building advice than you ever pay her.
So, where do you find these unicorns, tax professionals that know what they are doing with a reasonable fee? I have some ideas to increase your odds.
I have published on this topic before. These are two articles I strongly recommend, if I can be self-serving in the recommendations:
7 Questions Rich People Ask Their Accountant, and Finding a Good Accountant.
Tax Preparation Cost Thoughts
Not every tax professional is good at every aspect of tax law! For example, I avoid ex-pat returns like the plague. It’s not that I can’t do them; it’s that I don’t want to and don’t do enough to be good at it. Good tax professional are honest and admit their limitations. A tax professional too eager to get your account without first knowing the client (you) is guilty of one of my favorite saying:
Prescription before diagnosis is malpractice.
And it is.
Before you start your hunt for a tax professional I have an added suggestion. Finding a Good Accountant This tax preparation service has no cost to you for preparation of your return. They handle simple returns only, but many of the preparers came from the professional ranks and are retired now and don’t want to sweat as hard as they did in their traditional working days. If your return is too complex for the VITA program they will tell you. Then you are back to finding a tax professional on your own.
When looking for a tax professional you need to ask questions. Price is not the first question! It is the last one. You want to know if the supposed tax professional can push a 1 up against a 2 in an accurate way.
A good place to start your accountant search is by asking people in a similar situation as you are. If you have income properties, ask other income property owners who they use as a tax professional. Business owners should do the same. If you have multiple state issues you certainly need to find someone in the same boat you are because not all tax professionals handle out-of-state or multiple state tax returns.
This blog also has a list of tax professionals accepting new clients. It might be a good place to start your search. If you are a tax professional looking for more clients, use the contact page of this blog to see if we can include you on the list.
Always ask questions? If you feel uncomfortable, leave! You are going to spend serious time with your tax professional if they are good because they are going to save you a pile of money AND help you grow your wealth.
Final thoughts on tax preparation costs
You can’t avoid the risk of the hidden tax fee. Whether you DIY or hire a tax professional, the risk is the same. My hope is that this short guide removes the bulk of that risk and puts serious cash into your pocket.
Tax professionals and clients, use the comments section to share successes and failures related to tax preparation. Your story is important in helping the entire group (our tribe, if you will) crowdsource the problem and solutions.
Until next time, keep your cash in your wallet.
Friday 21st of May 2021
With my business, tax used to be one of the challenges I faced. According to my personal opinion, tax outsourcing is a great option to choose from for peaceful mind in tax season.
Tuesday 23rd of March 2021
Interesting. I think that for most people DIY works especially they are W-2 with few investments and no small business. But for once you have side hustles and investments in different assets it is a much higher effort.
Tuesday 23rd of March 2021
Yeah. I used Turbo Tax successfully for years and tried to learn the ins and outs, but then at some point it became overly complicated because I had to file in multiple states, K-1, capital gains, etc. At that point, it was more prudent to hand over to a professional. And the real value has been in tax management. Consulting and confirming money moves that I should make, before tax season even rounds the corner.
Morning A Waters
Monday 22nd of March 2021
I lucked into a great tax preparer that my husband knew for years. He has helped me through taxes and questions for not only myself, especially after the death of my husband, but also doing the taxes for my mom after my dad as well as handling tricky tax questions after she died. I got answers about paying all my property taxes in the year before my retirement, funding Roth IRA's as I qualified, paying off my mortgage vs not paying it off. He is worth his weight in gold and find his help and advice indispensable during tax time as well as any other time during the year when things happen in my life that could impact my income or taxes.
Tuesday 23rd of March 2021
I've been a tax professional for more years than I'd like to admit and I can say with 100% conviction this is not the year to be preparing your own taxes. Even the simple returns aren't so simple after the feds changed the rules half way through the season.
I spend a lot more time advising than preparing returns. For me, the tax return is a by product of my client relationship, not the product.
I agree that clients should find a tax professional whose area of expertise matches their needs. I've centered my practice around equine and related small farm businesses for years, but bring me a complex oil and gas return and I'll tell you to find someone else. I guess the hard part for clients is sorting the hay from the chaff! Your advice for those searching for new professionals to work with to seek referrals from others in the same industry is on point. How often do you hear "my neighbor said I could deduct ( insert whatever absurd expense you want). My response : " Is your neighbor a tax professional?" This usually ends the conversation!
Monday 22nd of March 2021
You are right, Morning. When a tax professional does her job they are worth their weight in gold. I am glad you found a good tax pro to keep in your corner.