Should I Prepare My Own Tax Return?

A reader writes in, asking:

“This is my first time having to file a tax return since getting a ‘real job’ and my head is spinning. Should I hire a CPA to do my taxes or is it better to use software for it myself? I’ve read that Turbotax guarantees the highest refund possible. Is it really better than hiring a CPA?”

Without a doubt, using a tax professional is the most reliable way to get the lowest tax bill. A key point here is that tax professionals use tax preparation software too, so using such software yourself does not provide you with any advantage over a professional.

That said, there are valid reasons for taking a DIY approach. Most obviously, you save on fees. Buying a download of TurboTax or other similar software certainly costs less than hiring a professional.

More importantly in my opinion though is that by preparing your own return for the first time, you’ll learn quite a bit about how income taxes work.

In my work, I frequently come across people who have been paying income taxes for decades, yet they don’t understand even the most basic income tax concepts (e.g., they misunderstand how tax brackets work, or they don’t know the difference between a deduction and a credit). Every year, they simply turn over all of their documents to somebody else who prepares their return, and so they go years without learning these things. Naturally, it’s impossible to make very good decisions about tax planning when you don’t understand the fundamental concepts.

In addition to allowing you to make smarter financial decisions, having a better understanding of income taxes allows you to be a more well-informed voter. It’s very common for politicians to propose various changes to our tax code (e.g., creating a new deduction or credit, or eliminating/changing an existing deduction or credit). If you don’t understand how the system works now, you can’t really understand the impact of proposed changes.

My point here isn’t that everybody should be preparing their own tax returns. It depends on your goals, and it depends on how complicated your return is. (If you’re already at the point where you have investments in taxable accounts, you itemize your deductions, and you have income from a rental property, then it’s going to be quite a challenge to prepare your own tax return if you’ve never prepared a return before.)

In summary, if you want to learn more about income taxes, you want to save on tax prep fees, and/or your return isn’t too complicated, those are all points in favor of preparing your own return. But it’s unlikely that your tax bill will be lower as a result of taking a DIY approach rather than hiring a professional. In most cases, the outcome that you’re hoping for with a DIY approach is that your return will turn out exactly the same as it would have if a professional had prepared it.