Worth it to pay someone to do taxes?

[J.P. MoreGains]

Hey,

I'm new to all of this. I'm saving aggressively (4.5k a month) I'm around 150k total in investments and savings.

Typically I just file my own taxes... I do Turbo Tax for federal and then print out state taxes and do them myself and mail them in.

Would it make sense for me to pay someone to do my taxes? I'm hoping maybe I could get some tax advice as well in the process but not sure if that would cost me more.

This past year I started work in August and put almost all of my paycheck in 401k and 457b so I won't have much taxable income at all. This year I'm maxing everything out...

... Plus I did a rollover into vanguard from a TIAA account and I also did a transfer of Roth IRA into Vanguard from American funds.

These are done and I think I'm good but I'd like to ask about tax implications about these. I don't think there are any but I think it's time I better understand this stuff.

So is it a good idea to start paying someone to do my taxes and start getting some tax advice in general and pay for that?

Thanks for any thoughts on this.

[RePatriot]

If you are taking a typical FIRE approach of broad-based mutual fund investing in primarily retirement accounts, you are not itemizing, and you don't have rental or business income, I don't think a tax preparer provides significant value. For the most part, you can sit and wait for your tax forms to roll in, and file yourself at a free online tax filing company. I'm personally fond of freetaxusa.com, and it is pretty much an exercise in data entry. Sidenote, I always thought the name made it sound like a scam website. Terrible branding, but great product!

I also think there is value in understanding your personal tax situation and crafting your own plan for savings and investments. First, most inexpensive options for tax professionals aren't going to give you advice fitting someone whose goal is retiring 20-30 years earlier than most. Second, there is value in understanding your own situation beyond the monetary (greater likelihood of adherence to your plan, less concerns about being ignorant of an aspect of your life you are seeking to optimize, etc.). Finally, I've found that with enough forethought and prior research before asking a question, this forum has provided all of the answers I've needed.

However, I do think that if you can find a professional with some strong chops who would sit down and walk through some forward thinking tax planning, there may be some value to be extracted in minimizing your tax burden going forward.

[Chris Pascale]

If you enjoy doing your taxes, then do what you enjoy. If you hate it, then for 1 month every year, peel a bit of that $4500 you put away for savings, and pay a CPA to file for you.

I have never done my own, and I'm an accountant.

ETA: I'm not a tax accountant.

[Dicey]

We have rentals and...stuff. we always pay our CPA to do our taxes. He's a curmudgeon and worth the mostly tax-deductible expense.

In your situation, you should be able to DIY your own taxes.

[secondcor521]

A professional tax preparer will likely charge separately for tax preparation and tax planning, as they should.

Very very few tax preparers are knowledgeable enough and are willing to spend enough time to understand your entire financial picture to do tax planning with you.

What you can get for free with your tax preparation will be some general advice that you've already read here or can read in a zillion blog posts, or maybe a few tactical things based on your current year tax return.

You can probably get your taxes done and filed for free through AARP Foundation Tax Aide, and depending on the people who do your return, you can get tax advice as well, but again it will be tactical and not long term.  It's free, and you don't need to be a member of AARP.  They're starting up in about a week.

https://www.aarp.org/money/taxes/aarp_taxaide/

Every one there who does taxes is trained and certified annually on both tax preparation and ethics, and everyone you see is a volunteer.  They'll e-file for you and give you a printed copy of your finished tax return in about an hour once they start on it.  Depending on your area, it might be walk in or by appointment.  Unlike most professional preparers, every tax return done gets a second complete review by an independent tax preparer for quality purposes.

There are scope limitations, but they are fairly broad.  What you described so far in your OP isounds like you'd be in scope.

[nouseforausername]

What everyone else said, plus you can login to your IRS.gov account and access an electronic Record of Account of your accepted returns for your past few filing years. Not necessarily for you for this year, but a lot of W2 earners probably have similar returns each year, and looking at a version of the data on the IRS accepted version for the previous tax year can be helpful.

Also, for what it's worth, my higher earning friends all seems to have a "tax guy." I am 100% in support of using the skills of a professional. Just for me, my stuff is pretty much the same every year, and I'm a public sector employee. Not much value in having a pro do mine.

[J.P. MoreGains]

Thanks for the replies! Definitely appreciated.

I think in my case it makes sense for me to do my own taxes as I've always done and save the money there.

But I think it might make sense for me to pay for tax advice / tax optimization strategy so I know what to do as I move toward FIRE. There is where I could get the real benefit.

I did a rollover and some transfers for a Roth and I would like to know more. The Vanguard people on the phone could answer somethings but always said they are not tax professionals/do not give tax advice.

So eventually I think I'll need to do that. Plus I need to just read more as well.

Either way the transfers were really scary for me since I don't understand everything well and it felt weird having a zero balance in my old account while the rollover check was in the mail.

Anyway, that was what made me want to really better understand this stuff.

I don't think I have any "taxable events" for these since I had a rollover go into a rollover account. And my Roth IRA's were transferred "in kind". So basically same scenario as before just vanguard now with lower expense rations.

Thanks for the comments since I'm new to the FIRE stuff and have a lot to learn.

[SeattleCPA]

For what it's worth, I think you DIY with TurboTax or TaxCut or some other bit of software if you've got a simple straightforward situation.

BTW I also think people should if possible keep their finances simple enough to DIY.

You only need to outsource to a tax accountant if you have a complicated situation because you own a business, have a multistate or international footprint, or invest in stuff where you're getting K-1s with lots of gritty details.

Terrible shortages of tax accountants exist right now so many firms aren't accepting new clients. (One study recently said 42% aren't.) Most firms you'd want to deal with are selective. (We are taking on new clients. But 5-6 people approach us most days. And for majority we aren't right fit and so have to decline to help.)

Sadly, work product quality varies widely. So you may pay too much for what you get. (This seems particularly true with lower priced firms.)

Finally, what people want often isn't available. There was a thread in Bogleheads recently where people discussed whether paying $450 an hour for tax planning was a rip-off or not. Many thought so. But the reality is, the people you'd really like to get your advice from, in hourly chunks, lose money if they sell just their time by the hour. Even at $450 an hour.

[secondcor521]

Finally, what people want often isn't available. There was a thread in Bogleheads recently where people discussed whether paying $450 an hour for tax planning was a rip-off or not. Many thought so. But the reality is, the people you'd really like to get your advice from, in hourly chunks, lose money if they sell just their time by the hour. Even at $450 an hour.

I generally agree, but I'm curious on two things:

1.  If they're losing money selling advice at $450, what other things would they do that would make them more?  Complex tax returns that they effectively charge $500 an hour for?  Something else?  This is mostly a question of curiosity.

2.  If I'm paying $450 an hour (I'm not, but a few times a family member paid the LCOL-adjusted amount), how do I know if I should upgrade to the $750 an hour person?  I ask because said family member in retrospect sometimes got good value and sometimes didn't.  As an amateur with good but lower than $450 an hour skills, it's hard to evaluate without becoming an expert myself.  Catch-22.

[SeattleCPA]

Finally, what people want often isn't available. There was a thread in Bogleheads recently where people discussed whether paying $450 an hour for tax planning was a rip-off or not. Many thought so. But the reality is, the people you'd really like to get your advice from, in hourly chunks, lose money if they sell just their time by the hour. Even at $450 an hour.

I generally agree, but I'm curious on two things:

1.  If they're losing money selling advice at $450, what other things would they do that would make them more?  Complex tax returns that they effectively charge $500 an hour for?  Something else?  This is mostly a question of curiosity.

2.  If I'm paying $450 an hour (I'm not, but a few times a family member paid the LCOL-adjusted amount), how do I know if I should upgrade to the $750 an hour person?  I ask because said family member in retrospect sometimes got good value and sometimes didn't.  As an amateur with good but lower than $450 an hour skills, it's hard to evaluate without becoming an expert myself.  Catch-22.

To answer the first question, the reality is for a super-skilled tax person that mentoring, supervising and coaching other tax accountants earning $50 or $100 an hour is far higher value than selling an hour to someone who has a question. (I.e., there's a synergy when experts provide their time to those folks that doesn't exist when they work with non-experts.)

The other thing is, if you were selling time just by the hour? You'd have a lot of overhead if you're selling time in half hour and one hour increments and lots of deadtime. So your bill at (say) $500 an hour to make the math easy. And suppose you can 500 hours.. which would be quite a bit. So that's $250K... which sounds great... but if the office overhead is $100K and the full-loaded cost of the administrative support person is $100k? The numbers don't work very well.

[secondcor521]

Finally, what people want often isn't available. There was a thread in Bogleheads recently where people discussed whether paying $450 an hour for tax planning was a rip-off or not. Many thought so. But the reality is, the people you'd really like to get your advice from, in hourly chunks, lose money if they sell just their time by the hour. Even at $450 an hour.

I generally agree, but I'm curious on two things:

1.  If they're losing money selling advice at $450, what other things would they do that would make them more?  Complex tax returns that they effectively charge $500 an hour for?  Something else?  This is mostly a question of curiosity.

2.  If I'm paying $450 an hour (I'm not, but a few times a family member paid the LCOL-adjusted amount), how do I know if I should upgrade to the $750 an hour person?  I ask because said family member in retrospect sometimes got good value and sometimes didn't.  As an amateur with good but lower than $450 an hour skills, it's hard to evaluate without becoming an expert myself.  Catch-22.

To answer the first question, the reality is for a super-skilled tax person that mentoring, supervising and coaching other tax accountants earning $50 or $100 an hour is far higher value than selling an hour to someone who has a question. (I.e., there's a synergy when experts provide their time to those folks that doesn't exist when they work with non-experts.)

The other thing is, if you were selling time just by the hour? You'd have a lot of overhead if you're selling time in half hour and one hour increments and lots of deadtime. So your bill at (say) $500 an hour to make the math easy. And suppose you can 500 hours.. which would be quite a bit. So that's $250K... which sounds great... but if the office overhead is $100K and the full-loaded cost of the administrative support person is $100k? The numbers don't work very well.

That makes sense.  Any thoughts on the second question?

[SeattleCPA]

Finally, what people want often isn't available. There was a thread in Bogleheads recently where people discussed whether paying $450 an hour for tax planning was a rip-off or not. Many thought so. But the reality is, the people you'd really like to get your advice from, in hourly chunks, lose money if they sell just their time by the hour. Even at $450 an hour.

I generally agree, but I'm curious on two things:

1.  If they're losing money selling advice at $450, what other things would they do that would make them more?  Complex tax returns that they effectively charge $500 an hour for?  Something else?  This is mostly a question of curiosity.

2.  If I'm paying $450 an hour (I'm not, but a few times a family member paid the LCOL-adjusted amount), how do I know if I should upgrade to the $750 an hour person?  I ask because said family member in retrospect sometimes got good value and sometimes didn't.  As an amateur with good but lower than $450 an hour skills, it's hard to evaluate without becoming an expert myself.  Catch-22.

To answer the first question, the reality is for a super-skilled tax person that mentoring, supervising and coaching other tax accountants earning $50 or $100 an hour is far higher value than selling an hour to someone who has a question. (I.e., there's a synergy when experts provide their time to those folks that doesn't exist when they work with non-experts.)

The other thing is, if you were selling time just by the hour? You'd have a lot of overhead if you're selling time in half hour and one hour increments and lots of deadtime. So your bill at (say) $500 an hour to make the math easy. And suppose you can 500 hours.. which would be quite a bit. So that's $250K... which sounds great... but if the office overhead is $100K and the full-loaded cost of the administrative support person is $100k? The numbers don't work very well.

That makes sense.  Any thoughts on the second question?

Ugh. Sorry. I meant to answer that too.

So here's what I'd suggest: Approach someone who works in the area where you have tax issues. Ask them to look at your prior year return and if it'd make sense to use them instead of the prior preparer. They will give you a price, surely. You shouldn't need to ask.

What you hope you hear is something along the lines of, "Well, we spotted some stuff we'd do differently... X, Y and Z for example... we think those tweaks will save you $20K a year (or whatever)... and our fee would be $3K a year (or whatever). And then what you do is decide whether the extra cost is worth it. So, basically you treat it like a "Return on Investment" question.

Some tips about this:

1. You wouldn't want to do this now. You'd want to approach people outside tax season.
2. Bespoke professional services are expensive. No scalability. So it'll be expensive and probably only something that works for both client and professional if the services really move the needle. You do not want to spend $400 to save $800 of tax. You want to spend $5K that saves $25K. Or you want to spend $20K that saves $200K.
3. Always keep in mind that if you keep your finances simple? You probably won't need to find and hire a hardcore tax person. (The tax software is really good for nearly everybody.)
4. The cost of good high quality 1040 tax returns probably starts in excess of $1K.

[secondcor521]

Finally, what people want often isn't available. There was a thread in Bogleheads recently where people discussed whether paying $450 an hour for tax planning was a rip-off or not. Many thought so. But the reality is, the people you'd really like to get your advice from, in hourly chunks, lose money if they sell just their time by the hour. Even at $450 an hour.

I generally agree, but I'm curious on two things:

1.  If they're losing money selling advice at $450, what other things would they do that would make them more?  Complex tax returns that they effectively charge $500 an hour for?  Something else?  This is mostly a question of curiosity.

2.  If I'm paying $450 an hour (I'm not, but a few times a family member paid the LCOL-adjusted amount), how do I know if I should upgrade to the $750 an hour person?  I ask because said family member in retrospect sometimes got good value and sometimes didn't.  As an amateur with good but lower than $450 an hour skills, it's hard to evaluate without becoming an expert myself.  Catch-22.

To answer the first question, the reality is for a super-skilled tax person that mentoring, supervising and coaching other tax accountants earning $50 or $100 an hour is far higher value than selling an hour to someone who has a question. (I.e., there's a synergy when experts provide their time to those folks that doesn't exist when they work with non-experts.)

The other thing is, if you were selling time just by the hour? You'd have a lot of overhead if you're selling time in half hour and one hour increments and lots of deadtime. So your bill at (say) $500 an hour to make the math easy. And suppose you can 500 hours.. which would be quite a bit. So that's $250K... which sounds great... but if the office overhead is $100K and the full-loaded cost of the administrative support person is $100k? The numbers don't work very well.

That makes sense.  Any thoughts on the second question?

Ugh. Sorry. I meant to answer that too.

So here's what I'd suggest: Approach someone who works in the area where you have tax issues. Ask them to look at your prior year return and if it'd make sense to use them instead of the prior preparer. They will give you a price, surely. You shouldn't need to ask.

What you hope you hear is something along the lines of, "Well, we spotted some stuff we'd do differently... X, Y and Z for example... we think those tweaks will save you $20K a year (or whatever)... and our fee would be $3K a year (or whatever). And then what you do is decide whether the extra cost is worth it. So, basically you treat it like a "Return on Investment" question.

Some tips about this:

1. You wouldn't want to do this now. You'd want to approach people outside tax season.
2. Bespoke professional services are expensive. No scalability. So it'll be expensive and probably only something that works for both client and professional if the services really move the needle. You do not want to spend $400 to save $800 of tax. You want to spend $5K that saves $25K. Or you want to spend $20K that saves $200K.
3. Always keep in mind that if you keep your finances simple? You probably won't need to find and hire a hardcore tax person. (The tax software is really good for nearly everybody.)
4. The cost of good high quality 1040 tax returns probably starts in excess of $1K.

Thank you!

[Taran Wanderer]

I had someone doing our taxes for a number of years, and I grew tired of the steadily growing bill, so I switched to TurboTax.  Even with multiple retirement accounts, W-2’s, 1099’s, K-1’s, rollover Roths, small business tax credits, 529’s, rental house, and other complications, it’s working well for us.  The only problem I’ve had is a weird local tax that it doesn’t capture, but I can handle those on the side. 

[GilesMM]

Depending on your aptitude and the complexity of your taxes, it may be best to do them yourself or hire it out.  I did ours for years when all we had was a domestic W2.  I did my Dad's last year in Turbotax. Once we moved overseas, the company managed our taxes.   We have had rentals since moving back plus residuals from overseas work so I hired a local savant who does mine.  She is sort of difficult to deal with (doesn't do email and I've never met her in person) but she really, really knows what she is doing and misses nothing.  Our return package is nearly 200 pages and includes federal plus three state returns. She charges $1000.


Keep in mind that the preparer does the mechanics of filling out the paperwork and, ideally, finding creative ways to save you tax money, but YOU still have to do hours of legwork preparing a package for them.  You need to collect all the documentation, digest it all, and provide summaries into forms provided by the preparer.  It takes a long time and often feels every bit as time consuming as filing your own taxes.    In the end, you are not paying someone to save you time so much as to ensure your returns are filed correctly and that your taxes are minimized to every legal extent.

[Taran Wanderer]

Keep in mind that the preparer does the mechanics of filling out the paperwork and, ideally, finding creative ways to save you tax money, but YOU still have to do hours of legwork preparing a package for them.  You need to collect all the documentation, digest it all, and provide summaries into forms provided by the preparer.  It takes a long time and often feels every bit as time consuming as filing your own taxes.    In the end, you are not paying someone to save you time so much as to ensure your returns are filed correctly and that your taxes are minimized to every legal extent.

This is why I switched to TurboTax. I was gathering all the information AND entering it into the boxes on the accountant’s paper form. Why not just enter it into TurboTax? There was a little pain with depreciation schedules at first, and I talked with a TurboTax accountant to check everything, but I think this year will be year 4, and even as things have gotten more complicated, it’s still working well.

To me, “doing my own taxes” means using TurboTax - I can’t imagine figuring it out on my own with paper forms or PDFs from the IRS.  That worked with the 1040EZ long ago, but not anymore.

[aloevera1]

I wouldn't completely rely on tax accountant to provide the most optimal solution. I think you have to have quite a bit of understanding anyway to assess if their proposal makes sense or not. Did they miss anything? Are they just fitting one universal solution for everyone without really considering your situation?

So I am a proponent of doing your own taxes until your situation becomes very complicated (multiple businesses, international tax, etc). It's a nice way to learn something that really affects you.

CPAs are also people, can make mistakes, do shitty work, etc. For most people I would recommend to DIY and use the tools available.

[SeattleCPA]

Keep in mind that the preparer does the mechanics of filling out the paperwork and, ideally, finding creative ways to save you tax money, but YOU still have to do hours of legwork preparing a package for them.  You need to collect all the documentation, digest it all, and provide summaries into forms provided by the preparer.  It takes a long time and often feels every bit as time consuming as filing your own taxes.    In the end, you are not paying someone to save you time so much as to ensure your returns are filed correctly and that your taxes are minimized to every legal extent.

This is why I switched to TurboTax. I was gathering all the information AND entering it into the boxes on the accountant’s paper form. Why not just enter it into TurboTax? There was a little pain with depreciation schedules at first, and I talked with a TurboTax accountant to check everything, but I think this year will be year 4, and even as things have gotten more complicated, it’s still working well.

To me, “doing my own taxes” means using TurboTax - I can’t imagine figuring it out on my own with paper forms or PDFs from the IRS.  That worked with the 1040EZ long ago, but not anymore.

I think DIY should mean you use a tax software program.

You hear people say sometimes, "oh use the forms so you know how the puzzle pieces fit together..." but I' haven't seen a hand-prepared amateur tax return that isn't riddled with errors.

[OzzieandHarriet]

I had someone doing our taxes for a number of years, and I grew tired of the steadily growing bill, so I switched to TurboTax.  Even with multiple retirement accounts, W-2’s, 1099’s, K-1’s, rollover Roths, small business tax credits, 529’s, rental house, and other complications, it’s working well for us.  The only problem I’ve had is a weird local tax that it doesn’t capture, but I can handle those on the side.

I have had the same experience. DH and I started using an accountant to do our taxes when there were a lot of complicated issues - rental property, self-employment income, my mother’s estate taxes - but then that person retired, the firm she hooked us up with was very expensive, and our situation became simpler. And as someone else said, we (I) still had to pull all the documentation together, so why not fill out the forms myself? I used TurboTax at first, then switched to TaxHawk.

So it may be worth paying someone once or twice to see how it all works, but then unless your situation is complicated it’s very easy to DIY using one of the software options.

[SeattleCPA]

I wouldn't completely rely on tax accountant to provide the most optimal solution. I think you have to have quite a bit of understanding anyway to assess if their proposal makes sense or not. Did they miss anything? Are they just fitting one universal solution for everyone without really considering your situation?

So I am a proponent of doing your own taxes until your situation becomes very complicated (multiple businesses, international tax, etc). It's a nice way to learn something that really affects you.

CPAs are also people, can make mistakes, do shitty work, etc. For most people I would recommend to DIY and use the tools available.

I've said for years that people should default to DIY. But for what it's worth, I think a good tax accountant will give you the best tax return and tax plan. To suggest otherwise, IMHO, is inaccurate.

The reality though is that most people won't get value from a $1K or $2K tax return. For most people, therefore, a good CPA is overkill.

Also this important clarification: Many of the poor-quality tax accountants aren't CPAs specializing in tax. They're either unenrolled preparers (so no credential or qualification) or EAs (which is a less intensive credential) or they're non-tax CPAs running small practices on a shoestring.

Also this observation: In many cases, taxpayers want a really cheap service. A few hundred bucks. And that pricing doesn't support quality. HRB often charges a few hundred bucks. Their preparers are often starting at $13 an hour where I live. (Source Indeed.) For a seasonal gig. If a CPA or EA charges similar prices as HRB, something has to give. And it'll probably be the quality.

[GilesMM]

I wouldn't completely rely on tax accountant to provide the most optimal solution. I think you have to have quite a bit of understanding anyway to assess if their proposal makes sense or not. Did they miss anything? Are they just fitting one universal solution for everyone without really considering your situation?

So I am a proponent of doing your own taxes until your situation becomes very complicated (multiple businesses, international tax, etc). It's a nice way to learn something that really affects you.

CPAs are also people, can make mistakes, do shitty work, etc. For most people I would recommend to DIY and use the tools available.

I've said for years that people should default to DIY. But for what it's worth, I think a good tax accountant will give you the best tax return and tax plan. To suggest otherwise, IMHO, is inaccurate.

The reality though is that most people won't get value from a $1K or $2K tax return. For most people, therefore, a good CPA is overkill.

Also this important clarification: Many of the poor-quality tax accountants aren't CPAs specializing in tax. They're either unenrolled preparers (so no credential or qualification) or EAs (which is a less intensive credential) or they're non-tax CPAs running small practices on a shoestring.

Also this observation: In many cases, taxpayers want a really cheap service. A few hundred bucks. And that pricing doesn't support quality. HRB often charges a few hundred bucks. Their preparers are often starting at $13 an hour where I live. (Source Indeed.) For a seasonal gig. If a CPA or EA charges similar prices as HRB, something has to give. And it'll probably be the quality.

Good points.  Our state licenses three level of tax experts: Preparer, Enroller and Consultant.  I use a licensed Consultant with many years of experience including 17 as a personal return auditor with the IRS.    She has an accounting degree but I don't think she is a CPA.