I have been doing my own taxes for many years, dating back to the days when I had to drive to the Federal Building 25 miles away to pick up all of my forms, read the books of instructions, then run all of the math on an 8 ½” x 11” pad before transferring the numbers to the forms. Everything was long hand; e-filing, tax software, the internet and personal computers had not been invented. Being a bit of a math nerd, I felt like this process gave me a rudimentary understanding of how the IRS worked.
Today, of course, I take advantage of whatever software will streamline the process. I still prepare my own taxes, but, when things get a bit dicey, I will ask a CPA to review my return before I send it in. The last time I asked for this review (about five years ago) my CPA, after thoroughly interrogating me, concluded that all was well and recommended no changes. I confess that my head swelled a bit as I thought, “I don’t need to hire a professional. I can do this myself.” So I did. Year after year. However, after successfully completing our first house flip in 2011, I knew it was time for another review. I now had two businesses (Plemon Financial Coaching and Plemon Homes) in addition to my wife’s business – an online store featuring her amazing hand crafted creations. I completed my taxes (using tax software), printed out the return, and met with the CPA. Am I glad I did!
He scrutinized my work and asked numerous questions before scoring a bingo: “Do you pay for your own health insurance?” For those of you who are tax savvy, I confess to being red faced, but remember that I have already admitted to being overly prideful. Back to the question…my tax software interview question for my Schedule C was “Does your business purchase health insurance for you or for you and your spouse?” Because my business does NOT directly pay for any health insurance, I hit the “No” button and continued along my merry way. But when my CPA worded the question as he did, I unhesitatingly said “Yes”. The key, of course, is to attribute those health insurance payments to my business. The wording difference between my tax software and my CPA is subtle, but it is worth over $1000 on my Federal return and another $150 on my State return.
I then asked the follow up question, “I have been making that mistake for several years now. Can I go back and change it?” The answer was a good one, but it could have been better: the IRS allows amended returns up to three years old. Good news for 2008, 2009 and 2010; not so good for the two years before then.
Still, I am pretty pumped. On my 2011 federal and state returns, I saved $1,586 in taxes (I still need to write Uncle Sam a check—just not as big), and for the previous three years, I am going to be refunded $2,724 … a total of $4,310.
Amending a previous year’s return
In order to amend a previous return, I need to send in my original return, my amended return and a schedule 1040X. Because my 2008 eligibility expires on April 16 of this year, I was up against a time line, so I filled out the 1040X myself, saved it as a PDF file, then emailed my original 2008 return along with the 1040X to my accountant who prepared the packet to be mailed (one can’t e-file amended returns). I must get approval on the Federal return before submitting my state return, so, for additional assurance, I sent my Federal return by certified mail, return receipt requested. Once I catch my breath, I will go ahead and file my amended 2009 and 2010 returns.
What did I learn?
I learned that hiring a professional is well worth it. In the future, I will continue to prepare my own taxes, but, instead of having my CPA review my return sporadically, I am planning to have him do so annually.
I also learned that pride can be costly and that humble pie is not very tasty.
Readers: Do you prepare your own taxes, hire a professional or (like I do) have a professional review your taxes after you have prepared them? What costly tax mistakes have YOU made?
Once I started getting involved with personal business expenses and it started taking me close to 40 hours to fill out the forms, I began using a CPA to do my taxes. The cost versus the amount of stress that was relieved so I didn’t have to do my taxes is well worth the effort.
You saw firsthand the role that some knowledge and communication can play in financial matters, especially taxes. Even though I have had a CPA do my taxes, I keep up with tax changes that may impact my return and am sure to convey that to him, meeting in person if necessary.
Your present plan is similar to my future plan. Like you, I want to keep up with how tax laws change so I can be somewhat savvy about what expenses to document and what records to save. The difference is that I will continue to prepare my own taxes (it doesn’t take 40 hours) then let my CPA review everything before actually filing.
All that fresh green cash will help wash that Humble Pie right down!
I have used a CPA for a very long (40+ years) time. My reasoning is simple, they are up on the laws and I can ask questions during the years for no extra charge.
Krant — As usual, your logic is impeccable.
I use the software, although last year I did a comparison of two products and ended up calling the free 1-800 number for some clarification. Looks like one product was going to help me save over $1,000. Score! I think I’ll get some help next year since I just bought a house.
Sounds like calling the 800 number was a very wise move! Getting clarification is essential, and doing so while dealing with taxes is very difficult. The software which uses the interview process, in my experience, makes things easier, but also numbs my mind to really understanding the whys of the process. I can answer the questions without really analyzing why the questions are being asked. That is why it was important for me to meet with a CPA this year.
By the way, congrats on buying your house!
It’s amazing what a real person can offer over a tax software. It still depends on the person though. I had a bad experience with H and R Block. I use turbo tax because my taxes are quite simple.
I didn’t want to use this post to criticize the mass production tax people, but I have heard quite a few horror stories about them. That is why I emphasized “CPA”. My advice is that if your tax preparation person offers you a short term loan so you can have your refund today, it is time to gather your papers and walk out.