RISMEDIA, Jan. 23, 2008-(MCT)-Soon, W2 tax forms will hit your mailboxes. Banks will mail your interest earnings statements. Churches and charities might send you records of your donations this past year.
Who are you going to count on to make sure you pay the government what you owe — but only what you owe?
With tax season just around the corner, now’s the time to think about whether you want to try your hand at computing your own taxes or if you need professional help.
The question is too tricky to have one simple answer, said Darryl Brown, assistant professor of accounting at Illinois State University in Normal. Such factors as income, homeownership, investments and business ownership could trigger the need for a certified public accountant, Brown said.
At first thought, the question could have a simple answer: If you’re a simple filer with a job but not much other economic activity, buy a tax software package and do the work yourself, Brown said. Complicate your tax status with a number of other issues, and call for help.
“The more forms you have, the more likely you are to need a CPA,” Brown said.
The most basic guideline for business owners is similar.
“My rule of thumb is the simpler and smaller the business, the more likely a business — an entrepreneur — can do their own taxes,” said Elizabeth Binning, director of the Illinois Small Business Development Center at Illinois State University.
In reality, the issue is more gray than black or white.
Income is one of the most important factors in assessing the need for a certified public accountant since the higher your salary, the greater the need for tax planning, Brown said.
Generally, a household income of $100,000 or more suggests taxpayers could benefit from a certified public accountant, he said. Taxpayers with a household income below $50,000 generally will not benefit from the professional, he said. Those in between the ranges probably don’t need a professional, but the situation can vary.
“You can figure it out yourself. … Your risk is making a math error,” Brown said, adding a tax computer software program can catch those mistakes.
But Americans who make more money but have little other economic activity also could compute their own taxes while consumers who make less money might need an accountant because of other factors like the birth of a child or a move to a new state, Brown said.
One of many factors on its own — such as homeownership — doesn’t automatically suggest the need for an accountant, Brown said. Even first-time homeowners with incomes less than $100,000 probably can handle filing their taxes by themselves, he said. But the need for a certified public accountant increases with more economic factors, he said.
“It becomes like a snowball effect,” Brown said. “It just gets bigger and bigger and bigger.”
Most likely, business owners will want to hire an accountant, Brown said. A sole proprietor potentially could do his own taxes, but it’s a better idea for all mom-and pop-and corporate businesses to go to a professional, he said.
Binning agreed that people who own a small business without any employees could try to do their own taxes, but she usually doesn’t advise that approach.
“A competent accountant can help them save money, will know what they can deduct, will know whether something can be expensed in a given year or if it should be depreciated,” Binning said.
For example, a business owner who bought a vehicle can deduct part of the cost spread out over a few years or expense the full price in one year. A taxpayer probably would want to expense the total price if the business received a huge job that year that meant higher-than-usual profits — and then taxes — for the year, Binning said.
Tax laws also get updated often, and a professional will have up-to-date information, Binning said.
The savvy taxpayer with more business sense or tax knowledge probably can handle his own taxes, through the IRS Web site or using a computer software program, Brown said. A software program such as TurboTax costs about $39, while the services of an accountant can average $200 and up, he said.
But beware of those software services, as well, Brown said. Through a series of apparently simple questions — such as whether you have a home office — someone inadvertently can make a mistake. People may think they have a home office, but they may not realize that room in the house does not actually meet the guidelines for a deduction, he said.
As a final tip, if you’re worried at all about being correct with your tax returns, call an accountant, he said.
Here are some factors taxpayers should consider as they decide whether to tackle their tax returns themselves or spend money for a certified public accountant.
– An annual income of more than $100,000 per household typically triggers the need for an accountant, while one less than $50,000 generally means you can do your taxes yourself. Exceptions apply.
– Lifestyle changes, such as divorce, marriage, birth of a child, death or care of an elder, care of a disabled child and adoption.
– Financial goals and plans, including retirement and estate planning and college planning.
– Owning a business.
– Substantial itemized deductions, including medical expenses, property taxes, sales taxes, state income taxes and charitable contributions.
– Your state income tax situation since if you live or work in more than one state, your state filing requirements are likely to be very complicated.
– Ownership of rental or vacation property and purchase or sale of a personal residence.
– Substantial investments.
– Significant casualty and theft losses.
– Substantial change in finances, such as inheriting large sums of cash, the settlement of a large lawsuit or winning the lottery.
Copyright © 2008, The Pantagraph, Bloomington, Ill.
Distributed by McClatchy-Tribune Information Services.
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