Tax Preparer vs. Tax Software: How to Choose

Slightly less than half of e-filed tax returns are self-prepared; paid tax preparers complete the rest. Of course, many taxpayers who complete their own returns do so with the help of tax software, such as Intuit TurboTax, TaxSlayer, and H&R Block Online. Whether you’re better off with a software package or a tax pro depends on your situation. Here are some factors to help you decide.

Deciding Point: The Complexity of Your Finances

As a general rule, the more complicated your tax situation, the more advantageous it might be for you to bring in a tax professional. What constitutes complexity? If you have any of the following situations:

• You own a business. Whether your business is a full-time endeavor or simply a side job, there are some special rules that you may want to discuss with a tax pro. For example, if your business purchased equipment, there are several ways to write off the cost—and the best method depends on your current tax situation as well as your prospects for the future. You can, of course, handle many of these situations with appropriate tax software (TurboTax Self-Employed, for example, helps you prepare a schedule C for a sole proprietorship), but you won’t get personalized advice.
• You had a major life event this year. If you started or sold a business, went through a divorce, bought or sold a home, rented out your property, or had any other significant life change, a tax pro can alert you to the relevant rules you’ll have to follow and the tax breaks to which you may be entitled.
• You were busy, busy, busy in the market. Tax software can automatically input the data from documents such as Form 1099-B, which brokers use to report your securities transactions. However, a tax specialist can help ensure you have all the other information required for your return, such as your tax basis, which may not appear on the 1099-B. Additionally, a tax pro can help you report and handle activities related to employee stock options or restricted stock.
• You want to itemize. Again, tax software lets you feed this information into the mix. Still, a tax preparer can provide strategic advice about the deductions you’re entitled to, the substantiation you need, and other matters that could help you reduce your tax bill while avoiding problems with the IRS.

Deciding Point: Your Tax Proficiency

For some people, the very idea of numbers, taxes, and the process of preparing and filing a return is daunting. For others, taxes have become a routine chore that you need to do each year, grudgingly or otherwise.

If you’ve been doing your taxes year after year and not much has changed in your financial or personal situation, you’ll likely be more than able to handle your next tax return. But make sure you’re familiar with any relevant changes in the rules, such as those brought about by the Tax Cuts and Jobs Act, the massive tax bill that went into effect in 2018.

Take these examples: The standard deduction basically doubled, the personal exemption went away, and new limitations apply to mortgage interest deductions and state and local taxes (SALT).

If you’ve never done a tax return before, decide whether you’re up to the task. Recognize that you don’t have to be a math wizard—the software or online preparation site will do the calculations for you. And you don’t need to be a tax expert either, because you’ll be prompted to supply the necessary information to complete your return.

Deciding Point: Your Schedule

Time is always an important factor in deciding whether to do something yourself or hire somebody else to do it. In the case of taxes, you’ll spend the same amount of time either way gathering the documentation that’s needed to prepare your return. That includes W-2 forms from employers; 1099 forms from banks, brokers, and other income sources; and canceled checks, credit card statements, and online banking records to substantiate your deductible expenses.

So the difference is in the time spent doing the actual return. Depending on your situation, that could be a few hours or a couple of days. The IRS says it takes the average person about 13 hours to file From 1040 or 1040-SR. If you don’t have the time to spare, using a preparer is the better choice.

Deciding Point: The Cost

Cost may also influence your decision. According to the IRS, it costs an average of $240 to file a return (including all associated forms and schedules across all tax return preparation methods). But fees for tax pros vary widely, depending on the preparer’s qualifications, the complexity of your return, the type of software the tax preparer uses, and the geographic location.

You can do your own return for little or nothing. If your adjusted gross income (AGI) is $73,000 or less (for the 2021 tax year in tax filing season 2022), you can use Free File, the IRS’s no-cost service that lets you prepare your return online and submit it electronically.

If your income is too high for Free File, you can buy software or use a tax-preparation website; prices start around $20 and go up from there depending on your needs. The cost will increase if you need specialized software for self-employment income, rental income, farming income, or other more complex situations. Some companies also offer free, stripped-down software versions suitable for straightforward returns.