You Prepare Your Own Taxes?!?

crazy tax manYou prepare your own taxes?!?

Are you insane?

I ran into a friend at the local coffee place recently.

She made the mistake of mentioning that her husband prepares their household taxes, by himself.

“What?  Is he insane?”

“I know, seriously, I keep telling him not to.”

Dear friend, don’t do this to yourself.

I would no more do my own personal taxes than I would hand-sew my wife’s wedding dress, do her hair and makeup just before the ceremony, and then administer the vows for the both of us.  Because I might, just might, make a mistake along the way.

I would rather rebuild the household toilet, sewage and drainage system and connect it to the city system, while everyone was living there, than do my own personal taxes.  I mean, what could go wrong?

I would no more prepare the infamous fugu sashimi for my friends and relatives than attempt my own taxes.


Who writes the tax code?

The income tax code consists of hundreds of specialty provisions written by and for relatively narrow interests who know how to maximize their advantages.[1]  Trying to navigate this even half-way intelligently makes no sense for a non-specialist.[2]

Now, I’m no Steve Forbes[3], but I too long for the day when taxes are so simple we can all prepare them ourselves, for free, in a couple of minutes.

I don’t expect comprehensive overhaul of the tax code, however, will be Obama’s legacy – it doesn’t seem his style, and he’s got nobody on the other side of the aisle who would risk giving him that legacy opportunity – but, boy do we need it.

Until that tax simplification and overhaul however, I’m not doing my own taxes.


Is there any time its ok to do your own taxes?

My personal finance students wanted to know this.  Yes, if you are a student with, say, less than $5,000 in income, I’ll endorse your do-it-yourself approach.  But if you’re a working adult with a regular salary, you can’t afford the risk of doing this yourself.


What about using tax-preparation software?

Stop.  Just hire someone.


What about using one of those pop-up stores like H&R Block or Jackson Hewitt?

Well, now you’ve upgraded the DIY approach to working with someone who received 1 weeks’ worth of training, and used the same tax-preparation software you could have bought off the shelf.

Also, their business model has always been about short-term and sub-prime lending, making tax-refund anticipation loans.  I mean, what could possibly go wrong?


But isn’t it costly to hire a tax preparer?

No, wrong question.

Right question: Isn’t it costly not to hire a tax preparer?   Answer: yes.

First, there’s the high probability you will pay too much in taxes.  In one year, many taxpayers will save more than the cost charged by their tax preparer.  Over many years, I suspect, the advice of a professional will save you from paying many times their professional cost, in taxes.

Second, there’s the possibility you will make a mistake and not pay enough in taxes. The IRS is a big nasty bully when it doesn’t get paid enough.  You don’t want to risk any chance of not paying the IRS what it wants.[4]

So, in sum:  Save yourself money.  Save yourself time.  Go to a professional.

Happy tax week, everyone.


Please see related post: 2012 IRA Contribution Infographic

[1] Who are the narrow-interest people who write the tax code?  As Lawrence Lessig brilliantly points out in this must-watch Ted talk, just 0.05% of people matter when it comes to selecting people who run for Congress.  There’s a high correlation between those 0.05% and people who can privately benefit from narrow provisions in a tax code.

[2] Do you want to really know who writes tax codes?  Max Baucus’ former senatorial aides, that’s who.  Senator Baucus is the chairman of the Senate Finance Committee.  His former aides go on to lucrative tax lobbying gigs in record numbers.  A picture is worth a thousand words here, of which senatorial aides go on to become tax lobbyists.  Baucus, you win.

[3] Flat-tax guy.  Everyone pays the same % on income or corporate profits.  Terrible idea.  But our present overly complicated system almost makes Forbes’ terrible simplicity seem sane by comparison.

[4] There’s a third reason why it pays to hire a tax preparer – it opens up the world of wealth-creation possibilities.  If you want to open or expand a business you’ll eventually need to borrow money from a bank, which will depend greatly on your taxes when reviewing your application.  Banks like to see you pay taxes properly, because it shows income as well as the ability to track and pay your obligations.  They’re not impressed by poorly prepared taxes.


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4 Replies to “You Prepare Your Own Taxes?!?”

  1. This is the conclusion that we came to two years ago when things started to get increasingly complicated with investment properties, etc. So far, the tax preparer has found us enough in additional savings that he’s paid for his services (plus a teeny bit for us). Small sample size, but for us your theory has proven spot on.

  2. For the average salary employee, doing your own taxes is ok via tools like Turbo Tax. For anyone who owns a business, real estate, or a complex portfolio, doing your own taxes is stupid!

    1. Taxes are more like cooking than plumbing…its okay and reasonable to do it yourself…unless you’re eating blowfish.

      Challenge: I think BA is underestimating 1) the clear decision tree for deductions and tax situations presented in Turbotax and 2) the simplicity of most people’s income. But, if his contention is true, then many of us are getting screwed. If its false, then he’s getting screwed. I would love nothing more than for him to compare his tax rate using Turbotax to the one his tax person got him. (shouldn’t take more than 1 hour with data from an already prepared tax return and turbotax is free unless you file with it).

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I founded Bankers Anonymous because, as a recovering banker, I believe that the gap between the financial world as I know it and the public discourse about finance is more than just a problem for a family trying to balance their checkbook, or politicians trying to score points over next year’s budget – it is a weakness of our civil society. For reals. It’s also really fun for me.

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