8

I am a fresh graduate with a simple income stream and no asset. I figure I should learn to do my own tax instead of TurboTax (both to save the fee and, philosophically, to be in control of my financial life). However I do place great value to my time.

The question "whether to DIY" boils down to this:

  • If later in life I have more complicated finance, will I inevitably have to rely on professional help? If so, then the investment I put in learning now does not have a long payoff.

  • A major annoyance I have with filing my own tax is the low tech of paper-pencil-calculator, which makes me change everything down the line if an input is wrong. Is there a way I can save / edit, and better yet, use formula instead of calculating every number?

EDIT: More personal info -- I am a PhD student in the United States. My income is simply an annual stipend < 30k. There's no investment and/or debt.

16

I would advise against "pencil and paper" approach for the following reasons:

  1. You should e-file instead of paper filing. Although the IRS provides an option of "Fillable Forms", there's no additional benefit there.

  2. Software ensures correctness of the calculations. It is easy to make math errors, lookup the wrong table

  3. It is easy to forget to fill a line or to click a checkbox (one particular checkbox on Schedule B cost many people thousands of dollars). Software ask you questions in a "interview" manner, and makes it harder to miss.

  4. Software can provide soft copies that you can retrieve later or reuse for amendments and carry-overs to the next year, making the task next time easier and quicker.

  5. You may not always know about all the available deductions and credits. Instead of researching the tax changes every year, just flow with the interview process of the software, and they'll suggest what may be available for you (lifetime learners credit? Who knows).

  6. Software provides some kind of liability protection (for example, if there's something wrong because the software had a bug - you can have them fix it for you and pay your penalties, if any).

  7. It's free. So why not use it?

As to professional help later in life - depending on your needs. I'm fully capable of filling my own tax returns, for example, but I prefer to have a professional do it since I'm not always aware about all the intricacies of taxation of my transactions and prefer to have a professional counsel (who also provides some liability coverage if she counsels me wrong...). Some things may become very complex and many people are not aware of that (I've shared the things I learned here on this forum, but there are many things I'm not aware of and the tax professional should know).

  • Regarding 7. It's free -- are you referring to the fact that I'm eligible for free software at my level of income? – Heisenberg Jan 26 '14 at 1:36
  • @Ahh yes, exactly – littleadv Jan 26 '14 at 2:05
  • @Anh You can see this online at apps.irs.gov/app/freeFile/jsp/index.jsp though it's not really software in the traditional computer software sense, but online programs with e-file. Also, if you decide to go to a tax preparer, you could do it yourself beforehand and ask questions if there are discrepancies. – BLaZuRE Jan 26 '14 at 2:09
  • 1
    "You should e-file instead of paper filing." The "pencil and paper approach" is not inconsistent with e-filing. There is the Free File Fillable Forms that allows anyone to e-file for free by filling out forms laid out exactly like paper forms (except some fields are calculated automatically). – user102008 Jan 27 '14 at 5:47
  • @user102008 yes, I mentioned it, but I'm pretty sure that not many people are aware of it. – littleadv Jan 27 '14 at 7:29
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Interesting. When you say DIY you mean pencil and paper. For most of us the choice came down to using a professional vs using the software.

Your second bullet really hits the point. The tax return is a giant spreadsheet with multiple cells depending on each other. Short of building my own spreadsheet to perform the task, I found the software, at $30-$50, to be the happy medium between the full DIY and the Pro at $400+.

With a single W2, and no other items, the form is likely just a 1040-EZ, and there shouldn't be any recalculating so long as you have the data you need. Pencil/paper is fine.

There's no exact time to say go with the software, except, perhaps, when you realize there are enough fields to fill out where the recalculating might be cumbersome, or the need to see the exact tax bracket has value for you.

You are clearly in the category that can fill out the one form. At some point, you might have investment income (Schedule D) enough mortgage interest to itemize deductions (Schedule A) etc. You'll know when it's time to go the software route.

Keep in mind, there are free online choices from each of the tax software providers. Good for simple returns up to a certain level. Thanks to Phil for noting this in comments.

I'll offer an anecdote exemplifying the distinction between using the software as a tool vs having a high knowledge of taxes. I wrote an article The Phantom Tax Zone, in which I explained how the process of taxing Social Security benefits at a certain level created what I called a Phantom Tax Rate. I knew that $1000 more in income could cause $850 of the benefit to be taxed as well, but with a number of factors to consider, I wanted to create a chart to show the tax at each incremental $1000 of income added. Using the software, I simply added $1000, noted the tax due, and repeated. Doing this by hand would have taken a day, not 30 minutes.

For you, the anecdote may have no value, Social Security is too far off. For others, who in March are doing their return, the process may hold value. Many people are deciding whether to make their IRA deposit be pre-tax or the Post tax Roth IRA. The software can help them quickly see the effect of +/- $1000 in income and choose the mix that's ideal for them.

  • +1. There are also free software options to do your taxes (although you will have to see ads). TaxAct has such an offering, unless that changed recently. – Phil Sandler Jan 25 '14 at 18:04
  • I have paid TurboTax $60 before to fill out my state and federal tax. My interest in learning to do my own is partly to save that money, but also partly to "remain in control" of my financial life as well. Hence my choice is framed between myself vs software. – Heisenberg Jan 25 '14 at 18:15
  • @Anh - I've edited into my answer a delightful anecdote as an example of how the SW can help. – JoeTaxpayer Jan 25 '14 at 18:44
  • @Anh at your level of earnings you should be qualified for free software from the IRS and most of the states, why pay? – littleadv Jan 25 '14 at 21:37
  • @littleadv - as I read his question, it wasn't pay vs free, but software vs the perceived learning process of doing it by hand. – JoeTaxpayer Jan 26 '14 at 1:57
1

If you've been using TurboTax, let me suggest a compromise: Let TTax fill out the forms, but then print them out and go through it again by hand. If you don't get the same numbers, investigate why. If you do, you can probably conclude that you could do it by hand if you really want to, especially if you have the previous year's returns as a reference.

(I've gone through every version of this from before personal tax software existed thru hand-constructed spreadsheets to commercial software and e-filing (federal only; I refuse to pay for something that reduces THEIR work). I can't use the free online version -- my return's got complications it won't handle -- and I'm uncomfortable putting that much data on a machine I don't control, so I'm still buying software each year. I COULD save the money, but it's worth a few bucks to me to make the process less annoying.)

Late edit: Note that a self-constructed spreadsheet is one answer to the annoyance of pencil and paper -- you're still doing all the data manipulation yourself, but you're recording HOW you manipulated it as you go, and if numbers change you don't have to redo all the work. And it avoids raw math errors. It does require that you enter all the formulas rather than just their results, and figuring out how to express some things in stylesheet form can be a nuisance, but it isn't awful... and once you've done it (assuming you got it right) updating it for the next year is usually not hard unless you've introduced a completely new set of issues.

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