It's tax time! Here's the low-down on filing your own taxes, complete with an exact process you should follow from gathering your tax documents to pushing the eFile button.

The Why, What and How of Filing Your Own Taxes (From a CPA!)

It’s officially here: that time of year that tax nerds like myself get all geeked up for tax season. I realize though that the rest of the population may be less than excited to file their taxes. The big question you may have is this: should I hire someone this year or should I file my taxes on my own?

It's tax time! Here's the low-down on filing your own taxes, complete with an exact process you should follow from gathering your tax documents to pushing the eFile button.

Just remember, you don’t have to know everything about the IRS tax code to file your own taxes. You simply need to know the rules that apply to you personally. With a little knowledge and a great process in place, you can totally do it! I’ve shared a little bit about the basics of income taxes here and here.

Why Should You File Your Own Taxes (Or Should You!)?

I used to be incredibly intimated by the thought of doing my own taxes. This partially stems from childhood memories of my dad working on my parents’ tax returns. My four siblings and I would warn each other not to go into his office during those times and for good reason. And because he loved doing taxes so much (okay, he’s just a great guy!), he even did my returns for me until the year I got married.

It seemed overwhelming at first, but it very quickly became easier when I learned the basics of income and deductions. I’m so glad that I started learning about taxes when my returns were simple and there was barely any money at stake.

Learning how to do my own taxes built a great foundation for me. I eventually went into accounting and became a tax professional. How’s that for a happy ending?!

Just remember, everyone starts from the beginning. All you need is the willingness to put in a small amount of time to learn the basics of taxes and to research deductions and credits that apply to your personal situation.

There are numerous benefits that come from filing your own tax returns.

  • It saves you money by not having to hire someone else (although you still have the minimal cost of tax software).
  • Your tax return may be even more accurate because you are the one that knows your financial situation and financial transactions during the year (as long as you know enough about taxes to know what you’re doing!).
  • Knowing about tax implications will help you make better decisions throughout the year that can minimize your tax burden.

So, realistically, not everyone should really file their own taxes, though. And I’m not just saying that because it’s what I do for a living. If you have major life changes during the year, complicated investments or own a business, it’s a good idea to hire someone else to help. In addition, the risk of an IRS audit goes up significantly when your income reaches $200,000 (nearly a 1 in 50 chance at that income level) so that’s a consideration as well.

What Should You Use to File Your Taxes?

First of all, let’s talk tax software. The good news is that there are lots of great options out there. The bad news is that it’s hard to know where to start or which one is the “best” to use.

I highly recommend using 1040.com, which is the personal use version of Drake Tax. The professional version, Drake, is the most highly rated overall professional tax software by CPAs. In fact, it’s the software I’m using this year to file my own taxes. 1040.com is very similar in features and inputs. If you are pretty familiar with doing taxes already and don’t need step-by-step guidance, this is just what you need.

If you require just a little bit of extra step-by-step help, I found TaxAct’s online software to be the most simple to use. It still directs you through everything you need but allows you to go right back to specific inputs directly.

The most popular option is, of course, TurboTax. I personally get really frustrated with not having the option to go straight to the number inputs. In order to adjust or run alternate numbers, it requires you to answer the interview questions each time before getting to the input screens. It just doesn’t work for me. I do think it could be good for someone that needs a bit of extra guidance and also uses Quicken since it integrates well.

There are other filing programs as well: H&R Block, eFile.com and TaxSlayer to name a few. I’ve checked these out and don’t like them nearly as much as 1040.com and TaxAct.

How Do You Complete Your Own Tax Returns?

Whew, you’ve decided now that you’re going to file your own tax returns (you can do it!) and you’ve got the tool to do it. So, what’s next!?

Step 1: Gather all of your tax information

The most frustrating part of the entire process is likely to be finding all the information you need. Start with the following documents:

  • W-2’s (for wage earners)
  • 1099-MISC (for freelancers)
  • 1099-INT (interest income)
  • 1099-DIV (dividend income)
  • 1099-B (stock sales)
  • 1099-G (state and local tax refunds)
If you itemize deductions, you’ll have lots more documents:
  • Medical bills (if they are a significant portion of your income)
  • 1098 (mortgage interest)
  • Property tax bills
  • Charitable contribution receipts
And here’s a few extra things you might need:
  • List of expenses if you have a business reported on Schedule C
  • Rental income and expenses, if applicable
  • Form 5498 for contributions to an IRA
  • Form 1099-R for distributions from an IRA or pension
  • K-1’s for passthrough businesses
  • Estimated payments you’ve made throughout the year

Step 2: Take an extra look at your income

If you were ever to get audited by the IRS (gasp!), the main thing they would want to see is whether you had any additional income that you should have reported on your tax return.

News flash: they won’t be searching for any of those additional deductions you should have taken but forgot about it (unbelievable, right?).

Even if you don’t receive a 1099-MISC form, you are still required to pick up income from a side business, consulting, sales of property for more than you paid and more. Basically, the IRS requires you to report everything as income unless they’ve specifically said it is excluded.

Some excluded income items are:

  • Inheritances
  • Gifts
  • Tax-exempt interest income
  • Some insurance payments
  • Sale of your principal residence, under specific conditions

If you can’t remember whether you’ve made some extra money during the year, it’s a good idea to look back at all the deposits in your checking accounts for the year.

Step 3: Research your available deductions and credits

Once you’ve accounted for your income, it’s time to reduce the portion that is subject to tax by ensuring that you take all of the deductions you’re entitled to.

Deductions follow an opposite rule from income. The IRS doesn’t allow you to deduct anything against your income, unless they specifically provide an allowance for it.

There are too many deductions to mention, but here are a few common ones that you may be able to take advantage of:

  • Contributions to a Traditional IRA
  • Contributions to an HSA
  • Student loan interest
  • Itemized deductions (medical bills, state and property taxes, mortgage interest, charitable contributions)

Some of the common tax credits include:

  • Child tax credit
  • Foreign tax credit (for investors with international holdings)

Your state may have some adjustments as well, so be sure you are aware of whether your state has additional deductions. For example, many states allow a deduction or credit for contributions to their state’s 529 college savings plans.

Step 4: Enter everything into the tax software

Once everything is organized and you have a pretty good idea of what you’ll be including on your tax return, it’s just a matter of entering all of the information into the tax software.

There will likely be other things that will come up as you’re going through and entering your personal information, income, and deductions. However, it will be much less frustrating after having gathered all your information previously than if you were to stop and try to figure out each item as you go.

Most of the software programs will allow you to do a final check to ensure there aren’t any missing inputs related to the income and deductions you’ve entered. Of course, it won’t know if you’re completely missing something altogether, but it’s still very helpful.

Step 5: Compare your tax return to last year

I think this next step is the one most likely to be missed by those preparing their own tax returns. Be sure to compare your tax return for the year to your last year’s return. It may show you some extra deductions you forgot to take this year.

In addition, while you’re looking at last year’s return you should check for anything that may have been carried forward to the current tax year. These could include capital losses, foreign tax credits, AMT credits and other types of carryforwards.

Step 6: Review your tax return one last time

I suggest taking at least a couple of days after you finish your tax return to step away from it altogether. You may be super excited to get it over and done with and get your refund but just wait (unless it’s the evening of April 17th and then you don’t really have that luxury!).

Then, look at it with a fresh set of eyes. Double check your information and every number you’ve reported. Filing amended returns is less fun than the originals and you won’t want to have to deal with an IRS letter showing a mismatch on what you reported.

Step 7: File your return (!!!)

All that’s left to do is file those returns! I highly, highly recommend that you e-file your returns, even if it ended up costing you a few extra dollars (such as for a state return). It’s much more secure and gives you an indisputable date that the return was filed. That, of course, is especially important if you’re a last-minute filer.

If you do have a need to paper file your returns (such as if you were the victim of identity theft), just make sure to mail them certified with proof of return receipt.

After your return is filed, just be sure to keep all of your documents in a safe place.

Bonus: Improve Your Process for Next Year

You may be just plain tired of taxes at this point. But, it’s also the perfect time to jot down some notes. Make a note of things that were difficult to find or that could be better tracked throughout the year.

I’ve shared some ways that I track my tax-related expenses in my budget and it makes a big difference when tax time comes.

I’m well aware of the cost of having someone prepare your tax returns. It can be expensive and without a doubt, it’s worth the cost for many people. However, if you have a fairly simple tax situation, there’s no reason you can’t file your own tax returns. The time invested in learning everything you need to know will pay for itself many times over!

What are the biggest challenges that you face in preparing your own tax returns? Or if you don’t, why don’t you prepare them yourself?

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6 Responses

  1. I’ve used TurboTax for years and like that it compares your prior year’s return (if you used them) to the current year for you. As you mentioned it is a bit clunky though with having to go through the questions if you want to change some numbers. 1040.com sounds intriguing! Thanks for sharing, Kathryn.

    1. That is nice about TurboTax! Intuit (the company that makes TurboTax) has some great products and the one I use at work is actually part of Intuit. It works great, just don’t have the patience for all those stinking questions in their consumer product!

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