Where should I start?
One way to prepare for tax season is to pull your copy of last year's tax return and the documents needed to prepare it. Make a list of those documents and add any new ones for 2021 to your list, including W-2s and 1099s for new jobs, 1098s for home loans, 1099s for stock trades, and cryptocurrency tax reports.
If you don’t know what new tax documents you may need this year due to a change in your financial situation from last year, you may want to consider seeking out the help of a tax professional.
Should I prepare my own tax return?
Most W-2 employees who rent their home, don’t have a side hustle, and are not into trading stocks or crypto may find that online tax software works fine for them. In addition, people with one or two W-2s, married couples with W-2s, and small families may not need a professional.
If you are using tax software for the first time, be sure to select the interview method and answer all questions asked. After you enter a number, be sure to double-check that you entered it correctly. Most modern software rounds 49 cents and below down to the nearest dollar, and 50 cents and up to the next dollar. Make sure you are precise when keying in any words and addresses. That said, hiring a tax pro to prepare simple returns may not set you back much more than purchasing tax software.
As your tax return becomes more complex, you may want to consider the services of a professional tax preparer, a CPA, or a tax lawyer. Tax professionals set fees for their services based on their level of certification, tax education and years of experience. An independent tax pro typically charges less than someone in a firm, but they usually do not offer audit protection beyond answering questions about the documents used in preparing the return. Here is an estimated range of hourly rates to give you an idea of what to expect, though keep in mind that rates often increase as the tax deadline approaches every year:
- Tax Preparer: $50 to $100.
- Enrolled Agent: $125 to $200.
- Certified Public Accountant: $250 to $400.
- Tax Lawyer: $400 and higher.
It is common for tax professionals to charge a two-hour minimum for the most basic returns. Some preparers may charge by the form. Tax pros may offer their services to review your self-prepared entries in your online tax preparation software, which is an excellent option if you want a little extra peace of mind before clicking submit.
One important note: Every tax preparer must have a Preparer Tax Identification Number (PTIN). Visit the IRS website and look up their PTIN or name to ensure their certification is current.
Who actually needs a tax preparer?
As your tax return becomes more complex, you may want to engage a tax professional's services. A tax professional can help minimize your tax liability and audit risk if you:
- Own multiple real properties.
- Own a business.
- Sell a home.
- Buy a home.
- Earn over $100,000.
- Inherited a lot of cash or property.
- Had more than a dozen stock trades or sales.
- Received stocks or cryptocurrency as payment for work or as gifts.
If you are a first-time entrepreneur, you may want to consider using a tax preparer familiar with business expense deductions to help you reduce your tax exposure. Freelancers, gig workers, rideshare drivers, delivery drivers, and independent contractors may leave a lot of money on the table if they are unfamiliar with the most common expenses they can claim. Worse than that, they may try to claim expenses that the IRS does not allow.
If the IRS or your state has ever audited you or sent you notices of errors made on a return, it is a good idea to enlist the aid of a tax preparer to help avoid that risk.
Where can I find a tax professional?
Locating a tax professional can be a daunting task. Friends or family may have a referral for you. However, it can often feel too personal to ask. Rocket Lawyer members can get discounts from our tax partners for small business tax help, and all members can get their legal tax questions answered by a Rocket Lawyer On Call® attorney.
To find independent or local tax help, the IRS’s website offers a lookup tool to identify tax preparers by ZIP Code, last name, and credential type. You can also look for independent tax professionals online, in the phone book, or on an app or freelancing platform. When hiring an independent tax professional, it is always a good idea to confirm their credentials.
For low-wage earners, people on limited incomes, and seniors, most areas offer a Volunteer Income Tax Assistance (VITA) program to help with tax preparation without charge. Each organization sets income limits as well as limitations on the types of returns they prepare. VITA tax preparers have the same training and professional certifications as other tax preparers who charge for their services.
What questions should I ask a potential tax preparer?
First, inquire about the potential preparer's certification type, tax education, and experience.
Next, describe your tax situation, including types of employment, assets owned, family situation, any changes from last year's situation, and anything else you believe is relevant. You can then ask if they are comfortable with the complexity. Doing so generally increases the likelihood that the person is familiar with tax situations like yours. Tax preparers, like any professional, may specialize in particular tax areas. While all have training in all areas of tax preparation, it’s best to find someone familiar with your situation. If the person does not handle your specific set of circumstances, they may be able to recommend a colleague.
Once you find your preparer, discuss pricing. It is vital that you tell them everything, as springing a surprise on them might result in a surprise price increase for you. Professional tax preparers have the same level of professional privilege you have with your doctor or lawyer. Tax preparers cannot repeat anything you tell them to anyone else, provided you do not tell them about a future crime.
Privacy and data protection are priorities for tax professionals. Ask how the preparer protects your personal information. The IRS has a minimum standard, and most preparers are somewhat paranoid about protecting your data and go to extremes to prevent exposing it.
Ask your preparer about their policy for copies, should you need one in a couple of years. Some charge to send you a paper copy, while others may not. Independent preparers may not have secure online storage to give you access to the return as many use secure storage drives.
Don’t forget to ask how long your return will take to prepare. Understand that any delays in submitting requested information or documents to them will create even more delays with the return. When a preparer stops to wait for you, they start on another client's return. They will return to yours when they finish or are otherwise forced to stop working on that return.
What should I have ready for a tax preparer?
With taxes, there is no such thing as too much information. Preparers generally prefer having information they don’t need over having to ask for missing information. When your tax preparer has to wait for documents or information, that means they cannot finish your tax return.
To prepare, the following list of common tax documents and information can get you started:
- 1099-NEC & MISC.
- 1099-INT & DIV.
- 1099-SSA or RRB.
- 1095A, B, or C (Health Insurance Form).
- Prior year returns and tax documents.
- Any other tax documents you received.
- Spreadsheet with self-employed business data, including expenses.
- Receipts for business expenses.
- Copies of reports for all stock brokerages or crypto transactions (1099-B, 1099-DIV, 1099-INT).
- All pages, including blank ones, of any IRS notices received during the year.
- Any other forms you believe the preparer needs.
While paying for tax preparation in addition to taxes may not appeal to most individuals, tax professionals can often save money for their clients. If you have legal tax questions or are unsure whether you need a tax professional, reach out to a Rocket Lawyer On Call® attorney.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.