Tax software makes filing your taxes easy. The program asks questions, does the math, and assures maximum refund with little work on the taxpayer’s behalf. For a straightforward filing, such as one W-2 and a bonus (perhaps with a few student loan deductions), tax software works. There comes a point, however, at which tax software is no longer enough. Fortunately, it isn’t difficult to reach that point.
Complex Finances
The problem with tax software is that it only works off what is provided. It doesn’t know to ask probing questions if it’s not privy to the fact that there’s a situation in which it should inquire. Someone who started earning self-employment income halfway through the year, inherited a house, or got married could answer every question correctly and still lose out on write-offs or instances of filing they qualify for.
The software won’t know to inquire about the existence of a home office that can be deducted or that estimated quarterly taxes should have been filed in the event of a tax liability.
Investment income complicates matters even more. Selling stock, receiving dividends, and cashing in cryptocurrency creates a tax liability. Tax software can handle these transactions. It can’t tell people whether they optimized their transactions, however, or what other methods could have written off gains. This is when a tax accountant is useful, particularly for taxpayers who would like to minimize their tax liability rather than just file a return.
Common Life Events That Render Software Useful
Common life events are a signal that it might be time to do more than file an income tax return using tax software. Getting married or divorced changes filing status. It also opens up a host of questions around whether the parties should file jointly or separately as well as how they can structure (or, in the case of divorce, re-structure) their finances. The software can file taxes as necessary. It cannot help them strategize which method will be the most beneficial for either party in the long run.
Buying a house comes with mortgage interest deductions, property tax situations, and yet more questions around points paid at closing. First time homebuyers in particular can benefit from advice on what can be written off now versus what it beneficial to write off later. The same can be said of new parents. There are dependents to consider, child care credits, accounts to set up for the education of children and timing strategies that need to be discussed, not just prompted via questionnaire.
Starting a business, even a side-gig, changes the tax situation dramatically. Business expenses, vehicles used for the business, and home offices all require judgment rather than software assistance. While tax accountants can help strategize around expenses that are personal in nature but which may be construed by the IRS as business expenses, software is bound by the input of the taxpayer. What counts as a purchase made for business acquisition, ownership, and use? How should clients account for purchased office equipment? At what point does hobby income become income subject to taxes from the IRS?
You Don’t Know What You Don’t Know
Most people have no idea what they don’t know when it comes to taxes owed. Tax software prompts for known situations. It does not query unique situations that represent potential tax credits for taxpayers. Someone taking care of elderly parents could qualify for credits for dependents they did not know about.
A teacher buying his or her own classroom supplies may miss educator credits. People working from home during the past few years may have neglected deductions that no longer exist, but which had previously been eligible.
It gets worse, however, because tax law changes regularly. Software updates help clients know about updates to Tax Law, but they don’t help customers understand how it affects their own unique situations. This is when someone needs someone with knowledge of the tax code to avoid pitfalls and who can point out opportunities otherwise overlooked.
When Strategy Counts More than Tax Filing
There is a difference between filing an annual report or return and planning around it. Tax software can help taxpayers file. It cannot advise accountants on how to file using a certain strategy throughout the year.
Tax planning means making decisions throughout the year with the knowledge of the annual tax filing. This also means considering timing when making significant financial decisions like when to recognize income or write off expenses. Tax planning means understanding what business expenses are deductible based on how people choose to categorize (or not categorize) their vehicles.
Someone in their twenties thinking of changing jobs has no idea whether they should consider the tax implications of stock options versus a signing bonus. Someone nearing retirement age has to think about how Required Minimum Distributions (RMDs) will change their taxes going forward. These aren’t questions prompted by tax software late at night in April when people are panicking to finish their tax filings.
The High Cost of Filing Errors
The cost of filing via software could be high. Missed prompts lead to missed deductions which lead to paying more in taxes than necessary. Missing income, incorrect input, and other issues lead to audits by the IRS, which leads to taxpayers owing penalties. How bad could this possibly be? So bad that, even after the fact, software (usually) catches mistakes, not in time to avoid the penalties but only in time to prompt a reconsideration of the amendment.
There are costs associated with filing through professionals, no question there. Yet when taxpayers are considering costs they need to do so in light of much more than just weighing a tax software fee versus that of a hired professional. People contemplating using tax filing software should consider the cost of not using professional help in order to glean proper deductions prior to filing.
Use Wisely
Tax filing software is a great option for simple tax scenarios. When a taxpayer’s finances get complex, however, two sources of income, different streams of income, a vehicle, an office, and investments, the limitations of tax software should become apparent. The question should not be whether people can file their taxes using this resource; it should be whether they’d be better off not relying solely on this resource for something as important as taxes. Wouldn’t it save time and money requiring professional insight?
