Please ensure Javascript is enabled for purposes of website accessibility

4 Signs You Shouldn't Do Your Own Tax Return

By Wendy Connick - Feb 4, 2018 at 5:07PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Got a complicated tax situation? Hiring a pro to do your return could be the best tax reduction trick of all.

Some taxpayers are lucky to have simple tax situations. If all you have is a W-2 from your employer and maybe a 1099-INT from your bank savings account, then you can use the simplified Form 1040EZ and buzz through your tax return in about 15 minutes. But if you have a more complicated financial situation like any of the ones described below, you should seriously consider getting a tax expert to do your return for you. You'll likely save way more on your tax bill than you'll end up paying the expert in fees.

1. You had a major life change

Getting married, buying your first home, having a baby -- these are all events that have a huge effect on how you file your taxes. When you've gone through such a major change, it's a good idea to have a tax pro do your next return. In future years, you can use that professionally prepared return as a sort of template to track all the deductions and credits that you now qualify to claim (at least until you have another major life change).

For example, take the case of a new baby. You may now be eligible for a plethora of new-parent tax breaks such as the Child Tax Credit, the Child and Dependent Care Credit, and the Earned Income Credit -- which puts you on a steep learning curve if you have to figure them out yourself the first year (while simultaneously living on two hours of sleep a night thanks to your new bundle of joy).

Unhappy couple doing their finances

Image source: Getty Images.

2. You own rental property

The rules on how and how much rental property is taxed are some of the most complicated in the entire tax code. Things get especially messy if you spent any time living in the rental property during the year, bought anything for the home, or suffered any losses (like property destroyed by a fire). In those cases, you'll definitely want to do yourself a favor and let a tax pro sweat over your Schedule E.

3. You just started a side gig

Starting your own home business of any size is a surefire way to complicate your tax return. Whether your business is a wild success or a gruesome failure, you'll have tons of extra documents to track and forms to fill out (including quarterly estimated taxes if you'll owe $1,000 or more in taxes at the end of the year, and those can be a right pain to calculate).

For example, driving your personal car to meet clients, pick up business supplies, or do any other business-related activity means that you can claim a business mileage reimbursement -- but to do so, you need to keep a mileage log and possibly other documents as well. If your business loses more money than it makes, you can deduct those losses -- but after several consecutive years of losses, the IRS is liable to classify your side gig as a hobby and disallow all those losses from past years, unless you can prove that it truly isn't a hobby (and that ain't easy).

You definitely want a tax expert to do your first business return. You may also want to consult with your chosen expert on how to reduce your taxes during the course of the year.

4. You failed to file returns in the past

It's not unheard of for taxpayers to simply skip filing their tax return for the year, especially if they expect a large tax bill. Unfortunately, failing to file returns can get you into big trouble with the IRS. In fact, you're better off filing the return and not paying the bill than failing to file the return at all. At least then, you won't be committing tax fraud, and you won't face the "failure to file" tax penalty of up to 25% of the amount due.

Given how serious skipping your tax returns can be, anyone who has done so would be wise to hire a tax pro for help. The pro can prepare those missing returns for you and help deal with any IRS hassles that arise as a result of those late returns. For example, if you skipped filing a return one year, the IRS may prepare a return for you -- and they won't exactly go out of their way to apply every deduction and credit you're eligible for. A good tax pro with experience in IRS representation can save you a huge amount of time, money, and stress when dealing with such an issue.

If any of the above situations apply to you, you'll need to pick the right kind of tax pro to help with your return. That means hiring an enrolled agent (EA) or CPA to prepare your return and generally advise you on whatever complications apply. Besides having tax preparation expertise, EAs and CPAs can represent you before any department of the IRS, which can be an immense help if you get audited, end up in collections, or need to file an appeal. But you'd better get moving: The closer you get to tax day, the busier the good tax pros will be. So run, don't walk, to the office of your nearest tax pro who has experience with your particular tax complication.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
336%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.