Is doing taxes on your own right for you?

I am getting pelted by ads about doing your taxes. It’s become annoying.

On one hand, there is a pretty nice campaign showing how much money was lost by people last year that did their own taxes. The first thought that comes to mind is, “how do they know that?” The only way I can conceive of figuring that out is to go through each person’s self-done tax statement, have it reviewed by a professional, and then calculate the difference. Seems costly and time consuming. I’m sure that’s NOT what they did. So what they are saying must be some sort of estimate. I am skeptical of estimates especially coming from people that are trying to sell me something.

On the other hand, there are a slew of ads that basically say you know whether or not you had a baby, got married, etc. last year, so you should be able to do your own taxes. Did someone say non-sequitur? Knowing that you had a baby doesn’t confer you with knowledge of the tax code. Nor does it empower you to ask all the right questions.

The more wealth you acquire, the more “complex” your taxes

I can share my own history of preparing taxes. I used to do them myself. For awhile I had a Windows computer and I bought one of the popular software apps. It worked great. Then I moved to Linux. They don’t sell that software for Linux. The first year, I had to visit my next door neighbor, borrow their computer, install the software, and print out my taxes there. A bit embarrassing I might add. The following year, that software app company had a webified version. They didn’t promise Linux support, but I tried it anyway. Worked great!

Then I got married. My sister-in-law and mother-in-law both, at one time, worked for H&R Block. My wife had always let her sister do her taxes, so we let her handle them that year. That was great. Four years ago, things got a bit crazy. We sold a house I had built years ago, but was now considered joint property since we were married. And we bought a new house. The federal government had this “new home buyer’s” credit of $8000 as well as a “first time home buyer’s” credit of $6500. I was pretty sure we didn’t qualify for the $8000 credit, but the $6500 one sounded perfect.

My sister-in-law worked for hours, including making phone calls to the IRS. It turns out that we DIDN’T qualify because my wife was now considered a home owner of the first house. If we had bought the house before we got married we might have gotten both. But being married knocked both of our list.

And then we bought rental property in 2012. I had my accountant complete a cost segregation study on all four units to accelerate our rate of depreciation. I had also bought a big chunk of MLP stock which dispensed a K-1 form instead of a classic 1099. I knew our taxes were even more complicated and I couldn’t lean on my sister-in-law for this. It was simply beyond her skill set.

Simply put, our income wasn’t very “ordinary”.

“Ordinary” vs. complex income

When you clock in at your job, get your check every week, every two weeks, or twice a month, and then spend it on food, rent, etc., you have what’s called ordinary income. The bulk of your taxes are paid to the government by having it withheld from your paycheck. This mechanism was crafted during World War II because the government needed to get their money quicker. Before then, you simply wrote a check once a year, and at the time, not many people paid income taxes.

Suffice it to say, most of the people out there earn their living this way, and that is what a lot of these tax services are oriented towards. The do-your-own-taxes as well as tax agents at Walmart, H&R Block, or whatever are all oriented towards the majority of clients.

When you start getting money from dividend paying stocks, rental property, trusts, and other more complex structures, then you have moved off the beaten path. You need someone more experienced. The person working a kiosk at Walmart isn’t that highly trained for such special situations.

The criteria I have used to weed out the right person has been “do you know how to handle a cost segregation study and a K1 for my MLP?” I suspect the people at H&R Block or Walmart would stare back at you with a bewildered look on their face. They probably have never heard of a cost segregation study. I’d say the odds are higher that they’ve seen a K1, but not much. The guy I hired said, “sure, no problem” to both.

The answer isn’t whether or not you know that you got married last year. And the answer isn’t tied to whether or not you left money behind last year. The answer is rooted in how “ordinary” your income is. I won’t decide for you, but I thought I would share that if you become successful at developing passive streams of income, you will probably reach a point at which DIY tax preparation will be inefficient and possibly you cost much

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