Monday, 16 July 2012

Should you do your own taxes or use an accountant?

I think that this is a question that gets raised every year by almost all people who submit their tax returns.  Those who use an accountant wonder if they should save money and do it themselves and those who do it themselves wonder if it isn't worth the money paying for an accountant so they can save some time.  Below I have outlined the situations in which you should do your own taxes versus when you should use an account

Before I go into the issues I will admit to having an inherent bias.  I believe that people should, to the greatest extent possible, have as much control over their financial lives.  This means that I think people should be making their own investment decisions whether it be related to taxes, shares, loans etc.  The major benefit of doing this is that you are less likely to get ripped off or surprised by anything that happens.  The downside is that you can never blame anyone for your financial mishaps.
Benefits of doing your own taxes
  • Cost: You save the complete cost of the accountant which often range from a couple of hundred dollars to thousands of dollars for complex cases
  • Understanding:  You understand completely what you can and cant claim.  This can help you make better decisions in the future (which in turn helps you save more money by making wise tax choices)
  • You will often get your tax return quicker:  Accountants are often swamped at tax time and while they will get your returns done it will probably be a while before you get your tax return as they tend to submit them in batches
Benefits of using an accountant
  • Time: You save the considerable time it takes to do the tax returns every year. 
  • Less likelihood of mistakes / missed deductions:  You are more likely than an accountant to make a mistake when it comes to claiming something or worse forget to claim a deduction you ordinary may be able to which can cost you money
  • Do not understand the rules when it comes to complex cases:  When there are entities like trusts set up the rules become a lot more complex and not many people understand them all fully
Is there a happy compromise?
I believe there is a compromise that most people overlook.
This involves virtually doing your taxes yourself in an excel file (i.e. splitting between different types of income and categories) and then taking that to your accountant.  Doing this has the following benefits:
  • It is cheaper than using an accountant and taking them everything:  They spend less time on your file and as their charges are typically made up of time spent on a file and a base fee you can save a fair bit of money
  • Understanding:  You actually get more understanding than in both the above cases because you have gone through the process and your accountant will tell you where you are right / wrong
  • Low chance of mistakes:  Your accountant is going to check everything you do and should pick up any mistakes
  • Spend less time than doing it on your own:  You will probably spend less time looking up every single rule you are unsure of so you're probably likely to save some time
  • Complex cases:  You can do as far as you feel comfortable with complex cases and leave the rest to the accountant.  This is especially true of things like investment properties.  I'm pretty sure about all the deductions I can claim and the registers I need to keep but I let the accountant fill in anything I am unsure about.  If you run a company or have investments in a trust structure I highly recommend seeking advice from your accountant.
  • You will get your tax return quicker than if you just gave them a box of receipts:  Everything is sorted for them so they don't have to spend the time looking through all your materials.  If you're wrong about things they may investigate further but if you are right it should be almost as quick as doing it yourself

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