If your taxes are tricky, consider hiring a professional
— -- Even if you're a pretty good handyman — or handywoman — sometimes you need to accept your limitations and call a plumber. Ideally, you should reach this conclusion before your toilet overflows.
Similarly, even if you're comfortable with tax software, there are times when you should consider hiring an experienced tax preparer.
Timothy Geithner, who was sworn in Monday evening as Treasury secretary, endured a public pummeling last week after lawmakers learned he had underpaid more than $34,000 in taxes while he was working for the International Monetary Fund. Geithner used TurboTax to prepare his taxes in 2000 through 2002 and again in 2005, according to the Senate Finance Committee.
Geithner blamed his problems on "careless mistakes," not the tax software. Still, Geithner's experience provides some lessons for do-it-yourself taxpayers. Consider getting help if:
•You're self-employed. Thousands of workers have lost their jobs in recent months, and many have started businesses. If you're one, you'll probably have to pay self-employment taxes, says Mel Schwarz, partner at the national tax office for Grant Thornton. Even if your situation isn't as murky as Geithner's — who owed self-employment taxes even though he was working for the IMF — navigating the rules can be tricky, Schwarz says.
Employers typically withhold Social Security and Medicare taxes, which amount to 15.3% of earnings (2.9% for Medicare, 12.4% for Social Security), and pay half of your share. When you're self-employed, you're responsible for the entire 15.3%. To avoid penalties, you may be required to pay estimated self-employment and income taxes every quarter.
You're allowed to reduce your self-employment income by 7.65% before applying the tax rate, and you can deduct 50% of your self-employment taxes. Still, you could end up owing the IRS a lot of money, Schwarz says.
You can lower your tax bill by deducting business-related expenses, but there are a lot of misconceptions about what is and isn't deductible, says Francis Degen, an enrolled agent in Setauket, N.Y. Some taxpayers mistakenly believe that "anything tangentially associated with their business is a write-off," he says. "That's a place where professional help is useful."
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