Doing your own taxes is frustrating: finding the forms, deciphering the instructions, finding your paperwork, doing the math, figuring out what needs to be attached, worrying about a tax audit.
What you may not realize is that doing your own taxes also costs you money. It costs you money because you don’t know all the credits and deductions you are entitled to, so you end up paying more tax than you truly owe. (After all, when was the last time you settled down for a quiet evening with the Internal Revenue Code?)
But besides missing opportunities to lower your tax bill, it also costs you money just to fill out your tax return. The IRS does projections for how long it takes the average taxpayer to complete each tax form. These projections are presented below (in hours:minutes). Referring to this table you can see that if you only have wage income (Form 1040) and some bank interest (Schedule B), the IRS calculates it will take you 3 hours and 33 minutes to learn about the law and the forms and 6 hours and 41 minutes to actually fill out the forms: a total of 10 hours and 11 minutes. If you have capital gains from a mutual fund, the total jumps to 15 hours and 5 minutes.
Form Description Education Preparation Hours:Minutes
1040 Basic form 3:25 6:16 9:41
Sch A Itemized Deductions :39 1:34 2:13
Sch B Interest Income :08 :25 :33
Sch C & E Small Business & 1:41 2:52 4:33
Sch D Capital Gains 3:04 1:50 4:54
Sch E Royalties and Rents 1:01 1:25 2:26
2106 Employee Business Expenses :12 :24 :36
2441 Child/Dependent Care Credit :25 :50 1:15
4562 Business Depreciation 5:10 5:59 11:09
So, how much is that time worth? If you get an hourly wage, say $10 an hour, multiply your wage by the estimated time. Fifteen hours and five minutes is 15.08 hours (the .08 comes from dividing 5 minutes by the 60 minutes in an hour, which gives you the decimal fraction.) Ten dollars an hour times 15.08 hours equals $150.80, your cost for doing your own taxes.
If you receive a salary, you can calculate your hourly wage by dividing your salary by 235 (365 days minus weekends, holidays, vacation and sick days) and then dividing that figure by 8 (for an 8 hour workday). If you earn $35,000 a year, the calculation is $35,000 divided by 235 (148.94) divided by 8 (18.62), which gives you your salary-based hourly wage. Multiply $18.62 by the IRS time estimate for each form and you will know how much it costs you to do your taxes. The same tax return as above (Form 1040 with Schedules B and D) would cost this salaried worker $280.74 in terms of the value of his own time (or, more correctly, in terms of how much his employer values his time).
And this does not include all your time or costs. The IRS does not count the time it takes to do record keeping, the major headache in figuring capital gain basis for a Schedule D. The IRS also does not count the time it takes you to assemble, copy, and mail in all the forms – or the hours it takes to learn the latest computer program that promises “to do it all for you” (after you have entered in all the numbers).
Furthermore, you cannot deduct the value of your time spent preparing your return. Only money spent for professional tax preparation is tax deductible. If the salaried employee found someone to prepare his taxes for the same $281 it costs the employee to do it himself, the after-tax cost would be only $202 ($281 minus the 28% tax deduction). Not only would this taxpayer get professional help with his taxes, it would cost him $79 less than doing it himself!
Finally, remember that all the time you spend doing your taxes comes from your own personal time: weekends and holidays. This is time you spend with your family and friends; time for yourself. How much is that time worth?
Article written by a fellow Alliance of Comprehensive Planners member,
Robert Reed, Columbus Ohio