Today, it takes more brains and effort to fill out the income tax form than it does to make the income.

~ Alfred E. Neuman

Update: This post is included in the Carnival of Money Stories XLV – The Sex, Lies and Videotape Edition at Len Penzo dot Com. Thanks Len! It was also included in Tax Carnival #67: A Pot of Tax Gold at Don’t Mess With Taxes. Thanks Kay!

It’s tax time again so I thought we might look at whether it’s better to hire a professional to prepare your taxes or try to do it yourself. If you go the professional route, you can choose a chartered accountant, a retail tax preparation chain like H & R Block or Liberty Tax Service, or any of the numerous independent tax preparers out there. In general, accountants tend to charge a little more, followed by the retail outlets and then the independents. Most will charge based on the complexity of the return.

If you choose to do it yourself, you will likely want to use a tax preparation software unless you are knowledgeable enough to fill out the tax forms yourself. Most programs use an interview format that allows you to answer questions about your income and deductions and places the information in the right spots on your return. They are usually available in a desktop and online version. The type of software you choose will depend on your knowledge level and the complexity of your tax situation.

The Canadian Finance Blog has done a couple of good reviews on QuickTax and UFile, two of the more popular programs for Canadians. Four Pillars had a review of QuickTax as well. From what I’ve heard, these programs are quite comparable and your choice may come down to personal preference, pricing, or your specific requirements. (Disclosure: Balance Junkie is a member of the QuickTax affiliate program, so we will receive a commission if you click on one of the ads and buy the program. If you choose to do so, thanks!)

Hiring a Professional: Pros & Cons

Pros:

• A good tax professional will be well-versed on the latest tax laws as well as the best ways to present your information to the CRA. In the event of an audit, they can represent you (for a fee). Their expertise may help you optimize your financial situation so that it’s most tax efficient.
• If you are a commission sales representative or self-employed, your tax situation will be more complicated and an accountant can help you navigate the rules.
• If you’re not all that knowledgeable about taxes and you have no interest in learning more, you may be better off paying a professional to prepare your return.
• If you have neither the time nor the inclination to go through the software interview and file the return yourself, and you can afford it, you may want to leave it to the pros.

Cons:

• Hiring a professional is more costly than using tax preparation software. I’ve seen pricing anywhere from $75 for an independent tax preparer to close to $1000 for a chartered accountant. It definitely pays to shop around, but if your return is more complicated, you can expect to pay more. Of course, beware of the “professional” offering rock bottom prices. Sometimes you get what you pay for, so always ask for qualifications and references.
• Even if you choose to hire a pro, you still have to do the legwork and basic bookkeeping needed to gather and organize all of your information. Even the best professional is only as good as the information you give him or her. If you hand your tax pro a shoebox full of receipts, you can expect to pay more. If your information is well-organized and complete, it will be a lot easier to get the most out of your return. At that point, however, you may start to wonder why you are paying a professional when you’ve already done a lot of the work yourself.
• When a professional does your return for you, you may feel like you’re not as in touch with your finances as you would like. This depends a lot on your personal preferences. Maybe you’d rather not be as involved, or maybe you’re a bit of a control freak (as I am) and you like to have a handle on all aspects of your finances.
• If your return is fairly straightforward, the cost of a professional may not be justified, as the software available today makes it easy for even the greenest novice to prepare and file a tax return. You can quickly and easily file over the internet. If you’re getting a refund, you can receive it very quickly and even have it directly deposited to your bank account.

How We’re Handling Taxes

For the past 10 years or so, we have used a chartered accountant as our tax situation was a bit more complicated. We have been paying anywhere from $400 when we first started to $500 last year (plus GST). Because of numerous job changes and various forms of compensation, this year’s return will be the most complicated ever for us. Needless to say, we’re sticking with our accountant for this year.

Having said that, this might be our final year using a professional for a while, as our income situation is a little less complicated now. (And our income is less too. ) I feel like I’ve lost touch a bit with our tax situation over the years, so I’m willing to put the effort into getting reacquainted with the tax forms. It takes quite a bit of effort to track everything already, so I may as well take the next step and do the taxes myself. I’ll let you know next year if I regret my decision!

Update: Rob Carrick says Tax Software’s Days Are Numbered. He’s referring to the desktop versions of popular programs like QuickTax. This article also gives a nice round-up of tax filing options.

How do you handle your taxes?

Related posts:

1. Taxes: The Missing Step
2. Get Your Inheritance Early – And Other Ways Your Parents Can Save Thousands in Taxes in Retirement

I don’t know if I can live on my income or not – the government won’t let me try it.

~ Bob Thaves, “Frank & Ernest”

Update#1: This post was the #1 pick in the Best of Money Carnival #39 posted at the Canadian Personal Finance Blog. Thanks Big Cajun Man!

Update #2: Thanks to Kay Bell for including this article in Tax Carnival #66: Tax Olympics posted at Don’t Mess with Taxes.

When I wrote about the 10 Steps to Fiscal Fitness, I may have overlooked one potentially huge factor that can affect your financial health, and that’s taxes. Whether it’s sales taxes, property taxes, provincial or federal income taxes, a pretty big chunk of our income goes to pay all sorts of levies. Strictly speaking, I guess taxes aren’t really a step to financial security on their own, but good tax management can leave more money in your pocket.

Most of us don’t even think about the total amount of taxes we pay, except maybe a few times of year when we look at the numbers, throw a small (or big) tantrum, suck it up, and write a cheque. This is one of those times. I just reluctantly started looking at our tax situation last week. It’s going to be pretty complicated this year, so I’ve been putting it off. But the T-slips started arriving, and I decided that I’d better get a move on. Here are a few things to consider as you ponder the effects of taxes on your personal balance sheet:

10 Tax Tips for Canadians

1. Be Aware

Look at your pay cheque and really get a load of how much of it goes to taxes. Take a look at a basic tax calculator and put in your numbers and some higher and lower income amounts. It’s interesting to see the effects of changes on the amount of taxes owing as you move up through the tax brackets. OK, I know. It would have to be a pretty snowy day to invest much time in this kind of exercise, but it can be pretty informative.

If you are self-employed or a commission employee, you will have a lot more flexibility on when and how you pay your taxes. You’ll also have access to a lot of deductions that other employees don’t. But you also have more work because you need to track things like mileage, business and home office expenses. These deductions are well worth the effort, as they can save you thousands on your tax bill.

2. Keep Up to Date

Tax laws change all the time, and the government periodically offers short term tax incentives like the recently expired home renovation tax credit. Watch the news and keep up to date on changes that might offer you an advantage. But be careful. Tax breaks can be like discount sales and coupons. You may end up spending money on, or worse, going into debt for, something you really can’t afford just to get a tax credit. Saving $1000 on a kitchen renovation isn’t worth it if you’re going to pay more than that in interest to finance the total cost.

3. Property Taxes

Are your property taxes a lot higher than a friend’s who lives just a few kilometers away? Would it be worth your while to lower your tax bill by moving? We happen to live in an area with very high tax rates compared to a town that’s just a few blocks away. But I love my house, so we continue to pay. Still, I know of at least one neighbour of mine that did move to take advantage of lower property taxes (and better municipal services) in the town next door.

4. Income Splitting

If you are a commission employee or self-employed, your options are much greater here. I actually worked as a self-employed paid assistant to my husband for a number of years when he was in commission sales. It gave me income toward my RRSP limit, some CPP contributions, and reduced our overall tax bill as my salary was deducted from my husband’s income.

Even if you have regular employment income, the new pension income splitting rules enacted in 2007 may be something for you to keep in mind as you decide how to allocate your retirement savings between vehicles like RRSPs, Spousal RRSPs, and other non-registered products. These new rules allow you to transfer up to 50% of your pension income to your spouse, with different rules if your spouse is under or over age 65. (Note: You cannot split OAS, CPP or QPP, or RRSP withdrawals other than annuity payments.)

5. Don’t Cheat

The tax penalties levied by the CRA are far more onerous than the taxes themselves. It’s not worth it to cheat. When I was earning self-employment income, I actually did do quite a bit of work for Mr. Cents, but we did get audited one year. I was the one who dealt with the CRA representative, so she knew that I really had been handling the bookkeeping. We did owe some money, but not much, and only as a result of some honest misinterpretations of the tax laws. They’re not as clear as you’d like to think!

6. RRSPs

RRSPs are a tax tool as much as a retirement savings vehicle. In order to decide how much (if any) of your income you want to put under the RRSP umbrella, you need to do some math. How much tax savings will you receive if you contribute at a certain level? Again, play with the numbers. Is it worth it to contribute $10000 to your RRSP for a tax savings of $4000? If you are in a lower bracket, your savings will be less. If you are carrying credit card debt, is the tax savings worth more than the ridiculous interest rate (usually around 19%) you’re paying on your credit card?

7. Children & Taxes

There is a lot to be aware of in terms of how having children will affect your taxes from the Child Tax Benefit and RESPs to the fitness and transit credits and many more. H&R Block has a nice little run down of basic issues. Note also that if your child is under 18 and earns income, they may be able to claim a refund of taxes paid if their income is below the basic personal amount of $10320. Even if they won’t get a refund, it’s worth it to file a return for them as it will allow them to build RRSP contribution room.

8. Charitable Donations

Do some research on how charitable donations affect your taxes. Is it worth it to contribute over the threshold to get a greater tax credit? You get a 15% credit for donations up to $200, but you receive a 29% credit for any amount over $200 up to a limit of 75% of your net income. You can claim all or part of your eligible credits and it’s usually worth it for the higher income earner to claim the credit if possible.

9. Medical Expenses

As with donations, you have some choice as to who claims the medical expenses. It’s usually beneficial for the lower income partner to do so. Also, don’t forget to claim premiums paid to private health plans.

10. Investments

Be aware of how taxes may affect your investment choices. As well as choosing between tax deferred (RRSP) and tax sheltered (TFSA) vehicles, be aware that investment income from interest, dividends, and capital gains is treated very differently, with interest carrying the highest tax burden. If you own funds, make sure they are tax efficient for your purposes.

These are just a few of the main issues to think about when you consider the bite that taxes take out of your balance sheet. Are there any others I could have included?

Related posts:

1. Get Your Inheritance Early – And Other Ways Your Parents Can Save Thousands in Taxes in Retirement
2. Taxes: DIY or Hire a Pro?
3. RRSP vs. Paying Down Debt