This post is part of a three post series which walks a recent graduate through filling out their W-4 and filing their taxes. After these three posts, recent grads should be squared away with Uncle Sam come April.

Post 1: How To Fill Out A W-4 For A Recent Graduate
Post 2: How To Figure Out Taxable Income for a Recent Graduate
Post 3: How to File Your Taxes for a Recent Graduate

You Have a Few Options

Depending on your circumstances you have a few options when it comes to filing your taxes.

• Do it yourself – This is what I personally did all throughout college. Being a college student, the best part about your taxes is that they are relatively simple. I didn’t own a house, I didn’t have any crazy investments, and I didn’t have any dependents. Your mileage may vary but I think most college students and recent grads fall into this category of DIY taxes. With the proliferation of tax assistant software, this is even more true now than before.
  
• Hire a pro – However, if you have a less average financial situation it may make more sense to hire a professional to do your taxes. What do I mean by less average? Among many things: if you own a house, a business, got married, had kids, are moving across state lines, have student loans and are paying for them yourself…. you may cause yourself a larger headache, and even worse an audit, by doing your own taxes. Make sure you have all the documents they may need, though. These include: Your w-2’s (report income), your 1099’s (interest and dividends), 1099Bs (stock and bond sales), 1098s (deducting interest and taxes), and any expense receipts you can write off, etc.

A large part of the decision comes down to a few factors:

• Do you want to learn how?
• Do you want to get them done quickly?
• Do you want to get them done right?
• Do you want to take advantage of all current tax code?

There is a trade-off in each of these categories for each of the three options (DIY actually breaks down into two parts!). I will try to weigh in on what options are better for your situation and what options may not be. Get out your w-4’s and any receipts that you may be trying to deduct as expenses as figured out in post 2, How to Figure Out Taxable Income for a Recent Graduate.

Do It Yourself, e-File

Have you ever filled out an online survey? Have you ever opened up an online account like Lending Club? Filing your taxes online pretty much takes the same approach. They have made the process flow from one section of your taxes to the next. You simply fill in the requested information, e.g. Did you work in two different states in 2008? []Yes []No. If you check yes, the flow chart takes you to a question regarding which two states you lived in. This answer then lets the tax program know that you need to file two different state tax forms for those two states later down the road. Without the program, you would need to develop this flow of operations on your own.

What are some of the other advantages? These programs are enhanced to maximize all of your applicable deductions and exemptions. As we discussed in the last post, this ensures that your taxable income is as low as possible thus minimizing your tax burden! The fact that the programs are created by professionals usually means that they take all of the new tax codes into account.When all is said and done the program will automatically tell you your tax liability (whether you owe money or are owed money).

You also have the ability to plug in your bank account information and have your taxes direct deposited. With direct deposit, they are typically sent out a week earlier and can be split between accounts. That’s a great option for those of you who like to split your checks between savings, emergency, and spending accounts. It is also a great option for those of you who need your money quickly; Typical returns take 3 weeks when filed electronically.

What are some of the disadvantages? Cost, for one. It can cost upwards of $40-50 to file a federal and a state return. However, if you are just graduating you most likely qualify for the IRS Free-file. If you make more than $56,000 AGI or if you have some other complex tax situations you will not qualify, though.

Another disadvantage is that the programs walk you through your deductions and help you claim them. I just mentioned this in the advantages yet here it is again in the disadvantages. Why? Are you certain that you have the needed documentation to substantiate that deduction? You may be entitled to the deduction, as the tax program is letting you know, but you need documentation to prove you are entitled to it. If you get audited, you could get in trouble.

 

Do It Yourself, Paper File

This is best for someone who has a simple return.  A paper file is also the only option for certain individuals like married couples who file separately, people who file before or after the e-file time-frame, and a few others.

What are some of the advantages? If you would prefer to pay just the cost of a stamp for your taxes, then you should look into paper filing. If you qualify for the free file, then this is not really an advantage.  Another advantage, one could argue, is that you are learning how to do a traditional tax file in case you ever needed to do so again. I don’t know how much weight this holds but I do agree it is good to get different experiences.

 

What are some of the disadvantages? The wait time is usually much longer. You will typically wait about 6 weeks, whereas the electronic filers wait 3 weeks. Checks can also be lost in transit. The IRS actually states they lose thousands of checks per year due to the USPS claiming them undeliverable.

Another disadvantage is that the IRS actually re-enters all of the data off of your paper file manually. So it can be safely assumed that the more complex a return the more prone it is to errors. I don’t want to deal with the headache of an error.

Pay a Professional

On the other hand, if you do not know what to do and don’t care to learn you could simply hire a professional.
What are some of the advantages? Having a knowledgeable professional look over your financial situation can be very valuable. They will surely have advice in regards to your overall tax situation and may possibly have suggestions in regards to tax planning for the future (reducing taxes in the future).

If you own a small business or have a complicated tax situation for other reasons, it may not be worth the hassle to actually do your own taxes.

What are some of the disadvantages? By doing your own taxes you could figure out how different aspects of your financial life impact your tax planning. I’ve always thought the best way to learn something is to experiment and see actual cause and effect.

Some tax preparers costs may be higher than the e-file (especially if you do the free file), typically around $60-200. However, your mileage may vary if you are one of the ones who don’t qualify for free file.

State Files usually Cost Money

When you file your taxes with one of these programs it usually costs money to file your state return. I think I usually wind up paying about $15-20. I just pay it so that I can print out the same receipt, ensure all of the paperwork is sent with the same information, and have all of my paper work with the same company (Turbo Tax).

If you do not want to pay for filing your state return you could just use the free file to do your federal return and then look up the states revenue service website and see if they offer a free file opportunity on their own site. I know a lot of states do this that I have lived in but check first before you make any commitments on your federal return.

Wrap-Up

I hope all of this helps you file your taxes. In the end, the suggestion is very situation based.

For most college students and recent graduates, I would definitely recommend that you try and e-file. Your taxes are still simple so you might as well try and do your own taxes before they get more complicated. As things get crazier and you have to worry about kids, dividends, and small business loans then you might want to move on to having a professional do your taxes.

When it comes to paper file vs e-file, I think e-filing wins hands down. If you get a free file you may wind up paying about $20 for the state return but you save a lot of time and the programs help maximize your deductions.

Recommended

My Life ROI recommends filing your taxes with TurboTax Federal Free Edition for ease of use, accuracy, speed, and… it’s free!