Many tax filers find tax-preparation software to be very useful, and most tax software is simple to use, cost-efficient (especially when compared to the cost of hiring a certified public accountant, or CPA) and fast (some returns may be completed in just an hour).
The proof of its popularity: The tax-prep software market was valued at $17.9 billion in 2024 by Fortune Business Insights and is projected to grow to $47.9 billion by 2032.
As we approach a new tax year, you might be wondering whether you could ditch your tax professional and stick with tax software. It depends on the nature of your financial situation. Let’s consider some financial situations that are appropriate for tax software and some that might require the expertise of a tax professional.
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When should you consider using tax software?
Tax-prep software is most appropriate when your financial situation is straightforward. In the world of tax, the following qualifies as a straightforward financial situation:
- You opt for the standard deduction, a fixed amount that is subtracted from your income to arrive at your taxable income, instead of itemizing your deductions.
- You earn only employment income and receive a Form W-2 from your employer.
- You invest only in traditional assets like stocks and bonds.
- You’ve resided in only one state all year.
In essence, the fewer your tax events and the fewer tax forms you will need to complete, the more you can rely on tax-prep software.
When should you stick to a tax professional?
However, the financial situations of many people are more complicated. If any of the following apply to you, tax-prep software might not be entirely up to the job:
- You itemize your deductions rather than using the standard deduction.
- You have multiple sources of income, such as 1099 income (dividends, rental income, earnings from a side hustle, etc.), or you juggle two or more jobs.
- You are self-employed or own a business.
- If you are a partner in a business, you will need to report your share of income, losses, deductions and credits on Form K-1. The form also applies if you have shares in an S corporation.
- You earn income in multiple jurisdictions.
- You own non-traditional assets such as commodities, derivatives and currencies, among others.
- You are focused on retirement planning and estate planning and need help identifying tax-efficient strategies to maximize your retirement income and the estate you leave to your loved ones.
- You sold a business. The tax implications will depend on the business structure (LLC, partnership, S corp, etc.) and whether it is an asset sale (selling the business assets) or stock sale (selling ownership). Tax professionals can help you minimize your tax liability.
- You received equity compensation. Different tax rules apply to the four types of stock (or equity) compensation — restricted stock awards, restricted stock units, non-qualified stock options and incentive stock options. Tax professionals can help you plan how to hold and exercise these options to minimize your tax liability.
- You got divorced. If you file taxes jointly with your partner, then a divorce can complicate tax matters.
One point that you should note is that the more complicated your financial situation is, the more tax planning you need to minimize your tax liability.
While tax software can help with tax compliance — filing the necessary tax returns and paying the right amount — it cannot help much with tax planning — making decisions that will help reduce your tax liability.
Which tax professional do you need?
Though we have used “tax professional” throughout this article to refer to experts in tax matters in general, there are some key differences among who does what.
- CPAs are full-time accountants who are very familiar with the tax code. They often work with businesses or those involved in long-term tax planning.
- Enrolled agents (EAs) can help prepare your tax return, advise you on tax matters and even represent you before the IRS for a tax audit. The IRS issues the EA credential to those who have met the requirements.
- Tax consultants or advisers usually have the same expertise on tax matters as CPAs. You can rely on them for both tax compliance and planning, especially in more complex situations.
However, while taxation is only one area of expertise for a CPA (financial planning, financial statements preparation, etc., being others), tax consultants are laser-focused on taxation.
So, which professional should you choose?
If you are looking only for tax preparation in situations that are a tad too complex for tax software, an EA may be all that you need.
However, if you are a business owner or you need long-term tax planning (especially relating to retirement and estate planning), investing the extra bucks in tax consultants or CPAs may be appropriate.
Finally, choosing between a tax consultant and a CPA boils down to the scope of services you want. If you are a business in need of more than just tax planning, a CPA might be in a better position to help.
In sum, while tax-preparation software has revolutionized the world of taxation by providing taxpayers with a fast, cost-effective and simple way to file their tax returns, some complex financial situations still require the personal touch of a tax professional.
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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
