If you're Lower or Middle Class, Never Pay Someone to Do your Taxes


I have a lot to say about taxes. How much you pay in taxes depends a lot on your actions, but it's very hard to reduce your taxes if you don't know what actions to take.

But today, I want to talk about a different kind of tax burden: the burden of paying for tax prep. This is especially rough on the lower economic class.

Why do working poor folks keep walking into H&R Block, Jackson Hewitt and Liberty to get their taxes done? For a normal return, these places charge $70-100.

The IRS gives free tax prep for those making under $54,000 through the VITA program. If you qualify, you should get your taxes done for free.

There's also lots of free tax software out there, but since many working poor folks don't own a computer, that isn't an option for them.


Here are my issues with the Jackson Hewitt/Liberty/H&R Blocks of the world:

1. They take their fees from your tax refund.


Your tax refund is not free money from the government. That is actually your money that the government has been borrowing.

See, taxes in America are a pay-as-you-go system. Your employer takes them out of your paycheck as you work. This has the effect of making it harder for people to "forget to pay" at the end of the year.

What comes out of your paycheck is just an estimate. You square up at the end of the year when you actually file.

Plenty of things can affect the real amount of taxes at the end of the year: qualified retirement contributions, student loan interest, daycare expenses, certain medical expenses, mortgage interest paid, and a whole slew of other things can trigger credits (money the government flat-out gives back to you) or deductions (amounts that get shaved off your taxable income, reducing your taxes by a percentage). Simply being poor and working triggers a great tax credit called the EITC, which almost ensures every working poor person ends up with a refund. Find out on the IRS website if you qualify for the EITC, or ask your VITA tax preparer!

Of course, the government does not have a crystal ball when it comes to how many tax-reducing boxes you'll check over the year. When your real taxes differ from the guestimate that got deducted from your paycheck, the government owes you the difference. Refund check time! Or, you owe the government the difference if you underpaid!

So when H&R Block or Liberty grab their fat fee straight from your refund, they are not taking the government's money. They are taking money you worked for, that belongs to you. Taking their fee from your refund is a psychological ploy. You might not miss it as much because you haven't seen or touched it yet, but it really is yours.

Side Note: Know the difference between Refund vs. Return:


2. In general, I don't trust their expertise.


Back when I was truly destitute, I thought of trying to get a $10/hr job at Liberty Tax. They make you take a little class before you start work with them, and I thought that sitting through it would be a great way to sharpen up.

Boy, was I in for a ride. I had a drinking game going with my water bottle where I'd take a sip every time the "instructor" gave flat-out-wrong information.

The most memorable moment was when she told the class that the 1040-A was the form for an amended return. This is sort of like hearing your mechanic tell you that the engine is the part of the car that connects the tires to the wheels.

That was when I walked out. I'd rather not tie my reputation up with a place like that.

There are some very qualified people at these places, but generally they are not the ones processing basic returns. That's left to a churn-house of newly stamped-out recruits, underpaid seasonal workers with little prior experience and few, if any, credentials besides a PTIN (ID number). '

Expecting one of these boiler-room tax preparers to do a thorough job on your taxes is like expecting a McDonald's fry cook to care deeply about the burger he is preparing for you.


3. There is a free option.


Back in college, I volunteered with the VITA program. The VITA Program is a volunteer based service that prepares taxes for free. To qualify for free tax help, you must make $54,000/yr or less.

I am very proud to have volunteered with VITA, alongside other accounting students and some very nice retired CPAs.

These were some of the people we helped back then:

  • An elderly man who wanted to make sure he was using little enough of his retirement savings to remain under the tax threshold
  • A young, broke couple with a tiny baby. They were pleased to learn that they were getting a HUGE refund due to the EITC (tax credit for working poor folks)
  • A woman who worked 4 jobs but was nearing foreclosure on her small house. She cried when we told her the refund amount: it literally saved her from homelessness.

If these people had gone to a paid tax prep service, they would have had to pay $70-100 out of their refund. Assuming the tax return takes a half an hour to prep, the $10/hr boiler room tax preparer makes $5 for each return. Where does the rest of the money go? Overhead expenses like rent and utilities, then right into the pockets of management, corporate and shareholders. It's like a weird reverse cashflow from the poor to the rich.

The people who end up paying are the people who can afford it the least. $100 means a hell of a lot to someone who is busting their butt for minimum wage.


Want to do something right now to promote economic equality? Tell five friends about the VITA program. Right now. Pull up Facebook and send five links straight to VITA's website. We all have at least five friends who make less than $54k. Sending one link can save them $100.

Here's a copy and paste straight off the IRS website:

 https://www.irs.gov/individuals/free-tax-return-preparation-for-you-by-volunteers

Go forth. Break the tax prep wheel that crushes us.


XOXO, Meow

P.S. Did you know that many other countries prepare tax returns for their citizens? After all, the government already has access to much of the information, and does check their info against the info you send them. Why, then, do Americans have to spend so much money just to figure out the complex tax code on their own every year? Why can't the government just do it automatically and cut out all the expense?

One tax scholar named Joseph Bankman asked this very question. The story of how he was shot down by business and government interests made me feel sick inside. You can hear the whole story on NPR's Planet Money podcast here: Planet Money Episode 760: Tax Hero

I am a huge fan of Joseph Bankman and dream of a day when tax preparation is no longer a burden, especially on America's working poor.

1 comment:

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