Income Tax-Preparation Software Programs

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This article was published by ComputorEdge, issue #2703, 2009-01-16, as the cover article, in both their PDF edition (on pages 9-11) and their website.

When you are faced with the joyless chore of completing your U.S. federal and, for many Americans, state income tax returns, then you have essentially four options: hire a tax accountant or other tax preparer to do them for you; fill out the tax forms yourself, by hand; use tax-preparation software on your computer; or use a tax website and submit the information online. Each approach has its own advantages and disadvantages.

Having someone else do your taxes is an irresistible option for countless Americans every year — especially at the last minute, and even more so for people confronting the greater complexity that accompanies, for example, running a small business or investing overseas. Admittedly, it is so easy and tempting to dump onto someone else's desk your W-2 forms, 1099 forms, and paycheck stub (or stubs, if you work multiple jobs, to make ends meet). After all, these tax experts tend to be much more knowledgeable about the tax code than the rest of us, and can often identify — or create — deductions that reduce your tax burden by more than the fee for their work. In those cases, using their services truly pays for itself. Not only can it save you money, but it definitely saves you time and frustration.

On the other hand, hiring someone else to do your taxes can have disadvantages, aside from the financial cost. There is no assurance that they will be able to (legally) reduce your tax bill any better than you could have done yourself, especially if your tax situation is simple. Furthermore, even though the tax preparer will fill out all of the needed paperwork and perform all of the calculations, ultimate responsibility for any errors rests on your shoulders. Any and all promises of quality service and money-back guarantees, will be worth nothing if and when the Internal Revenue Service decides to enliven your existence with a tax audit, and you discover that "Joe's Fly-By-Night Tax Service" has suddenly relocated to the Caymans.

Perhaps the only advantage to filling out paper forms yourself, is that it reduces your tax preparation expenses to an absolute minimum. But it is also the most costly in terms of time — and that downside will most likely only get worse in the future, because Congress seems to have no interest in simplifying the federal tax code, but rather the opposite. You also have to endure the hassles of reading the IRS publications and forms; filling them out; performing the calculations manually; double-checking those calculations; fixing any errors using correction fluid, or filling out the form again; photocopying the documents, for your records; and mailing in the originals.

Furthermore, you have to request all of the paper forms from the IRS and, if applicable, your state tax agency, or pick them up at one of the distribution points (which are shrinking in number). This process must be repeated if you failed to get all of the needed forms. To have copies (always advisable), you must scan or photocopy the originals, before mailing them in. Even then, you end up with only image files or photocopies, and thus the data cannot be exported for use during the next tax year.

Software to Save Your Sanity

The third option — using tax-preparation software on your own computer — might be your best choice. After all, that is what the tax preparation companies are doing once they receive your data. The desktop tax applications available to individuals, have greatly matured over the years, in terms of accuracy, ease of use, error detection, audit alerts, and automatic updates due to last-minute changes to the tax code.

The best-known and most commonly used products are TurboTax, TaxCut, and TaxACT. We will examine some of the lesser-known alternatives momentarily. We will also briefly discuss some of the Web-based programs, because nowadays there is a trend away from desktop software.

Intuit's TurboTax has long been the dominant tax program, and the one for the competition to beat. With its incremental but constant evolution, it has now reached a level of stability, completeness, and usability such that most customers are happy with its results and functionality. Intuit offers several federal editions, which can export data to state-specific editions. Their Free edition is suitable for filers with simple tax situations, who don't need to import from previous years, and do not need tools for checking their audit risk, maximizing deductions, or providing guidance for investments, rental properties, or self-employment income. The Basic edition, at $14.95, adds import capabilities. For $15 more, the Deluxe edition adds audit checking and deduction maximization. An additional $20 gets you the Premier edition, which handles investments and rental income. Another $30 on top of that delivers the Home & Business edition, which provides guidance on self-employment income. For state income taxes, you will need to pay $25.95 for each state. All of the editions include free electronic filing with the IRS ("e-file").

H&R Block's TaxCut is also quite well known, partly because H&R Block has, for decades, been a leading firm for tax planning and preparation, and other financial services, with their brick-and-mortar offices throughout the United States. TaxCut comes in four different editions, but none of them are free. They range from the Home edition, at $19.95, up to the Home & Business edition, at $79.95, which includes unlimited state returns. As with TurboTax, all of the TaxCut choices include free IRS e-filing. Some users of TaxCut strongly prefer it over TurboTax, but I experienced poor results with TaxCut, years ago — specifically, eight serious problems, including TaxCut changing data values when printing on a different machine, and ignoring data pasted into entry fields. These bugs would have cost over $100. As always, do not assume that your chosen program's results are flawless.

TaxACT is the newer contender, and not as well-known, but that is changing, as people discover that their free edition offers more functionality than those of the rival programs. Each set of state tax forms is an additional $13.95. Similar to the previously discussed programs, TaxACT includes free e-filing.

Online Options

Two of the aforementioned tax programs offer free editions, and all three are well-regarded and reasonably priced — particularly when taking into account the rebates typically offered in computer stores (those few surviving). Nonetheless, some customers may wish to try out alternatives, for whatever reason. In those cases, they usually select one of the Web-based programs/services.

This approach does not require you to purchase, download, install, or configure any software on your computer. The downsides are that you will have to trust an online service to properly and securely store all of the tax data that you have laboriously entered. Also, you will have far less control over the entire process, which could be especially disadvantageous to people who want to run numerous "what-if" scenarios, or who have greater control over their income, expenses, and deductions — such as small-business owners and people who have yet to contribute to an IRA.

TaxSlayer.com offers two different editions, Classic and Premium, which are both billed as being free. However, you have to pay $9.95 or $19.95, respectively, when you want to print or e-file online. But why would anyone go to all the trouble of inputting their tax information if they were not going to print or e-file? The programs can be either downloaded or accessed online.

TaxBrain makes available four different editions: EZ ($14.95), Basic ($19.95), Deluxe ($39.95), and Premium ($69.95). All of them include free IRS e-filing. But to add a state, one must pay an extra amount that is greater than that for all of the other competitors. The only apparent benefit of TaxBrain, versus some of the competitors, is that it includes free live assistance.

Using these products, you should be able to take advantage of a wide range of deductions, some of which you may not have previously considered. Just don't assume that any of these programs — either running on your desktop or in your Web browser — are free of all bugs. What you don't find, the IRS probably will.

Copyright © 2008 Michael J. Ross. All rights reserved.

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