Income Tax-Preparation Software

For many Americans, filling out federal income tax forms can be almost as painful as seeing how much Uncle Sam has extracted from their net worth — and certainly far more confusing. Each year the federal tax code is made more complex by Congress, and current events suggest that there will be no change in that trend. On top of that, for those people living in the 41 American states that tax personal income, April can be an especially unpleasant and expensive time of year. The paperwork and resultant anguish is even worse for freelancers and other business owners, who are required to estimate their income for the year, from all sources, and pay quarterly estimated tax payments.

Americans can choose to complete all of the forms by hand, using preprinted instructions and forms distributed by the Internal Revenue Service (IRS) and the state revenue boards, or they can use the electronic equivalents that are downloadable from the websites of those organizations. This may be the lowest cost approach, but only for those people who do not see the hidden costs of losing time, because far too much of it will be consumed trying to decipher the instructions and filling out the forms accurately enough to avoid overpaying one's taxes or triggering an audit. In addition, one must either complete the editable PDF files, if such are available, or download forms and print them out, or pick them up at one of the distribution points (which are declining in number). This tedious process must be repeated for any forms that one only later learns are needed, which oftentimes occurs at the last minute, when one is running out of time and under greater pressure.

Another approach is to enlist the services of a professional tax accountant or other tax preparer, to do all of the required paperwork for you. It is quite tempting to choose someone else to do your taxes, particularly if you are running up against the IRS deadline for submitting paperwork (or at least an extension request, plus payment), or if your tax situation is more complicated than that of the average citizen, such as those contending with the tax implications of small-business ownership or foreign investments. It can be a great relief to simply take that intimidating pile of forms and pay stubs, and drop the bundle of unhappiness onto someone else's desk — especially if that individual is far more knowledgeable about the tax code, and is better prepared to find valid deductions that can minimize your tax burden (oftentimes by more than the cost of their services).

For many people, there is an effective middle ground between going it completely alone, at one end of the spectrum, versus turning it all over to a tax professional, at the other end of the spectrum: A growing number of taxpayers are electing to use software, by themselves, to fill out their taxes, without consulting an attorney or anyone else, yet still enjoying the many advantages of these tax-preparation programs — specifically, the correctness of the calculations, the up-to-date tax rules applied dispassionately by the computer, the ability to print dozens of completed pages in minutes, and, if needed, later correct any mistakes without having to fill out forms again or use liquid paper to cover up mistakes.

In this article, I will examine some of the best-known applications for doing one's US federal and state taxes.

"Revenue Enhancement" on the "Intertubes"

Anyone who has been paying attention to trends in the world of computers, cannot help but notice that the number of software manufacturers, as well as retail outlets that sell their wares, appear to be in an unstoppable decline. At the same time, more Web-based services are emerging to replace the functionality once offered by the old shrink-wrap software. In fact, these online applications are appearing on an almost daily basis, oftentimes directly targeting some venerable software package or single-product vendor. The same pattern is clearly evident in the realm of US tax preparation.

Two examples of online tax-preparation services are TaxBrain and TaxSlayer.com. Both of them allow you to enter in your tax information online, using a secure connection, and then download or print completed tax forms. You can also file electronically with the IRS, at no extra charge. Both of these services offer several different plans, priced according to features included.

TaxBrain offers four plans: EZ ($14.95), Basic ($19.95), Deluxe ($39.95), and Premium ($69.95). EZ, as one would expect, is for people who file 1040EZ forms, and thus are not declaring any dependents and do not have income greater than $100,000. Their Basic plan has no income restrictions, and handles dependents, but not alternative minimum tax (AMT) — and is best for taxpayers filing 1040A. The Deluxe plan is for just about everyone else, especially people earning enough income from investments to trigger the AMT. Small-business owners would want to choose the Premium plan. State taxes are an additional $29.95, which may be worth it if one's state income tax situation is complicated; but most people would be better off simply completing the state form themselves. One advantage of TaxBrain is the inclusion of live tax assistance, at no charge.

TaxSlayer.com has changed their offerings from last year, when they had two different plans. Now there is just a single plan, which is free to try, but costs $9.95 for filing one's federal taxes, and an additional $4.95 for state taxes. These prices compare quite favorably with competing services. It includes a deduction finder, as well as functionality for handling major life events, investments, rental property, and small business.

These services, like their Web-based brethren, avoid the cost and hassle of purchasing, downloading, installing, and configuring software on your laptop or desktop computer. However, there are numerous disadvantages to this approach: You will be uploading sensitive financial information to their computers, and assume that they will handle all of that data securely, now and far into the future. Moreover, unlike doing taxes by hand or even using local software, it is typically much more difficult to try out various scenarios — such as seeing the impact of IRA contributions, or alternatives that you may have in handling business expenses.

Keeping It Local

In view of the downsides mentioned above, a sizable portion of the American population have shown no interest in using Web-based tax services, and instead plan on sticking with their tried-and-true installable tax applications. After all, if this approach is good enough for the professional tax-preparation firms, such as H&R Block, then it may be the best choice for common citizens. Furthermore, these desktop programs generally offer more features than their online competitors, including extensive built-in help, audit alerting capabilities, and automatic updates over the Internet, to account for any recent modifications to the tax code.

TurboTax, TaxCut, and TaxACT are arguably the three most popular such products in use. There are of course alternatives that do not enjoy the limelight, but when it comes to managing and transmitting online your personal financial data, it is best to stick with the name brands from the larger vendors, because they receive a lot more scrutiny from consumers and government regulatory agencies. All of these products have Web-based versions (in addition to their downloadable software), which would be more appropriate for any user who, for whatever reason, does not want to install any software or may not even have a computer of his or her own.

TurboTax, by Intuit, has continued to hold its position as the leader in the field, with no sign of relinquishing the crown, despite being the most expensive option. In the eyes of the untold number of people who rely upon it year after year, it is the most complete, usable, and stable tax product available. TurboTax is offered in a number of different federal editions, all of which can export data to their state-specific editions. Intuit's Free edition is adequate for taxpayers with simple tax situations, and who have no interest in being able to import data from previous years. Their Basic edition — $14.95 for online, or $24.95 to download the program or receive it on a CD — adds import capabilities, and is able to handle all of the federal forms, but does not perform audit risk assessment, deduction optimization, or calculations required for rental properties and other advanced situations. Their Deluxe edition — $29.95 online or $59.95 desktop — adds the audit checking and deduction maximizing features. Their Premier edition — $49.95 online or $89.95 otherwise — is designed for taxpayers with income from rental properties and investments. Their Home & Business edition — $74.95 or $99.95 — includes professional guidance on self-employment income. Major businesses would want to select the Business edition ($105.95), which is intended for corporations, partnerships, and LLCs. All of the TurboTax editions include electronic filing with the IRS at no extra charge. But state income taxes do cost extra, at $25.95 for each state.

TaxCut, by H&R Block, has been for the longest time the main competitor of TurboTax, benefiting from its association with its well-known financial services parent. TaxCut products are generally more affordable than the TurboTax equivalents when taking into account state taxes. The Free edition, available only online, is intended for people without complex tax needs. The Basic edition, costing $19.95, is the downloadable version of the Free edition. For anyone who is a homeowner or investor, and wants guidance on maximizing deductions, assessing audit risks, or handling investment income, the Deluxe edition would be optimal, and costs $29.95 online or $15 more for the local software. Anyone who is self-employed or has rental property, should choose the Premium edition, priced at $49.95 online or $10 more for the downloadable version. All of these prices include state tax handling, so if you opt out of state capabilities, there are reduced prices.

TaxACT may not as be as well known as the aforementioned heavyweights, but is gaining new fans every year. This is partly because the free edition offers more functionality than many of the competitors, and includes free electronic filing with the IRS, as well as free tax assistance and product support. The Deluxe version costs only $7.95 for the online version, or $12.95 for the downloadable version, and includes importing of previous year's data, tracking non-cash donations, tax calculators and reports, and more. The Ultimate version adds state taxes, for an additional $10 for the online version or seven dollars for the desktop program. Last but not least, there is a downloadable version for business owners, at $54.95, with business-specific capabilities.

Even though any one of these programs could easily make this tax season far less taxing for you, do not make the mistake of assuming that they are incapable of error. In years past, I have found several bugs in earlier versions of some of these products, so you will want to double-check your work before sending it into the authorities. Nonetheless, any poor soul who has switched from filling out tax forms by hand, to using dedicated software, will tell you that it can save a tremendous amount of time and frustration.