When it is time to do your U.S. federal and state income taxes, when you have postponed the pain long enough, you have three main options: fill out the forms by hand, hire a tax preparer, or use tax software on your computer. Possibly the sole advantage of the first option is that it minimizes your financial costs, because you pay only for photocopying the completed documents and mailing in the originals. But this is usually a frustrating and time-consuming process. Consequently, what may appear to be the economically cheapest solution, is the most expensive overall if you value your time.
Moreover, the low financial cost of manually filling out the forms is greatly outweighed by the disadvantages: You have to request all of the paper forms directly from the IRS and the state tax board, or pick them up at a distribution point. This must be repeated if you did not get all of the forms that it turns out that you need. You are forced to perform all of the calculations yourself, and hope that you do not make any errors. Once the inevitable errors have been detected, they must be covered over using "creative math", er, correction fluid. Even then, math errors may not be seen by your bleary eyes, but will no doubt be detected by the helpful tax authorities. To make copies, you have to photocopy the originals. You do not have an online version of your tax forms, unless you scan them. Even then, the results are only images, and not data that can be exported to other programs. Finally, by the time you are done, you must wash any correction fluid out of your hair, assuming you have any left.
The second option, hiring someone else to do your taxes, proves irresistible to many Americans every year, especially at the last minute. What could be easier than dumping (literally) all of those unsorted W-2 forms, paycheck stubs, 1099 forms, and missing socks onto the already-swamped desk of your local tax preparer? These folks are more knowledgeable about the tax code than us mortals, and can oftentimes find deductions that reduce your tax obligations by more than what you will be charged for those services; then, it pays for itself. Lastly, this option minimizes the time you must spend on what, for most Americans, is a lengthy and onerous ordeal.
But using a tax preparer has its downsides: You must pay for the convenience of having someone else do the work, and there is no guarantee that they will be able to (legally) reduce your tax obligations any better than you could have done yourself, particularly if your taxes are straightforward. Even though the preparer completes all of the paperwork and performs all of the calculations, you are ultimately responsible for any mistakes. All of those quality promises and money-back guarantees will be worthless if and when the IRS agents have you in the hot seat, and you learn that "Ernie's Aggressive Tax Service" has relocated to the Bahamas.
The third approach, using a computer to do your taxes, may be your best option. After all, that is what the tax preparation firms are doing. The software available nowadays can be remarkably easy to use. In fact, the major products step you through the entire process, asking you a series of questions, and describing exactly where on your forms you will find the requested numbers. Once you have entered in all of the needed data, you can print any of the forms, and create as many copies as you would like. You can export the information so it can be used by other financial programs. One year later, when it is time to repeat the joyful process, you can import the previous year's data, and thereby save time, to the extent that your tax situation has not changed. These tax packages of course do the calculations for you, and can be overridden if you see a mistake or if you are feeling especially daring.
But there is always the possibility that a given program will not complete the forms exactly as you presume it will, or that you may misinterpret one or more of the prompts for your data. The odds of this happening, are far greater than the odds of the product making an arithmetic mistake. As with any software, all sorts of subtle problems can crop up. For instance, I used TaxCut once, and discovered eight distinct problems (all of which I reported to the manufacturer): data pasted into entry fields being ignored unless additional keying was done, TaxCut changing data values when printing on a different machine, etc.. These bugs, if undetected, would have cost me over $100. As always, be careful.
Other problems can be the result of security "features" of the product, such as the use of product activation by the manufacturer to prevent software piracy. Last year, Intuit added activation to their flagship tax product, TurboTax, and received criticism, complaints, and product returns from users and the media — especially from those people who were consequently unable to complete their taxes on one computer and then print the forms on another. At the time, tax newsgroups were peppered with complaints of the activation feature trying to write to hard disks' boot sectors, Internet auto-update causing TurboTax to freeze up, incessant advertisements to purchase other products, and inoperability with the latest versions of Internet Explorer and Media Player.
But reported problems are usually fixed, which is fortunate, because despite the handful of bugs encountered every year, almost everyone who tries tax software at least once never goes back to the correction fluid. It is tremendously convenient having the computer do all of the calculations and generate all of the forms for you. The most popular products are Quicken TurboTax by Intuit, and TaxCut by H&R Block. Do not hesitate to try a particular vendor's package, because the manufacturers make it easy to switch over to theirs and to import your previous year's data, even if contained in files generated by a competitor's product.
Even though both TurboTax and TaxCut are reasonably priced each year (especially after the typical rebates), some users instead elect to use one of several free tax applications available, such as TaxACT, which, at least last year, allowed you to use their software on your computer, or to enter your tax data over the Internet. In fact, an increasing number of financial companies are allowing their customers to do their taxes on the companies' websites, using, for example, "TurboTax for the Web".
The leading financial software companies offer a variety of tax products. The one area in which the American taxpayer can find the most subjectivity, and hence potential savings, is the valuing of itemized deductions. Stand-alone packages exist to help people estimate the fair market value of their charitable donations. The two primary such products on the market are It's Deductible for TurboTax and Deduction Pro for TaxCut.
Using these products, I'm able to take advantage of all kinds of astonishing deductions. At least, Ernie says they should fly.