In 1789, Benjamin Franklin wrote the famous words, “In this world nothing can be said to be certain, except death and taxes.” More than 200 years later, nothing’s changed all that much in that regard. Although many people live longer, almost everyone pays taxes. Changes have been happening, though, in how that process gets done. Over the years, options for filing returns have expanded to include the use of human tax preparation pros, paid Windows and Mac software packages, and free online tax prep systems.
If you want to try using software to help do your taxes, you need to cull through the maze of available offerings first. At the present time, there are three major vendors in the consumer tax preparation software market. These are far from the only ones. They're only the most popular.
TurboTax from Intuit, Inc. is the market leader. We're reviewing the Microsoft Windows version of a paid edition of TurboTax in this article, but the software is also available for Apple Macs. H&R Block -- a name associated for years with face-to-face return preparation -- has also become aggressive in the software arena. Finally, lesser known 2nd Story Software’s TaxACT is gaining in use.
Should you even buy a PC tax prep software package?
Yet before investing in a software package for your PC, you might consider whether you'd rather hire a human tax prepare of use a free online system instead. Software is pretty accurate in constructing a return under many circumstances. However, if have any serious doubts on how to handle something, you might want to consult a tax professional.
Tax laws change change from year to year. For example, let's say you've experienced casualty loss damages from a hurricane, flood, or other natural disaster. For the 2011 tax year, changes were made in how to deal with these disasters, especially for losses occuring in regions declared as federal disaster areas.
Also, while nobody wants to receive questions from the IRS about a return, it does happen. There are only three kinds of professionals who can actually represent you before the IRS. With your signed power of attorney, a CPA, attorney, or enrolled agent can actually conduct all audit-related or other contact activities for you. You don't even need to be present at a hearing. Other kinds of tax preparers can accompany you to an IRS meeting, but they can't actually act as your legal representatives.
If you don't want to hire a tax preparer, the IRS provides a help line, and all of the three major vendors of consumer tax preparation software offer online or phone consultations on how to handle some tax questions. Keep in mind, though, that if you make a mistake on a return, any additional taxes, penalties and interest are likely to land in your lap unless the error is a computational one made by the software.
Be careful of 'free'
You should also be cautious about the use of the word “free." Although most tax software vendors are upfront about telling you what they will and won’t charge you for, sometimes you’ll come across some tricky wording and find that there’s a charge for something later in the process.
However, there is such thing as a tax return being generated and electronically filed at no cost. For example, “Free File” is a plan developed several years ago between the IRS and a number of participating tax preparation companies to allow certain taxpayers to prepare and e-file their federal tax return at no cost. Initially, the program only allowed very simple returns on Form 1040EZ with a moderately low income cap. This year, it’s been greatly expanded as far as how complex the return can be, and the IRS has raised the income cap to an adjusted gross income (AGI) of $57,000.
Yet each participating vendor is free to set its own conditions for user participation as long as these conditions are within the constraints that the IRS has set. Vendor participation in the “Free File” program is entirely voluntary; lots of tax software and preparation companies participate, but lots don’t. Intuit participates through an online offering called TurboTax Freedom Edition. To use the Freedom Edition, though, you need to have an AGI of $31,000 or less, unless you're a member of the active military (in which case you can have an AGI of up to $57,000) or unless you are eligible for an Earned Income Tax Credit. The IRS offers considerable information on the Free File program, including eligibility requirements of participating companies, on its Web site.
Other free filing approaches are also available. You can file your federal tax return online directly with the IRS, too. Additional options are available through some tax software vendors. TurboTax, for instance, also offers something called TurboTax Free Federal Online Edition. On its Web site, TurboTax describes this edition as "designed for people who don’t need much tax guidance, regardless of income level." You can purchase a similar state tax edition on the site for $27.95.
Another alternative, of course, is to pay for packaged software. These paid products tend to offer guidance on matters such as deductions and depreciation that could help to quite legimitately lower your tax bill or increase your refund. Use of this software is generally much simpler than old-fashioned pen-and-paper methods, but it is still work, especially if you itemize rather than take the standard deductions.
The first step in preparing a return is the same regardless of whether you’re preparing it by hand, online, with paid software, or by hiring a preparer. You need to gather up whatever documents and receipts you think might have a bearing on your return. Did you get paid for something in goods? The IRS considers the fair market value of that as income.
Did you win more than you lost at gambling? Did you work in a business where you received tips? All are viewed as income. Which expenses and other items are deductible can get even more confusing. You can’t show your dog Spot as a dependent, but if Spot is classified as a service animal by an organization that provided and trained it, you can take many Spot-related expenses as a deduction.
Although we tested a paid edition of TurboTax for this review, most tax preparation software works pretty similarly, offering you the choice of whether to let the application guide you step-by-step in preparing your return or to go at it on your own if you’re more familiar with the process and forms.
TurboTax review configuration
Intuit offers four paid editions of TurboTax. Unlike the Free Federal Online Edition, the paid editions come with step-by-step guides to help you through the process. More forms are included in the paid editions, too. The least expensive of the paid editions of TurboTax, the $29 Basic Edition, has the fewest features. It not provide a state return, yet it does include free federal e-file.
The $59 Deluxe edition, on the other hand, includes federal and one state return. If you need to file a second state return (which is not uncommon if you worked in multiple states, or one partner works out of state), you will have to pay both for the second state return software and for e-filing for each state if applicable. This is common practice, and other vendors have similar pricing structures.
The third and fourth editions are the $89 Premier and $99 Home & Business editions. The Premier edition is focused on taxpayers who have investments and rental property, The Home & Business Edition, which is the one we're reviewing, is oriented towards those who run a business either full- or part-time. Generally, this means someone who has self-employment income, not a taxpayer who is in a business that requires filing of a partnership or corporation tax return.
The step-by-step guides in the Home & Business Edition are geared to helping you to maximize various types of deductions (personal, home office, small business, and industry-specific) as well as depreciation.
We installed and ran the Home & Business Edition on a Lenovo IdeaPad U300s. This is a high-end i7 ultrabook with a 13.3-inch display, 4GB of RAM, and a 256GB SSD drive. (You won’t need anything this powerful to run TurboTax, but it’s just what we had handy.) After the initial testing, we installed and entered/ran the test return on an Atom-based netbook. While the Atom processor is slower, the TurboTax software itself ran and functioned identically.
Installation of the software was easy. The first thing the software does when installed is to ask if it can check for updates. Allowing the updates really is necessary, because new updates happen frequently during tax season. Installation and updating took under 15 minutes and required nothing but a few clicks of the mouse on our part.
At this point, you can download the state software (if you live in a state that has personal income taxes), or wait until the federal return is finished. The Home & Business Edition allows you to prepare an unlimited number of federal returns and an unlimited number of state returns. You can e-file the first five returns for free (federal only). Extra states beyond the first one cost an additional $39 per state. For each federal return you generate, you can file up to five different state returns.
Once we started the return, we were presented with a screen asking whether various circumstances had changed during 2011. Have you gotten married, lost a job, or had educational or medical expenses, for example? There’s a check box next to each category.
Flowthrough in the application is pretty much identical to all tax preparation products, whether consumer-oriented or targeted at professional preparers. You enter personal information (name, address, social security number, date of birth) for the taxpayer, a spouse or legal partner, and any dependents. TurboTax leads you through this process by asking you specific questions, which makes it pretty quick.
Wages are entered in a similar fashion, as are deductions, other income, and -- if you specify that you have a business that does not require its own return -- questions on revenue and expenses. Home office expenses are calculated automatically from the gross amounts that you enter for utilities and similar items. However, if you take the home office deduction, you need to know how many square feet you’re using for business as well as the total square footage of your home. The Windows flavor of Home & Business also lets you generate 1099s and W-2s if your business pays others, although this feature is unavailable in the Mac version.
As we finished each section, TurboTax showed us a summary. You also gets a rolling total of taxes due -- or refunds due to you -- at the top of the screen. When the return is completed, a summary of the return is presented, and the return is checked for completeness and missing entries.
When the federal return is complete, you can then download the required state forms. You can also do this from a menu when you start a new return. You'll then be guided through the process again. Relevant figures are automatically transferred from the federal return -- and if these figures need to be adjusted for state purposes, those adjustments are made automatically. Our simple test return had only a single state (New York), and the adjustments that needed to be made on the NY IT-201 were done without needing any input from us.
When you are finished with the return(s) and are satisfied that they are ready to file, you are given an option of which returns to file (federal, state or both), how each return should be filed (e-file or paper), and whether or not to print a copy for yourself. TurboTax uses the default printer unless it’s specifically set up to use a different printer.
Moreover, regardless of how you prepare your return, or even whether you have someone else do it, the front-end decisions are still the same.
There are lots of advantages, though, to using PC software. The software will speed the process for you, while also helping to make sure that the calculations are performed correctly and that the right figures wind up on the right places and forms. You'll get tax guidance that could work to your benefit. That’s a whole lot of return on a relatively small investment.
Using TurboTax Home & Business for assistance in these ways is a very good approach, although it's not perfect. The EZ-Guide works well. It's easy to actually follow, and it covers most of the bases thoroughly. I like the fact that it often suggests a second look at areas where you might have overlooked income or deductions.
In places, though, TurboTax has a chatty gee-whiz feel that can be somewhat annoying. Also, there's one feature that you’ll find in applications for professional preparers which I think would be very useful in the Home & Business Edition of TurboTax.
This is an organizer. Professionals send out the organizer to their clients so that clients can fill in as much as they can before meeting with the tax preparer. At the home level, the organizer could simply be an advance checklist around what might be needed in the future for each section of the preparation process.
TurboTax does provide a checklist of this kind at the beginning of each section, but having it at hand before the return gets started would help taxpayers to organize records and documents right upfront. That way, you wouldn't need to stop in the middle of the return to hunt for the records and information relevant to that particular section.
It would also be nice if the software could give you a quick heads-up on things to pay particular attention to on matters such as home office deductions, depreciation, and casualty losses in federally designated disaster areas. This is something that might be handled through quick tutorials.
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