09 February 2006

Consider Using Tax-Prep Software

This part four in a weekly series focusing on lowering tax bills and making the process of filing slightly easier. Today, I’ll focus on whether or not to use tax software.

To Use or Not to Use

I am a firm believer in non-tax types using tax software. The major products from Intuit and H&R Block are so easy to use that most people should be able to follow along without much problem. They are definitely a step above using paper and pencil to file returns if you are unsure what you are doing.

The Motley Fool has a pretty one-sided article on the pros of using tax-prep software.

  • You don't have to gather any forms; they're all in the program already.

  • You can revise and revise and revise, without making a mess with whiteout or an eraser. Enter your information to see what your tax liability is, and then you can make adjustments, playing out different scenarios to see which is most cost-effective. (You might see that it's smart to realize some capital gains this year, for example.)

  • The software can assist you with decisions. It asks you questions and either makes decisions for you (regarding which forms to use, for example) or offers you some information and asks you to make a choice.

  • You can pay less attention to details. Once the program has certain information, it will make sure that it's carried over to and entered in all the required places. You don't have to worry about that.

  • Carryovers from year to year get taken care of automatically -- if you used the same program to prepare your return last year.
The one disadvantage that they list is that the program may have an error or that you enter in the wrong data causing errors in the return, which you are eventually responsible for. I would add to that the cost of the software (unless you use IRS Free File) and people's unfamiliarity with tax terms (which I know that Turbo Tax Online uses since that is the software I have used the past two years).

Overall, I can't recommend enough that non-professionals use tax software. I participated in free file last year so I was able to prepare my return for free with Turbo Tax Online (I would have to pay to e-file, but I chose to paper file for free). The cost will likely be saved by the time and frustration that will be saved by non-professionals trying to grapple with form instructions. Add to that the fact that the software can find deductions non-professionals may miss and you could save the cost just in gained deductions.

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