It's Tax Time

It’s that time of year, the time when Americans spend hours preparing their tax returns or pay someone to do it for them. Before we owned a house, I prepared my own tax returns. A simple return wasn’t rocket science. Then we bought a house. Trying to clarify a point in my tax return, I called up the IRS twice and received two different answers to the same question. At that point I threw up my hands and carried the entire mess over to the local CPA. He found deductions for me that I know I could have never have located by myself. The CPA had a book case with about a four foot long shelf filled with three ring binders detailing the tax code and recent court decisions. He told me he subscribed to a service that provided him with weekly updates to the tax laws. He showed me one week of such updates. It was about ½ an inch thick. Since then, my taxes have been done by a CPA. Currently my taxes include buying and selling stocks, foreign income taxes, and something called a form K for a limited partnership. Preparation by a licensed professional costs me $225 plus something like $58 for insurance in case my return is audited by the IRS. I consider this money well spent.

I am suspicious of storefront tax preparation stores, like those run by H&R Block. How good are those part time tax preparers? Over the years I have read articles by consumer research organizations and local investigative reports. Generally speaking, using such services is a crapshoot. Some of the preparers are experienced and competent. Some are less than competent. Repeated experiments have proven that 10 different tax preparation services will produce 10 different results at 10 different prices.

Something has happened in the passage of time. My current CPA does not have a book shelf filled with court decisions and the text of the tax code. She has a computer and access to a massive tax preparation program for professional accountants. After she does her thing the computer spits a copy of my 58 page tax pack to my email address and a copy to the IRS and the Comptroller of Maryland. I was surprised to learn most of my coworkers use Turbo Tax, a low cost cousin to the more sophisticated codes used by corporations and accountants.

I found an article in USA Today, “Test Drive Highlights Tax Software Limits”, by Sandra Block that evaluates various tax preparation packages. The author contends that any of the major products are OK for normal tax returns. However, for filers such as retired folks with substantial portfolios, the author recommends a professional. She observes that determining the cost basis of a stock purchased in the 1980s is not something the uninitiated should attempt to perform without supervision. The biggest headache thrown at the software products turned out to be the conversion of a traditional IRA to a Roth IRA. None of the packages could properly determine the optimum tax strategy. For some filers it is more appropriate to defer part of the tax bill for others it would be better to pay it all now. Turbo Tax handled this problem better than the other products but it still required the user to do the calculation by hand on a separate piece of paper. H&R Block just deferred the income without explanation. Complete Tax offered the user an option but the testers found the explanation vague and confusing. If this question was posed to the help section, the user was offered the option of buying an upgrade to receive an answer. Tax Act wanted to tax all the conversion in 2010, producing a tax bill so large the author experienced heart palpations. After talking to the company that produced this product, the author learned the user had made a mistake, but she still contends that any normal user would have problems with this package. While all of the packages handle casual income from a part time job without any problems, small businessmen are encouraged to seek professional guidance when preparing their tax forms. An upgrade to Turbo Tax Home and Business Version @ $75.00 handled part time or consulting income better than any of the tested standard versions.

Bottom line? Turbo Tax is the winner, although users found the automatic updates irritating. H&R Block is a good product that costs 25% less than Turbo Tax. Tax Act is the cheapest product and quite suitable for simple returns or for people who have a good understanding of the tax laws. If you want any guidance you will have to buy an upgrade.

One more note, my broker Schwab is offering its clients up to 35% savings on Turbo Tax products. When you buy Turbo Tax from Schwab the company will prepopulate your return with the numbers from your form 1099 and cost basis information on your stock sales. How cool is that?

Here are the products reviewed in the article.

TurboTax Deluxe, turbotax.com. Desktop: $59.95, includes federal and state tax return. Online version: one federal return, $29.95; one state return, $36.95.

H&R Block at Home Deluxe, hrblock.com. Desktop, $44.95, includes federal and state tax return. Online: $29.95 federal; state tax return, $34.95.

CompleteTax Deluxe (online only): $29.95 federal; $29.95 state.

TaxAct Deluxe: Desktop, $12.95 federal; federal plus state tax return, $21.95. Online: $9.95 federal; $8 state.