Tax Software: The Scoop on Shrink-Wrap

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Tax season is upon us, and tax software users once again have several choices. Intuit's TurboTax remains the market leader, followed by H&R Block's TaxCut and 2nd Story Software's TaxAct.

But different tax situations call for different levels of sophistication. Don't pay the higher price for TurboTax if all you need is a simple form 1040EZ. In fact, don't pay anything at all! Download TaxAct Basic and file your return on paper--it won't cost you a dime.

The boxed software programs (as opposed to Web-based tax prep services--for a look at those, click here) are more differentiated this year. For example, whereas TaxAct has few changes from last year, TurboTax has improved its interview process considerably. TaxCut falls somewhere in between: The 2005 edition has a few improvements but hardly represents a major overhaul.

Each package is available in several versions. TaxAct Standard is the budget deal: As a download it's free; or you can get it in CD form for $6. But TaxAct Deluxe ($13 for a download) may be the best bargain, since the price includes free e-filing. In general, basic versions don't include the cost of e-filing, but deluxe versions do.

Intuit's TurboTax Basic costs $30; Deluxe, $40; and Premier, $70. The pricing for H&R Block's TaxCut starts at $15 for its standard version (download or CD); the deluxe version lists for $25, and the premium edition costs $40.

Various rebates promise to reduce the price of some packages. For example, TurboTax Deluxe is widely sold for $35 with an additional $10 mail-in rebate. On the other hand, software for preparing state income taxes costs extra in some cases.

Sorry, No Upgrades

As usual, changes in tax law require each taxpayer to buy new tax software--you can't use last year's program. But if your return is at all complicated, it's now far easier to import the previous year's information into this year's software than to reenter names, Social Security numbers, employer information, and so on from scratch. This is an obvious consideration when you switch from one publisher's program to another's, and many people choose to stick with the same package year after year even if cheaper (or better) alternatives are available.

As it did last year, H&R Block's TaxCut will import the previous year's returns prepared with TurboTax. But last year, TaxCut incorrectly imported the numerous depreciation assets on my return; this year, it got them right. If you're thinking about switching from TurboTax to TaxCut this might be a good year to give it a try. Similarly, TurboTax imports its own format as well as TaxCut's, but 2nd Story Software's TaxAct doesn't offer much help to people thinking of switching from another company's product: It imports only data prepared from last year's version of TaxAct.

All three programs can import data from other financial software packages and/or financial institutions with which they've partnered. TaxAct is the most limited: It can access stock market transaction data only from Gainskeeper (so can every other major shrink-wrapped or Web-based tax package).

TurboTax, in contrast, imports data from Intuit's Quicken personal finance management software and from the company's ItsDeductible program, which helps you assign values to charitable donations of goods and services. TurboTax also supports W-2 data imports from a substantial number of payroll services, and Schedule D and 1099 data imports from a small number of investment institutions.

TaxCut works with DeductionPro, which resembles ItsDeductible but is broader in scope (more about these helper programs later). TaxCut also supports W-2, Schedule D, and 1099 data imports, but from fewer sources than TurboTax.

The underlying structure of tax software changes little from year to year; so for an in-depth evaluation, see my review of 2003 tax year software. This year I'll focus on important changes.

Choosing Your Poison

I tested the deluxe versions of all three major shrink-wrapped packages on three different PCs, each running Windows XP with SP2 and all current security patches installed. One system was a 1.99-GHz Dell notebook with 256MB of memory. The second was a 1.46-GHz AMD Athlon homebrew desktop with 256MB memory. The third was a 2.4-GHz Sony VAIO desktop with 512MB memory. Each installed all three packages without difficulty. (See "Tax Software: Let the Bugs Begin" for information about installation difficulties reported by other tax software users.)

Unfortunately, each of these packages bombards you with marketing pitches for various financial services and software. TaxAct is especially aggressive: H&R Block integrates the marketing with the interview, so the first window that opens asks whether you've ordered your state return, and the next window invites you to upgrade to TaxAct Deluxe.

TaxCut and TurboTax occasionally use the interview to pitch services offered either by their parent companies or by their partners, but they aren't as brazen as TaxAct. TurboTax and TaxCut also put most of their pitches near the end of the interview rather than the beginning. The pitches are there, but the software lets you get your return done first.

Bottom line: If your return is very complicated, TurboTax is for you. Its interview is the most detailed--in fact, it's overkill for taxpayers with simple returns.

Wondering whether your return qualifies as complicated? Consider whether it involves these factors:

  • Mileage deductions, particularly in multiple categories, such as medical, charitable, and business
  • Depreciation expenses
  • Noncash charitable contributions exceeding $500, or a large cash contribution to a single group
  • Anything that might trigger the Alternative Minimum Tax (AMT)
  • Asset sales, or complications resulting from the ever-changing treatment of stock sales and dividends (for instance, if you received Microsoft's special one-time dividend of $3 per share in November 2004, your return is complex almost by definition)

Streamlined Interview

Figure 1: TurboTax 2003 forced you to look at each screen.
Figure 1: TurboTax 2003 forced you to look at each screen.
This year's TurboTax interview is even easier to navigate than the 2003 version was. The main new feature eliminates screens and questions that aren't relevant to your taxes. For example, in 2003 you had to go through a screen for each of the Schedule A items shown in Figure 1.

The 2004 edition lets you check boxes for the areas of the interview you want to see, skipping screens that aren't relevant (see Figure 2).

Figure 2: TurboTax 2004 uses checkboxes to skip irrelevant screens.
Figure 2: TurboTax 2004 uses checkboxes to skip irrelevant screens.

Users who remember the onerous updating process of the past will be relieved to learn that TurboTax has implemented background updating this year. Updates are downloaded while you work on your taxes. In other respects, the TurboTax interview, results, and suggestions remain at the top of the heap for people with complex tax situations.

TaxCut: For the Personal Touch

Figure 3: TaxCut includes many irrelevant questions.
Figure 3: TaxCut includes many irrelevant questions.
As I mentioned earlier, this year's edition of TaxCut successfully imported my 2003 TurboTax data--but then bombarded me with screen after screen of irrelevant questions (see Figure 3).

And the life changes summary screen lacks at least one major category that appears in similar lists in TurboTax and TaxAct: the death of a spouse (see Figure 4). In fairness, the death of a spouse does appear later in the interview, but why isn't it included in the main list?

Figure 4: TaxCut omits an important life change--the death of a spouse.
Figure 4: TaxCut omits an important life change--the death of a spouse.

TaxCut crunched all the numbers correctly. But it's harder to use than TurboTax and gives a bit less tax guidance. For example, TurboTax lets you enter an entire W-2 on a single screen, but TaxCut takes ten screens. On the plus side, you get the support of H&R Block. Thus, the Premium package includes an option to discuss tax issues with one of Block's tax preparers. Users who like their tax advice delivered in a human voice will like this feature.

TaxAct: A Decent Package at a Great Price

TaxAct hasn't changed much from last year. The software still uses too many screens to acquire basic information. But unlike TaxCut, TaxAct asked about many more life changes (see Figure 5), giving relevant advice from tax expert J.K. Lasser.

Figure 5: TaxAct asks about many life changes.
Figure 5: TaxAct asks about many life changes.

Even after importing information from my 2003 TaxAct file, the program asked me irrelevant questions. For example, it devoted an entire screen to inquiring about whether I was a minister or a member of the clergy. Though I might well have changed jobs, does it make sense to devote an entire screen to asking about the possibility.

On the other hand, TaxAct does bring one nice feature to the table: the SiteMap button on the toolbar (see Figure 6). Clicking it brings up a list of interview pages, so you can easily move around the interview--a welcome navigation aid!

Figure 6: The TaxAct site map is a useful navigation tool.
Figure 6: The TaxAct site map is a useful navigation tool.

TaxAct also performed the calculations and came up with the correct results. But advice was skimpier and creative solutions to tax problems were less abundant than in either of the other two programs. This isn't a major shortcoming if your return is simple, however, and the budget state-federal e-file bundle is a big plus.

Valuing Gifts

As mentioned above, TurboTax and TaxCut each offer add-on programs to help you assign a value to items you donated to charity. What was the value of that old coat you gave to the Salvation Army? Both ItsDeductible (TurboTax) and DeductionPro (TaxCut) have an extensive database of prices for various items. (Unfortunately car donations aren't included; you'll have to use the Kelley Blue Book for that.)

Figure 7: The ItsDeductible user interface is well designed and easy to master.
Figure 7: The ItsDeductible user interface is well designed and easy to master.
Each package transfers data quickly and easily to its parent tax program. I found the user interface for ItsDeductible considerably easier to use than the one for DeductionPro because it lets you enter multiple items without having to perform excessive mouse clicking (see Figure 7).

But DeductionPro handles medical and other Schedule A deductions, too, while ItsDeductible helps out only with cash and non-cash charitable contributions and charitable mileage (see Figure 8).

Figure 8: DeductionPro includes medical and other deductions.
Figure 8: DeductionPro includes medical and other deductions.

Unfortunately, when I tried to transfer data from ItsDeductible to TurboTax, TurboTax crashed. It turned out that the culprit was an older version of ItsDeductible: I was using version 7, which was still being sold in December 2004. If you have version 7, be sure to download version 8 before you try to transfer your data to TurboTax. To do this, go to the ItsDeductible menu and select Tools,Check for Updates on the Web.

Entering an item in DeductionPro is time-consuming: You have to use three pull-down menus for each type of item (see Figure 9).

Figure 9: DeductionPro's main entry window with three pull-down menus.
Figure 9: DeductionPro's main entry window with three pull-down menus.

Both gift valuation packages are priced at $20 and are available for downloading. Some stores sell ItsDeductible for $16. I found DeductionPro on sale in one store for $20, with a rebate for the full purchase price.

While only people who donate dozens of items are likely to realize the $300 in additional deductions that each of these programs promise, both offer incredible detail in item descriptions and pricing--and unless you're meticulous about handling deductions on your own, both should pay for themselves several times over. I found that I had seriously underestimated the value of my donated items.

Gainskeeper is less of a sure bet to save you money (if you get the service merely to use it with tax software). Gainskeeper charges about $50 per year to sit between you and your stockbroker, recording transactions. But as noted earlier, TurboTax and TaxCut will download Schedule D (capital gains and losses) and 1099 information directly from some brokers. If available, this arrangement is probably more efficient than using Gainskeeper to get the same data.

The Cheapest Alternative

If your return is simple, consider a Web-based program instead of buying the boxed software. Online programs are cheaper, mostly because the interviews don't go into as much detail as the shrink-wrapped versions do. The Web-based version of Tax Act will let you complete a simple return (forms 1040, 1040A, and 1040EZ; schedules A, B, C, and D; and many others) and file the printed copy for free. So will newcomer TaxNet. For more on these options, read my review of Web-based tax software.

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