Review of Major Tax Software Products Reveals Limits

As regular readers are aware, I have been running a series of tax software reviews from readers. I was given free access by the software companies to their sites, gave away that free access to readers, and the readers agreed to use and honestly review the programs. In case you missed them, here they all are in one place:

• CompleteTax Review #1
• CompleteTax Review #2
• CompleteTax Review #3
• CompleteTax Review #4
• H&R Block's At Home Premium Federal Tax Product Review #1
• H&R Block's At Home Premium Federal Tax Product Review #2
• TurboTax Review

The reviews were from seven different readers all with different life situations and tax issues. And yet they all (in general) came to the same conclusion: the programs are great for basic, uncomplicated returns, but not-so-great if you have any sort of issue that's considered "unique."

This was interesting to me because it's the same conclusion USA Today came to when it tried out H&R Block At Home, TurboTax, and TaxAct. Here are their findings:

For taxpayers with straightforward returns, tax software gets the job done, at a fraction of the cost of a tax preparer. Most tax software programs are also adept at handling returns that claim common tax breaks, such as the deduction for mortgage interest and charitable contributions.

But this year's tax software review also revealed the limitations of these programs. Taxes have grown so complex that even those of us who don't invest in individual stocks, own rental property or run a small business could find ourselves in need of advice from a flesh-and-blood tax preparer.

The article then highlights two issues they discovered while testing the software -- converting IRAs to Roths and reporting miscellaneous income. Their conclusion on these:

If you converted a large IRA to a Roth last year, it may be worthwhile to consult with an experienced tax preparer.

You shouldn't have to upgrade to a premium software program to report a couple of hundred bucks you earned mowing lawns last year. But you may need to root around a bit to find the right place to enter this information.

Finally, here are their overall conclusions about each of the products:

As has been the case in past years, TurboTax provided the clearest instructions of all the programs we tested. However, if you're a longtime desktop user, you may want to consider making the leap to the online version. It's cheaper and updates automatically. In our test drive of the desktop version, we had to endure several updates, one of which lasted more than 10 minutes.

H&R Block At Home did a workmanlike job on our tax return — and costs about 25% less than TurboTax. Block has enhanced its data-import function, which lets you electronically transfer information from your W-2, mortgage statements and other documents, but it still lags behind TurboTax in this regard.

TaxAct continues to be the preferred choice for cost-conscious taxpayers. Its standard program is free. However, if you want any guidance, you'll need to upgrade. For that reason, it's best-suited for people with a good grasp of tax laws or those with simple returns.

My taxes are pretty complicated (and have been for several years) and that's why I use a CPA. I think that at some point things might become "common" enough that I'll be willing to tackle the time and expense of doing it myself, but for now I am quite content to have them do it.

And one more piece of food for thought. Here's a great comment from my post asking if you need a professional to do your taxes:

My taxes (state+federal) are fairly straightforward and I used to do them myself. But about 10 years ago I started using a paid tax preparer because it was included in my job's compensation package. I was surprised that the guy found more deductions that I did. I always see the same guy and he gives me advice every year about upcoming rule changes and if he sees me approaching a tax bracket or something like that--very useful for planning ahead. Definitely worth it.

Interesting point-of-view, huh? And one of the reasons I use a CPA -- I want to be sure I get all the deductions I can.

Comments

[Pop]

"I was surprised that the guy found more deductions that I did."

When the audit comes, I'm sure he'll be there 100% to defend each and every one too.

[FMF]

Pop --

Even if someone else does your taxes, YOU need to understand and be comfortable with the entire return because YOU are responsible for it.

I always review my return in detail before my CPA submits it since even though they would represent me in an audit, I want to be sure I am in agreement with what is being submitted.

[Pop]

FMF,
You are absolutely right. Unfortunately most people are either too stupid or too greedy to look at it that way.