by Joe Lan, CFA
As another new year starts, investors look forward to an exciting time—tax season! If you are one of the many who dread the arrival of April 15, fear not; this article can help you find a service to sort through all of the tax implications of your 2011 finances.
Capable tax programs have been around for a number of years. All of these programs are now available on the Web. Although you can still find software versions, completing your tax forms directly on a website is the fastest and easiest way to file your return.
This year, we chose to review only three services—H&R Block, TaxACT and TurboTax. Jackson Hewitt, which was reviewed in last year’s comparison and which filed for bankruptcy protection last year, was dropped this year because it does not seem to have anything unique to offer (in addition, a quick Google search on the company brought up a list of customer complaints).
For this comparison, we used the online versions of all three services. There is no difference between each service’s software and its online counterpart. However, if you are hesitant about having so much personal information on the Web, then by all means, use the software-based version. The online versions are offered at a lower price, but they only allow you to file a single return (H&R Block and TurboTax software allow five federal e-files).
These services are all similar in that they offer step-by-step guidance; however, some offer more hand-holding than others. Each does an outstanding job of finding appropriate deductions and credits and maximizing your tax refund (or minimizing your tax bill). In addition, each of the three services keeps a running tally of your tax refund or liability on the top right of the browser window.
All three online services allow you to create a basic federal tax return (1040-EZ) and file it for free. Furthermore, each service allows you to complete both the deluxe and premium tax returns and pay only when you are ready to file. To minimize costs, you can start with the basic version and upgrade if you feel a more advanced version is needed. Although the services create and file your basic federal tax return for free, they each charge a fee to file your state return. The bright side is that the services will transfer your information from your federal return to your state return, making the process less tedious. Also, keep in mind that many states offer taxpayers the ability to file their taxes online for free.
The grid provides a side-by-side comparison of the three services, including their costs (online and software), features and minimum system requirements.
H&R Block at Home Deluxe
H&R Block offers several levels of service. For testing purposes, we used H&R Block at Home Deluxe and started completely from scratch, opting not to import data from the previous year’s tax return. However, if you choose to import data, H&R Block allows importing from three separate sources: H&R Block, TurboTax and TaxACT (all three of which we review in this article).
H&R Block starts with a “Your Year in Review” page, which allows users to check any major events that occurred during the year, including a change in marital status, family, education expenses, medical bills, real estate holdings and job. The next few pages are straightforward and involve filling in your personal information. Make sure you enter the appropriate amount of dependents that may be claimed. On the final page of the personal information section, the website allows you to review your entries before finalizing them.
H&R Block categorizes income into several groupings: common; business, rental, partnership, farm and royalties; investments; retirement and Social Security; sales and transfers; and other income. Expand each section and select the types of income that you have received during the course of the tax year. In our test, the incomes selected were employment; dividend and capital gains; sale of stocks and bonds; and Social Security. The separate income categories allow experienced users to save time by simply checking the income items that are pertinent. The service will automatically skip the other income sections.
After you have selected your income sources, H&R Block will ask you to input the information from your Form W-2, Wage and Tax Statement. Each section of the W-2 is laid out for you and the boxes are all separated. Once you receive your W-2 form from your employer, there should be no problems filling out this section. In addition, H&R Block can automatically input the required data from certain companies based on the company’s employer identification number. Users have to input the figures manually if their company is not supported by H&R Block for data import.
Filling in the sections on dividend payments and sale of stocks and other assets requires 1099-DIV and 1099-B forms, respectively. Once again, H&R Block can automatically fill in the appropriate data by connecting to your brokerage account. The website can handle all of the most popular discount brokerages, such as Scottrade, E*Trade and Charles Schwab. Users can also opt to input the figures manually.
When your income section is complete, H&R Block will show a brief summary of your income figures. In addition to wages, dividends, capital gains and Social Security, the service also provides separate income lines for unemployment, interest, IRA distributions, retirement and alimony, among others. Two links are provided next to each income type: one explaining the figure that should be provided and one bringing you directly to that particular income section for quick editing.
If you are satisfied with your income section, move on to adjustments and deductions. Common records for adjustments and deductions include homeowner expenses, taxes (real estate, vehicle and personal property tax bills), medical expenses and job-related expenses. Just as with income, users can check off specific adjustments and deductions that are relevant. The service offers two sections. The first deals with common adjustments and deductions such as student loan interest, traditional or Roth IRA information, home mortgage interest, real estate taxes and charitable donations. The second section addresses other adjustments and deductions, such as job-related moving expenses and alimony.
In the case of student loan interest, H&R Block offers assistance in calculating the deductible amount even if you do not have a 1098-E form. H&R Block also offers DeductionPro, a separate feature for $19.95 that helps users determine their charitable deduction for the year. DeductionPro opens as a new window in your Web browser. After filling in certain personal information, including income range, DeductionPro assists you in finding the value of your donations. There are numerous categories of deductions offered along with fair values for a large number of frequently donated items, such as clothes and electronics. If you choose not to use Deduction Pro, you may manually enter the charitable organization, type of charity and amount.
H&R Block goes through each item that you checked off in deductions and adjustments, skipping the deductions that were not marked. At the end, a table displays a list of deductions and the amount of each deduction. Go through this table carefully because all of the deduction categories are listed here again. Users who forgot to select certain deductions can use this list as a reminder.
A separate section is included for tax credits such as child care, tuition and adoption expenses. H&R Block also provides assistance on expense credits for foreign tax paid and for homebuyers and the elderly and disabled. Once again, users are able to check each pertinent tax credit. In addition, a “What qualifies” link is provided next to each tax credit.
As a final check, H&R Block examines your various payments throughout the year to assess whether any of them qualify for a tax break. Documents that you need for this section include statements of IRA and HSA investments, Form 1040-ES showing any federal estimated tax payments made, Forms 1099-INT and 1099-DIV for a child under 24, records detailing household employees’ wages paid, and COBRA health insurance coverage. Be sure to check off all payments that may apply to you, even those you are not sure about. Doing so makes it less likely that you will miss a tax break.
H&R Block runs an accuracy test at the end to catch any mistakes and oversights. Problems are brought to your attention, and you can choose to either fix or ignore the issues. After the federal tax return is completed, the service also fills out your state tax return with minimal additional inputs. Inputs from your federal tax return are used to obtain your state tax bill; any specific tax deductions that are pertinent to the state tax return are brought to your attention.
Once you are satisfied with your tax return, H&R Block can electronically file your tax return at no additional cost. However, filing your state tax bill is an additional $34.95. The website allows you to designate a bank account for the IRS to automatically deposit a tax refund or withdraw a tax liability. If you are eligible for a refund, H&R Block can automatically deduct its fees directly from that amount.
While filing your tax return, H&R Block offers answers to common questions on the right-hand side of the page. For additional help, H&R Block offers a Q&A section on its website, where user questions are answered by tax professionals at the firm. This area also contains tax tips and a blog.
TaxACT is the least expensive of the three services reviewed. The Deluxe version, which allows importing of prior-year data and offers free email and audit support, costs only $9.95. You can start your tax return free of charge and pay at the end when filing.
Begin your tax return by entering your personal information, including any disabilities you have and the number of dependants you can claim. Just as with H&R Block, TaxACT asks you to fill out life events that occurred in the tax year that may impact your tax bill. Life events are separated into the categories of family; employment and retirement; home, auto and personal property; money and investments; state filings; and other topics. TaxACT provides a brief description and guidance when you choose any of the sections. Make sure to check off all life events that are applicable.
A federal question and answer section is required when starting your federal tax return. The questions are very straightforward and help the website ascertain which sections of the federal tax return are needed in your personal case. During the question and answer process, TaxACT will ask you to complete sections that require further data. For instance, one of the first questions asked is whether you received any wages or salary from an employer. If you answer yes, TaxACT will require you to fill out the W-2 section. You can choose Quick Entry or Step-by-Step Guidance. Choosing Quick Entry brings up a W-2 that you can quickly fill out by jumping to the various fields. Step-by-Step Guidance leads you through each of the fields.
The W-2 that pops up when you select Quick Entry contains two links at the top left: Form Instructions and TaxTutor. Clicking on Form Instructions brings up a new window with instructions for filling out the form W-2. Clicking on TaxTutor Guidance presents the table of contents for TaxACT’s comprehensive help section designed to assist you in preparing taxes. The design is the same for all Quick Entry pop-up windows. Simply click on either of the links if you need help.
The federal tax filing goes through each section in the same manner—asking whether you have made income through various methods and, if you have, requesting additional information. Unfortunately, I was not able to import dividend and capital gains information directly through a brokerage account using TaxACT; that particular function does not seem to be available. For dividends, interest and capital gains, TaxACT once again allows you to enter the information into an online 1099-DIV (or 1099-INT) quickly or with step-by-step guidance.
For help reporting capital gains TaxACT offers Stock Assistant. Enter a description, the dates at which you bought and sold the stock, and the purchase and sale proceeds into the Stock Assistant and the service will calculate your tax liability. Although TaxACT does not offer the ability to download the figures straight from your brokerage account, you are able to import from GainsKeeper or a CSV file.
TaxACT progresses through the income section with questions regarding income from sale of home, business income, rental and royalty income and retirement plan income, just to name a few. At the end of the income section, TaxACT provides a summary of each income category and the amount that you entered. You can jump to and edit any section by clicking on the review link at the right-hand side of the table.
Deductions is the next section, and it is set up in the same manner as the income section. TaxACT uses a series of questions to determine which sections need further inputs. The service asks whether you would like to fill out itemized deductions, and it is recommended that you answer yes. TaxACT will only use the itemized deductions if doing so lowers your tax bill, so there is no harm in filling out the page, unless you are certain that the standard deduction is greater than the sum of your itemized deductions.
Review your entries at the very end and make sure that your expenses have all been entered into the Deduction Examiner table. The itemized deductions section in the table is broken down into medical/dental expenses, taxes paid, interest paid, gifts to charity, casualty and theft loss, miscellaneous and other miscellaneous.
The tax credits section proceeds in very much the same manner. A series of questions determines which sections are pertinent to your personal situation. If you are unsure, answer yes, and the service will go into more detail. At the end, make sure to thoroughly go through the Credit Examiner table to make certain that nothing was missed.
TaxACT also includes a miscellaneous section after you have completed your income, deductions and tax credits sections. This area allows you to set up estimated tax payments for the next year and enter additional information to avoid an underpayment penalty in the future.
While filling out any of the sections, there are several links provided on the right-hand side of the page to provide assistance along the way. The Tools tab includes the Donation and Stock Assistants tools and the Loan, Savings and Tax Calculators.
After completing all the sections, TaxACT will provide a comprehensive summary (TaxACT Final). You may also view the completed form 1040 (TaxACT 1040). Just as with H&R Block, TaxACT can complete the state tax return using the answers that you provided in the federal tax return. TaxACT asks several questions that are only relevant to the state return, and at the end a summary table is presented.
Finally, TaxACT reviews all your entries and searches for possible errors or omissions. When you are satisfied with the information contained in your federal tax return, TaxACT can file the return for you electronically. If you are receiving a tax refund, you may elect either to have it wired electronically to an account of your choosing or to have a check mailed to you. If you owe taxes, you may elect to have the IRS withdraw the funds directly from your account, mail in a check, or have it charged to a credit card. TaxACT will also file your state return electronically for an extra fee of $8.00.
TurboTax offers a free edition that allows you to file a simple tax return free of charge. The website suggests that those who own stocks, mutual funds or rental properties use TurboTax Premier. However, we found that TurboTax Deluxe was able to handle stock and mutual fund transactions. TurboTax Deluxe costs $29.95; if you are using the service to file a state return, it will cost an additional $36.95.
One of the main advantages of TurboTax is the live community shown on the right-hand side of the window. This feature allows users to ask questions about common problems. The questions shown on the page correspond to the section you are working on. A ratings system ensures that the best answer to each question is shown.
To get started, you need to fill out your personal information, including occupation, state of residence, birth date and any disabilities you may have. Much like TaxACT, TurboTax guides users through this section with a series of questions designed to ascertain which future sections are relevant. Once again, it is recommended that you answer yes to questions that you are unsure about, allowing the website to walk you through the process and ensuring that you receive the proper deductions.
After entering your personal data, TurboTax offers two options for the Wages & Income section: EasyGuide or Explore on My Own. EasyGuide provides assistance by asking simple questions to determine whether a section is relevant to your tax situation, while Explore on My Own offers you total control over the sections you fill out. It is recommended that you choose EasyGuide if you are new to filing taxes online. Explore on My Own allows experienced users to quickly finish the filing process. For our testing purposes, EasyGuide was used.
The first section that most users need to fill out is the W-2 section. If the employer identification number that you entered is compatible with TurboTax’s import feature, the website will allow you to import your W-2 figures directly. Otherwise, EasyGuide will walk you through each section and show you where to find the information (Figure 3, TurboTax EasyGuide). An “explain this” link is provided for certain sections of the W-2 that provides further explanations of the information found in that section. TurboTax also checks for errors after each section. If figures are omitted on the W-2, the website prompts you to double-check your entries. In addition, if TurboTax calculates that too much for Social Security or Medicare was witheld, it will prompt you to get a corrected W-2 from your employer.
The next few questions ask about other income received, such as unemployment benefits, interest and dividends, and capital gains. For investment income, TurboTax offers the ability to import directly from a wide range of brokerages. In fact, the major brokerages are all compatible, including discount brokerages such as Scottrade, Fidelity and Charles Schwab, as well as full-service brokerages such as Morgan Stanley, UBS and Merrill Lynch. In addition, users may import directly from Mint.com, an online personal finance website owned by the makers of TurboTax. Of course, you can always type in the figures manually. After completing each income section, TurboTax presents a checklist of items you may have missed.
TurboTax categorizes income into nine separate sections, and EasyGuide walks you through each one. It is very difficult to miss any income items using EasyGuide, although more experienced users will inevitably find the process tedious. Furthermore, the website asks about any foreign income, trusts or assets that you have.
Deductions and tax credits are grouped into a single section. Again, TurboTax allows users to choose between EasyGuide and Explore on My Own. After completing the 10 deduction and tax credit sections, TurboTax will bring errors to your attention so that you can verify any discrepancies. Your final deductions will then be listed.
During the review process, your entire tax situation is presented. Be sure to check this section carefully before proceeding. In order to go back to any of the sections, simply click on the Revisit button on the right-hand side. TurboTax will also run a final error-check of your tax return before filing. If errors are found, the nature and location of the error are shown.
The data on the completed federal tax return (Figure 4) is then transferred to your state return. TurboTax will ask a series of questions designed to minimize your state tax bill or maximize your state tax refund. The website also determines any underpayment penalty that you may have incurred.
The final Wrap-Up section summarizes both your federal and state tax returns and allows for one final chance to correct errors. TurboTax also shows your audit risk and offers to represent you in case of an audit (for an additional fee).
Just as with TaxACT, you have two choices when receiving a tax refund: to have it wired directly to your bank account or to receive a check in the mail. Also like TaxAct, if you owe taxes, there are three options for making a payment: to have it withdrawn from your bank account, to send a check to the IRS, or to have it charged to your credit card.
Each of these tax services is capable and deserves to be highlighted in our annual review. As you can see from the screen shots, they all calculated the same federal tax ($2,887) in our tests. TurboTax shows a slight discrepancy for the state tax return ($2,665 instead of $2,905) because I chose not to have the service calculate any underpayment fees. As a confirmation, the state tax calculated by TurboTax coincides with the actual tax due line item for H&R Block.
Each year, these websites become more expansive, and it is harder to choose a clear winner for Editor’s Choice. However, the nod this year goes to TurboTax once again. The EasyGuide provided by TurboTax is still the most comprehensive aid to filling out an individual tax return. The website provides nine categories for income and wages and 10 categories for deductions and credits, and EasyGuide goes through every one, listing the common items in each. If you are experienced at filing taxes online and need no assistance, the websites offer no significant advantages over each other. In this case, the recommendation would be to use the least expensive option—TaxACT.
||H&R Block at Home Deluxe||TaxACT Deluxe||TurboTax Deluxe*|
||$29.95, e-file one federal; $64.90 incl. state||$9.95, e-file one federal; $17.95 incl. state||$29.95, e-file one federal; $66.90 incl. state|
|Software Cost (download or CD-ROM)||
||$44.95, e-file five federal; $64.90 including state e-file||$12.95, e-file one federal; $19.95 including state||$59.95 state + e-file five federal|
|Cost of State E-File With Software (after cost of state forms)||
|Program Functionality||Free trial||yes||yes||yes|
|Import last year’s data||yes||yes||yes|
|Import data from financial institutions||yes||yes||yes|
|Import W-2 Forms||yes||yes|
|Transfer data from federal return to state return||yes||yes||yes|
|Deductions & Credits||Automatically checks for applicable deductions||yes||yes|
|Deduction wizard (cost)||Deduction Pro ($19.95)||Donation Assistant (free)||It’s Deductable (free)|
|Printing and Filing||E-file option||yes (free federal)||yes (free federal)||yes (free federal)|
|Check status of e-file||yes||yes||yes|
|Email confirmations of IRS receipt||yes||yes||yes|
|Technical/User Support Features||Ask a tax professional (cost)||yes ($19.95)||yes (free)||yes ($29.95)|
|Phone/online chat with company reps (cost)||yes (free)||yes (free)||yes ($29.95)|
|Ask, answer and read other user questions||yes||yes|
|Calculates audit risk||yes|
|Min System Requirements for Software||Windows||XP, Vista, 7||2000, XP, Vista, 7||XP, Vista, 7|
|Mac||Mac OS X 10.4.11||Mac OS X 10.0||Mac OS X 10.4|
|Min System Requirements for Online||Internet Explorer Version||XP (IE 6+); Vista (IE 7+); Wind 7 (IE 8)||IE 6||XP (IE 6); Vista (IE 7); Wind 7 (IE 8)|
|Mozilla FireFox Version||3||2||3|