Tax Preparation Services
by Joe Lan, CFA
As I write this, I’m finding it hard to believe that tax season is approaching once again. And I’m sure, as for me, that’s a thought that brings on a bit of dread for many. Tax season can be a confusing time, especially for those with numerous types of income. Luckily, current tax preparation programs are powerful and simple to use. With the best tax programs, you are able to do your taxes from the comfort of your home for a reasonable price.
Capable tax programs have been around for a number of years. All the top programs are now available online without having to buy “disc” software. 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.
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This comparison of tax preparation services gives you unbiased reviews of the websites that we feel are the best in this area. The three best programs this year are the same as those chosen last year: Turbo Tax, H&R Block and TaxACT. We feel these services provide the best combination of ease-of-use, price and accuracy.
For this year’s comparison, the online versions of each tax preparation service were reviewed. It is important to keep in mind that using the online version necessitates that the user provide a wealth of personal information that is saved on the company’s online servers. This allows users to start on their taxes, save their work and return at a later time or date to finish. If you are uncomfortable with having so much personal information online, each of the three tax preparation services reviewed here offers a CD version at a more expensive price.
TurboTax, H&R Block and TaxACT allow users to file simple (1040EZ) tax returns free of charge. Most users require “deluxe” versions of the tax services, which can handle the reporting of additional dependents, investment income and home ownership. The services charge a fee for their deluxe versions, which range from $9.95 to $29.99 per federal filing. If you don’t know which version fits your needs, all the services allow you to begin filing a simple return and switch to a more sophisticated version if needed. You are not asked to pay for the filing until you are ready to file.
Each of these three services will also file state tax returns for an additional fee. If you choose to go this route, the information provided for your federal tax return will automatically be used to populate your state tax return. Personally, I believe the convenience of filing out one tax return for both federal and state filings is worth the additional cost.
The comparison grid accompanying this article provides a clear breakdown of the features provided by the tax preparation services and the cost to use them.
To get started with TurboTax Deluxe, users first need to create a username and password. As stated, all the information you provide will be saved so there is no need to finish your tax return in one sitting. In addition, if you filed using TurboTax in the past, some of the personal information will be filled out automatically. If not, the first section begins by asking for personal information such as name, marital status and occupation. At the end of each completed section, the website provides a summary of the information entered. Double-check each section carefully before proceeding to the next section.
TurboTax breaks down the federal tax return into five sections: wages and income, deductions and credits, other tax situations, federal review and error check. After completing the personal information section, TurboTax will ask for wages and income, which typically begins with a W-2. Completing the W-2 section is straightforward: Users simply fill each box with the corresponding information shown in the W-2 form provided by their employer. After completing the W-2 section, TurboTax asks a few questions regarding special income situations, such as whether you have worked outside the U.S. or whether you worked for a foreign government within the U.S. TurboTax asks whether additional forms of income pertain to you, such as investment interest or dividends, forgiveness of debt, sale of stocks or other investments and contract work. The program can link directly to major brokerage accounts to download investment data, which is the easiest way to accurately provide the information. At the end of the wages and income section, TurboTax also reminds you to enter data on investments or brokerage accounts held outside of the U.S.
When the wages and income section is complete, you move on to deductions and credits. TurboTax gives you a choice of two options for completing this section: EasyGuide (recommended by TurboTax) and Explore on My Own. As the names suggest, EasyGuide walks through each deduction and credit, while Explore on My Own allows experienced tax filers to jump from item to item. Even if you have filed your own taxes numerous times, EasyGuide can be preferred as it makes it less likely for you to miss an item. For instance, if you own a home, EasyGuide will walk you through the deductions to interest and taxes through energy-efficient home improvements.
There are 10 deduction and credit items, and EasyGuide goes through each one in detail. At the ending summary section, be sure to double-check that all your deductions and credits have been entered. When you are comfortable with the information provided, move on to the next section, which covers other tax situations.
The other tax situations section includes alternative minimum tax, additional tax payments, other return info (including deductions such as presidential campaign fund contributions) and other tax forms (such as forms for amending a return or filing an extension). TurboTax provides help for each section, which is accessed by clicking on the Learn More link next to each corresponding section.
After this section is completed, TurboTax performs a comprehensive review of the entire tax return and brings any errors to your attention. Each entry missed or piece of inconsistent information entered is brought to the user’s attention. The correct entries are automatically populated in the correct sections.
When the federal return is completed, TurboTax offers the option of transferring the data to a state tax return. Should you choose to use this option, TurboTax simply asks a few personal questions, such as whether you lived in the state for the entire tax year and whether there has been a change in residency during the year. The program also presents a list of state deductions, allowing you to mark off the pertinent ones. A final state tax review is presented at the end. Just as with the federal review, any errors and inconsistencies are brought to your attention.
Before filing, TurboTax shows your audit risk based on whether your tax return contains aspects that have historically triggered audits. If you are concerned about the possibility of an audit, you can purchase audit protections through TurboTax.
When ready, TurboTax can electronically file your return. The website can set up a bank account where tax returns or payments are automatically debited or credited. If you are receiving a return, the tax preparation fees can be automatically deducted from the return amount; alternatively, you can pay using a credit card.
H&R Block At Home Deluxe
H&R Block At Home Deluxe can import your information from previous tax returns or W-2s, but we tested the program without using this feature.
The initial page of the Personal Information section called Your Year in Review prompts you to provide information for the past year regarding marital status, family life, medical bills, real estate and occupation. The next page goes through each box that you checked and explains what effect that item has on your tax reports. For example, if you checked “recently married,” H&R Block describes the effect of changing your name or being married on your taxes. The next couple of pages go through simple step-by-step questions involving filing status and tax report basics. One exceptional feature is the information generated by H&R Block based on your input for this section: You are presented with the exemptions you qualify for, credits you can receive, and information pertinent to any new filing status.
After the Personal Information section, a page will pop up describing what paperwork you will need in order to fill out the next section: Income. Again, the program refers back to any information you provided in the first section: If you checked “new job,” the service describes the changes that this will make in terms of excess Social Security tax, your retirement plan or unreimbursed employee expenses. If you didn’t report a shift in occupation, this page is skipped. The Income section breaks your income into categories: common income; business, rental, partnership, farm and royalties; investments; retirement and Social Security; sales and transfers; and other income. The site prompts you to click any boxes that apply, and if you’re unsure of how to classify an income source, H&R Block provides assistance in selecting the appropriate option. In our test run, we chose income from employment wages, interest income from bank accounts, and dividends or capital gain distributions. The many options for sources of income give experienced users the advantage of checking boxes that pertain and skipping other income sections.
H&R Block then asks you to input information from your W-2 form. Importing a W-2 is an option, but you can also enter the information manually. The site makes it easy for you to input the information by providing sections on the website that have a direct correlation to the boxes on the W-2. The page headings tell you what boxes on the W-2 apply to the questions you’re answering, so it’s easier to locate the information needed. Certain sections have links that can be clicked to learn more, in case the user is unsure or confused. If a mathematical error is made, the site will ask you to correct it before continuing. Other filing sections include 1099-DIV and 1099-B. H&R Block can automatically load this information from your brokerage account, or the information can be entered manually. Accepted websites that H&R Block At Home Deluxe can access include broker websites such as Scottrade, E*Trade and Charles Schwab. Before moving onto the next section, the program allows you to check your income. A list is displayed showing each income source, along with a link to go to the item if it is incorrect.
Adjustments and Deductions is the next section. Again, H&R Block provides you with a list of documents or paperwork needed to adequately complete the section. The website refers back to information provided in the first section if it affects this section of your taxes. Common adjustments and deductions are listed with checkboxes for the user to select those that apply. Other adjustments and deductions can also be checked. Next to each item there is a link explaining what qualifies, so you can be sure that it pertains to your situation. In our test, we clicked “real estate taxes,” so the next page requests more information. At the top of the screen, there is a description of where this information can be found: For our example, it read “These taxes are in box 5 of Form 1098 or on a statement from the county or city where the property is located.” 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. DeductionPro helps users determine their charitable deduction for the year; this used to be a separate tool for $19.95, but now it is offered as part of the H&R Block At Home Deluxe service. The website makes it very easy to input the information, and again, asks you to make corrections if any numbers don’t match up. The last page has an overview of all the adjustments and deductions you input, and gives a total for standard deduction.
Credits is the fourth section in H&R Block At Home Deluxe. Common credits and other credits are listed, and you check the individual boxes that apply. The program automatically adds checks to boxes that would apply based on information that has been previously provided. Links for what qualifies are located next to each item for user clarification. In the case of tuition expenses, the site lists tax breaks that may be available by walking you step by step through amounts paid for tuition and exactly where the money came from. H&R Block also provides assistance on expense credits for foreign tax paid, homebuyers, and the elderly and disabled. After inputting the information, each tax break that you qualify for is listed. At the end of the credit section, the program will run through each allowable credit and provides a “go to” button if anything needs to be edited.
Taxes, Penalties and Payments requests information based on payments made throughout the year. 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 children under age 24, records detailing household employees’ wages paid and COBRA health insurance coverage. By reviewing these documents, you can figure out if you owe any additional taxes and penalties, or qualify for any other tax breaks. Checkboxes are provided for users who know what situations apply, and each subsequent page goes through any boxes checked in detail. The overview displays what taxes, penalties and payments will appear on your tax report.
H&R Block runs a verification and accuracy check before your tax return is completed. The test goes through your return and notifies you of any mistakes so you can choose to fix or ignore the issue. The final page of your federal return displays how much you owe or will be refunded, with a breakdown of your adjusted gross income, taxable income and deductions. H&R Block can electronically file your federal tax return at no additional cost.
Directly after completing your federal taxes, H&R Block at Home Deluxe will help you complete your state taxes for $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.
Throughout the whole tax reporting process, the website offers a Help Center where users can search for answers to commonly asked questions. If your questions aren’t answered there, the website provides a Q&A section where questions are answered by tax professionals at the firm. Tax tips and a blog are also available resources.
If at any point in the process you need to leave your computer, the program allows you to save your work and continue at another time.
TaxACT Deluxe is a do-it-yourself tax return that is offered online for only $9.95. You can start the tax return process and wait to pay until you are ready to file at the end.
The first step is filling out the basic info section of the website. Users are asked if they are returning from last year and if they want to import vital information from previous reports. For our review, we started from scratch. TaxACT allows you to import digital copies of important tax documents (such as images, PDFs, text documents and spreadsheets), W-2 forms from select payroll providers, stock transaction information using a comma-separated-values CSV file, capital gains from GainsKeeper or any stock history from TradeLog. TaxACT Deluxe first goes through a set of personal information about you and your spouse, if applicable. The questions are very basic and checkboxes are provided for responses that apply.
A section titled Life Events inquires about significant happenings from the past year. These events are separated into categories: family, employment and retirement; home, auto, and personal property; money and investments; state filings; and other topics. You choose what pertains to you or your life situation, and under the Guidance tab, TaxACT gives you information on how that event affects your taxes. The Tips tab allows you to check any life event that occurred in the last year, such as buying a home, moving to a new residence, making student loan payments and a wide variety of other circumstances.
Continuing through the Life Events section brings you to the Federal Q&A. Income is the first set of questions regarding wages: If you click “yes” to the question of whether you or your spouse received any wages or a salary from an employer in 2012, the website asks if your employer provided you with access to an electronic W-2 form. For review purposes, we clicked “no.” Under this scenario, you are given the option to complete your W-2 information using Quick Entry or Step-by-Step Guidance. Choosing Quick Entry brings up an electronic 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.
If Quick Entry is chosen, two different options arise: Form Instructions and TaxTutor Guidance. Form Instructions pops up as another window and it explains in detail how to fill out a W-2, box by box. The TaxTutor Guidance goes through different topics about your W-2 and explains what each section does. It is a useful tool to educate users on their taxes and tax forms. Both options are available for questions or assistance while you fill out your form. The Quick Entry form is probably a better option for individuals who are comfortable inputting information onto a form that looks similar to a W-2. Step-by-Step Guidance lists each section in list format, and blanks are provided for the user to fill in. The screen then prompts you to enter your wage information as it appears on your W-2. It tells you which box is being referenced and in which section. Throughout this whole process, if you want to pull up a W-2 that you loaded onto the computer via a PDF file, there is a link at the bottom of the screen to guide you.
When you reach the Investment Income section, the site tells you what forms are needed based on what types of investment income you declare. The page gives a description of what “investment income” may include and also offers additional guidance for forms that may be useful.
The Investment Income section asks you a series of questions and, after answering yes or no, each response is evaluated and subsequent questions are asked. You can’t import your brokerage files directly from an account, but you can import from GainsKeeper or a CSV file. The site goes through mortgage interest, principal payments, interest income, investment expenses and foreign taxes, interest deductions, and interest exclusion, among other income items. When providing information about any of these items, you again are given the option of entering information using Quick Entry, where you essentially copy information directly onto a form that looks like a 1099-INT, or Step-by-Step Guidance, where the website walks you through each step. Questions about other income such as sale of home, business income, rental and royalty income, retirement plan income and Social Security benefits pop up before the section is finished. Each page asks a series of questions to help you figure out what income items pertain to you and where the correct information can be found. At the end, a page summary is provided that displays each category of income. If you need to edit anything, you can click “review” to fix any mistakes.
The Deductions portion of the tax report comes directly after income. Information from previous sections carries over, and TaxACT asks additional questions to determine which sections may need further input. The program asks if you would like to fill out itemized deductions and recommends that you answer yes. The site will only use itemized deductions if doing so lowers your tax bill. The deduction examiner allows you to review each deduction or go back to edit any mistakes. The Itemized Deductions section is a table broken down into medical/dental expenses, taxes paid, interest paid, gifts to charity, casualty and theft loss, miscellaneous and other miscellaneous. The Credits section inquires about adoption expenses, residential energy credits, foreign tax credits, and child and dependent credits, among other types. The information from previous sections translates over, and the program automatically recognizes if you are eligible for certain credits based on previously provided information. The same review process is available, and TaxACT makes reviewing or editing your credit information easy.
Under the Miscellaneous category, users can input estimated tax payments for 2013 to avoid penalties when taxes owed are not covered by the withholdings amount on each paycheck. Different methods are provided for calculating estimated tax. On the right-hand side of the page, popular help topics are provided to educate inquisitive filers.
A Federal Tax Summary is provided after the questionnaires in each section have been completed. At this point, the site gives three options: review Q&A topics, preview form 1040 or continue. After clicking continue, TaxACT offers to automatically transfer data to your state tax form. If you want this to be done, click the appropriate responses. Continuing forward, a review is performed on your tax report. The program scans for incomplete or inconsistent information, and a series of suggestions or corrections that need to be made will pop up in order to ensure an accurate tax report. TaxACT Deluxe has several pages of tools that you may find useful, and offers other programs that may help you based on information you provided. Although all the information they offer can be helpful, it seemed a bit tedious.
A couple of filing options are provided. You can file electronically or by mail. If you are receiving a tax refund, you can choose to have it wired electronically to an account or have a check mailed to you. If any amount is owed, you can request that the IRS withdraw the funds directly from a designated account, you can mail in a check or you can have the amount owed charged to a credit card. TaxACT will file your state return electronically for an extra fee of $8.00.
Each of the three tax preparation services reviewed offers a capable tool, and each has their own strengths and weaknesses.
TurboTax Deluxe and H&R Block at Home Deluxe are similar in pricing and features, each providing step-by-step instructions. TurboTax’s EasyGuide feature, which asks specific questions about your tax situation, helps you avoid mistakes or omissions.
TaxACT offers far less hand-holding, so it is suitable for users experienced with filing their own taxes. In addition, TaxACT is the least expensive option out of the three reviewed in this comparison.
We tested all three tax preparation services for accuracy, and each arrived at the same tax refund. Since none of these options are overly expensive, the Editor’s Choice goes to TurboTax Deluxe once again, since it provides the most straightforward guidance through their series of targeted questions. For users on a budget, the recommendation goes to TaxACT.