Tax Preparation Services
by Joe Lan, CFA
Preparing taxes can be an arduous task, but it is one that must be done regularly. Luckily, there are several programs available online that are intuitive, powerful and inexpensive; some are even free if you are filing a simple tax return. One of the benefits of these programs is the systems they have in place to double-check your work and bring possible errors to your attention.
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For this comparison of tax preparation services, we have selected H&R Block at Home, Jackson Hewitt Online, TaxACT and TurboTax. Jackson Hewitt Online is a newcomer to our comparison this year, but it offers services similar to those offered by the other three, which were included in last year’s comparison.
These programs are all similar in that they offer step-by-step guidance. Some of the programs offer more “hand-holding” than others. Each program does an outstanding job of finding appropriate deductions and credits and maximizing your tax refund (minimizing your tax bill).
The programs each differ in how they present information, the amount of help they provide and their price. Furthermore, H&R Block, TaxACT and TurboTax each calculated the exact same tax refund when we did our hands-on testing. Jackson Hewitt had a slightly different refund, but the discrepancy was less than 1%.
In essence, each of these online services provides the same functions as their software-based counterparts. But the online versions are offered at lower prices because they only allow you to file a single return per account, whereas multiple returns can be created and filed using the software-based programs.
All four 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 their 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 programs 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 programs 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 on pages 2 and 3 provides a side-by-side comparison of the four products, including their costs (for both online and software versions), features and minimum system requirements.
H&R Block at Home Deluxe
H&R Block offers several online versions. Their Free edition allows you to file a 1040-EZ at no charge. The Basic edition also allows you to file a 1040-EZ, but charges $19.95 to import last year’s return and get step-by-step guidance. The Deluxe edition is appropriate for most taxpayers, allowing for investments, various sources of income and multiple homes. For those who own rental property or their own business, the Premium version is the best bet.
The first step when filing a return with H&R Block is to provide your personal information. You have the option of importing your prior-year information from an H&R Block program or from TurboTax. If you didn’t use either of these services last year, or are filing online for the first time, the program will walk you through the personal information section, posing questions that will determine any specific tax circumstances based on the answers you provide. The program goes through an “interview” process that collects information about life-changing events, filing status, personal situations, military status and dependents.
At the income section, you start by checking the areas that are pertinent to your tax return. Income is divided into common income; business, rental partnership, farm and royalty income; investment income; retirement and Social Security income; income from sales and transfers; and other income. Jury duty pay, foreign income, alimony, loss carryforwards and cancellation of debt are all handled by the program. The division of income into different areas is a major strength of H&R Block’s format. It allows users, especially more experienced ones, to simply check the relevant areas, and the other areas are skipped in the preparation process. Additionally, if your employer is in H&R Block’s database, you can import your W-2 directly.
Adjustments and deductions work in the same way. H&R Block allows you to check off each adjustment and deduction you have before proceeding. Common deductions such as student loan interest, IRA contributions, home mortgage interest, real estate taxes and charitable donations are all covered by the program. The program also includes less common deductions such as job-related moving, interest on loans used to buy investments, and theft loss. H&R Block then walks you through each area that you checked. The program does not allow you to enter the current price and cost basis for donated stock, so in these cases you must calculate the deduction amount yourself.
Next, H&R Block includes a separate section for tax credits. Each credit is listed separately in the overview section. There, they can be checked off, making it difficult to miss possible tax credits.
Even though there is no independent error-check section, H&R Block does run an error check at the end of your federal return and will notify you of sections that require additional attention.
Once you are finished with your federal filing, H&R Block Deluxe will transfer your information to your state filing. You can complete and electronically file one federal return, but filing the state return costs an additional $34.95. The program runs another error check after you complete your state return. H&R Block offers you the ability to set up a bank account so that the IRS can directly wire your tax return or withdraw any tax payment owed. If you are eligible for a refund, H&R Block can deduct its fees directly from that amount.
While filing your return, H&R Block offers answers to common questions on the right-hand side of the page. These answers are provided by H&R Block, but you may not find your specific question listed. For additional help, H&R Block offers a Q&A section where users can ask questions that are answered by tax professionals at the firm. This area also contains tax tips and a blog.
Jackson Hewitt Online Deluxe
Jackson Hewitt Online is a new addition to our comparison. To complete and file your tax return online, Jackson Hewitt offers three versions: Basic, Deluxe and Premium. The Basic version can handle a basic return with no dependents and is provided free of charge for the federal filing (state is additional). The Deluxe version is designed for taxpayers with dependents and those who own a home, and it provides for itemized deductions. Premium is for those who own a business or are self-employed. The program poses four questions to determine which version is right for you. For most taxpayers, Deluxe is sufficient.
Answering a list of general employment questions determines the sections you will be asked to populate. The program then loads a screen that looks very similar to a W-2. Filling out this section should not cause any problems. Jackson Hewitt also allows users to import their W-2, provided the employer is in its database.
The deductions section works in the same way. A series of questions cover items such as mortgage interest paid, real estate taxes, personal property taxes, medical expenses and theft loss. Each section that is relevant to you is then broken down with additional questions. For example, answering that you have mortgage interest will prompt questions such as what form was used to report the mortgage interest to you and whether you have deductible points to report. After pinpointing the exact deductions, you will be asked to provide the final numbers.
There are separate sections for investments and retirement in the Jackson Hewitt program. Information is gathered in exactly the same way as it was in the previous sections. Sections that have been determined to be irrelevant to you are winnowed out.
The program includes several tools on the right-hand side that help with the entire process. A calculator can be quickly opened and closed, and tips and FAQs are both available. Clicking on “Where Do I Enter” opens a resource center that allows you to search for the location of any item on the tax return. The resource center is very comprehensive and is the best one offered among the four services reviewed here.
Lastly, the program checks for errors and files your tax return. You are offered the option of transferring the information from your federal tax return to a state tax return for an extra fee. You also may have your refund or payment directly transferred into or out of your bank account (or multiple bank accounts). Be sure to set up a MyTaxManager account to track your return and get updates sent directly to your mobile device.
TaxACT is a relatively inexpensive option suited to taxpayers with some previous experience filing their taxes online. The program offers the best price, but the least hand-holding, which may be perfect for certain users. The three available versions are the Free, Deluxe and Bundle editions. TaxACT is the only program that provides both simple and complex federal filings for free. The difference between the Deluxe and Free editions is that the Deluxe edition offers more step-by-step guidance that may be suited to taxpayers with a more complex tax return. For example, the Deluxe edition helps maximize your refund by walking you through major life changes and charitable donations and double-checking for credits and deductions. The Free edition expects users to enter all their information manually. The Bundle package includes everything included in Deluxe plus the state return.
TaxACT starts by asking you to import basic information from a previous year’s tax return or from a PDF file (a unique feature). Of course, you can also input the information manually. An error check is performed at the end of each section. The program also takes into account whether you made any estimated federal or state tax payments the previous year.
After completing the basic information section, TaxACT lists common life events. Users can go through the list and enter events that are applicable, such as a change in marital status, a move, a change in employment or the purchase of a home. The program walks you through each item by asking a series of questions and then calculates your tax consequence. Upon completion of this section, a summary is provided. You can use this to double-check your work.
The next section is the federal question and answer. TaxACT combines all federal information into one section. Income and wages, deductions, credits, and other miscellaneous topics are all presented here. This is a different setup than that offered by H&R Block and TurboTax, and it benefits more experienced users. There is less step-by-step instruction, and the program assumes that the user knows which items need to be updated. As a matter of fact, TaxACT allows you to type directly into an online form, enabling you to speed up the process even further. For instance, while entering your W-2 information, clicking on “quick entry” brings up a replica W-2 that you can fill out with no guidance at all. However, you can request help by clicking on “step-by-step guidance” for each individual area. Bear in mind that TaxACT does not ask many leading questions; you have to select each relevant section before you can use its guidance.
For other income, TaxACT has separate sections for interest income, dividend income, gain/loss from sale of investment, business income, rent or royalty income and retirement plan income. Although each section is self-explanatory, the lack of leading questions may cause users to miss events with tax consequences. Additionally, each investment must be entered manually, as there is no option to import from a brokerage account.
After finishing the income sections, TaxACT goes through other adjustments and itemized deductions. These are relatively straightforward; you start at the first items and work your way through. The itemized deduction section includes charitable donations, and a donation assistant helps you estimate the value of your donation items. Also, a separate section for child and dependent care is available.
Your refund is tallied at the top right of the program, and summaries of each section are provided so that you can double-check your work.
When you are satisfied with your federal return, the program will import your data into a state return if you upgrade to the Bundle package. TaxACT will also ask you a series of questions specific to the state filing.
The next step is to run the review. Alerts are issued in red, yellow and green colors. Red alerts signal incomplete or inconsistent information and require your attention. Yellow alerts identify potential problems, and green alerts indicate possible tax savings. Once you have gone through the alerts, you can choose to file electronically or print out your return. TaxACT allows you to set up an account for direct deposit of a refund or withdrawal if tax is owed.
The TurboTax program will allow you to create and file a simple federal tax return for free. The website directs investors who own stocks, mutual funds and rental properties to use the TurboTax Premier version, but based on our tests, TurboTax Deluxe is able to handle these tax calculations. The Deluxe version is reviewed in this article and costs $29.95 for the federal filing (state filing costs extra).
One of the main advantages of TurboTax is the live community. 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 rating system ensures that the best answer to each question is shown.
Upon signing up for the program, you will be asked to enter your personal information, such as filing status and number of dependents. If you have used TurboTax in the past, the program will prompt you to identify anything that has changed about your circumstances—such as a new job—and future questions are adjusted accordingly. Furthermore, the Deluxe version will import last year’s data into your new filing.
After entering your personal data, TurboTax asks you to choose to either use their EasyGuide or “Explore On My Own.” The EasyGuide provides assistance for people who are new to the program or unsure how to proceed. The option to “Explore On My Own” allows experienced users to fill out information more quickly by jumping around each section without having to go through any prompts.
Choosing EasyGuide will walk you step-by-step through each section. The wages & income category is very straightforward and covers wages and salaries, investment income, retirement plan and Social Security income, and rentals and royalties, along with other income. It also covers business income and other less common income, such as gambling winnings, alimony received, jury duty, child’s income and scholarships. You also have the option of importing this data from financial institutions, such as a brokerage firm.
After completing the wages & income category, the program will calculate your deductions and credits. This covers 10 separate sections that include home, family, charitable donations, education, medical and retirement. The program addresses newer tax credits such as home energy credits and homebuyer credit. Furthermore, TurboTax will ask questions to make sure you aren’t forgetting specific credits you may have received, such as the Making Work Pay credit. You are able to enter employment expenses, tax preparation fees, moving expenses and legal fees to ensure your minimum tax bill. While entering information, TurboTax keeps a running tally of how much you owe or are owed.
The federal review page allows you to see your income, deductions and credits, and taxes all on one page. It provides you with the start-to-finish calculation of your taxes. When you are finished with your entries, you can move on to the error-check section, at which point TurboTax will check for any inconsistencies or red flags.
Once you are satisfied with your federal tax return, TurboTax can import the information into your state tax return. Filing your state return will cost an additional fee.
Upon completion, TurboTax can file your return electronically or print it out for you to mail. The program also allows you to set up a direct deposit (or withdrawal) from your bank account. The IRS will notify you within 48 hours if your tax return has been accepted and your bank account will be credited (or debited) within eight to 14 days from the date the IRS accepts your return.
||H&R Block at Home Deluxe||Jackson Hewitt Online Deluxe||TaxACT Deluxe||TurboTax Deluxe*|
|Online Cost||$29.95, e-file one federal; $64.90, including state||$27.95, e-file one federal; $57.90, including state||$9.95, e-file one federal; $17.95, including state||$29.95, e-file one federal; $66.90, including state|
|Software Cost (download or CD-ROM)||$44.95, e-file five federal; $64.90, including state||na||$12.95, e-file one federal; $21.95, including state||$59.95, e-file five federal, state included|
|Cost of State E-File With Software (after cost of state forms)||$19.95||na||$7.95||$19.95|
|Program Functionality||Free trial||Y||Y||Y||Y|
|Import last year’s data||Y||Y||Y||Y|
|Import data from financial institutions||Y||Y||Y||Y|
|Import W-2 forms||Y||Y||Y|
|Transfer data from federal return to state return||Y||Y||Y||Y|
|Deductions & Credits||Automatically checks for applicable deductions||Y||Y||Y|
|Deduction wizard (cost)||Deduction Pro ($19.95)||Donation Assistant (free)||It’s Deductable (free)|
|Printing and Filing||E-file option||Y (free federal)||Y (free federal)||Y (free federal)||Y (free federal)|
|Check status of e-file||Y||Y||Y||Y|
|E-mail confirmations of IRS receipt||Y||Y||Y||Y|
|Technical/User Support Features||Ask a tax professional (cost)||Y ($19.95)||Y (free)||Y ($29.95)|
|Phone/online chat with company reps (cost)||Y (free)||Y (free)||Y (free)||Y ($29.95)|
|Ask, answer and read other user questions||Y||Y|
|Calculates audit risk||Y|
|Min System Requirements for Software||Windows||XP, Vista, 7||na||2000, XP, Vista, 7||XP, Vista, 7|
|Mac||Mac OS X 10.4.11||na||Mac OS X 10.4|
|Min System Requirements for Online||Internet Explorer Version||XP (IE 6+); Vista (IE 7+); Windows 7 (IE 8)||IE 6||IE 6||XP (IE 6); Vista (IE 7); Windows 7 (IE 8)|
|Mozilla FireFox Version||3||not recommended||1.5||3|
|Safari Version||4||not recommended||4||3|
|Google Chrome||Y||not recommended||Y||Y|
|* Editor's choice.|
Overall, the four programs offer an accurate way to complete and file your tax return. The main differences between the programs are in the amount of step-by-step instructions offered and how information is presented.
H&R Block, Jackson Hewitt Online and TurboTax each offer similar pricing for their Deluxe and Premium versions. TaxACT is noticeably cheaper but provides less guidance. For taxpayers who have experience and are confident that added guidance is not needed, TaxACT should be adequate.
The main area in which TurboTax excels is their flexibility with guidance. Their EasyGuide tool offers step-by-step assistance so that you never feel lost, but more experienced users can opt to “Explore On My Own” and finish their tax returns more quickly. This flexibility, along with the live community, makes TurboTax, once again, our Editor’s Choice for tax preparation services.