Obamacare, introduced with the aim of providing quality affordable health care, will add significantly to the population of new tax filers and increase the complexity of tax filing. As a result, tax-preparation service providers such as H&R Block (NYSE:HRB) and JTH Holding (NASDAQ:TAX) are expected to be key beneficiaries. In contrast, the impact on tax preparation software company Intuit (NASDAQ:INTU) is less certain.
Reform driving the need for paid tax preparation
Two key tax-related implications of the Affordable Tax Act are the advanced tax credit and the tax penalty. Firstly, the government is providing the lower income population with advanced tax credits for their health insurance coverage needs. In return, a beneficiary is bound by law to file a 2014 tax return in 2015. Secondly, a person who neither meets the government's baseline health coverage requirement nor is exempt will incur a tax penalty when they file a tax return in 2015.
Without going further into the nitty-gritty details of the tax act, it is obvious that more first-time tax filers will come on board in 2015. Also, more people will require assistance to file their tax returns, given the complexity of calculations and the likelihood of new IRS documentation.
Online and offline marketing efforts
Most people are naturally confused about what the Affordable Care Act means to them, along with the potential tax implications. In today's world, it is typical to simply search for answers on the Internet before even speaking to family or friends. JTH has introduced its own web portal complete with commonly asked questions and a tax subsidy calculator. The website address (http://www.health caretaxinfo.com/) makes it easy for potential clients to knock on its doors from a search engine optimization, or SEO, angle. Although the website address of the portal is titled in a generic manner, 'helpful' links to JTH's Liberty Tax Service are displayed prominently on the site.
Of course, not everyone is Internet-savvy and some will still prefer to meet face-to-face to discuss their tax issues. Consequently, JTH has also organized seminars for individuals and small business owners to educate them. According to JTH's recent poll of 800 clients, about 25% of them are without health insurance coverage, which is a clear indicator of the potential demand for its services. JTH's online and offline marketing efforts should put the company in a good position to seize the associated growth opportunities.
Size and brand advantages
Similarly to JTH, H&R Block has gone all-out to reach out to its current and potential customers through a health micro-site, digital ads, and focus groups. However, H&R Block has a slight edge over JTH for two reasons.
Firstly, H&R Block has a larger base of clients than JTH; it is the largest tax preparer in the U.S. while JTH is third. Since it is easier to sell new services to existing clients, H&R Block has an edge in churning out incremental revenue opportunities from this entire exercise. H&R Block is fully capitalizing on that by sending each of its clients a customized health report based on the tax information they submitted. This report will allow its clients to determine their eligibility for advanced tax credits and other government assistance programs, and estimate insurance premium costs and potential tax penalties.
Secondly, the specialized and customized nature of tax filing services suggests that people will feel safe leaving their tax filing needs in the hands of a trusted retail brand like H&R Block. This situation favors the incumbent, H&R Block, which has the most recognizable brand in the space.
Choosing between DIY software and outside tax preparers
Intuit has updated its TurboTax software for the most recent changes resulting from the Affordable Care Act. It also set up a portal titled TurboTax AnswerXchange, which boasts a list of more than 700,000 frequently asked questions, or FAQs, relating to the Affordable Care Act. By answering a series of simple guided questions, users of the portal are also able to find out if they are required to be insured, and if yes, what the approximate cost will be.
While I don't deny that all this is very helpful, Intuit may not be able to capitalize on the increased tax-filing needs that result from the Affordable Care Act to the same degree as its tax-preparer peers. New tax filers are unlikely to commit time and effort to learning a new tax preparation program such as TurboTax.
Even for seasoned tax filers faced with new IRS forms and difficult calculations, there will still be a steep learning curve for new features or modules to tackle the new filing requirements. In fact, there is likely to be a shift in market share from do-it-yourself tax filing to paid tax preparation services, to the dismay of Intuit.
JTH estimates that there will be an increase of between 1.5 million to 2 million tax filers this year as a result of the Affordable Tax Act, which suggests that future growth prospects look very promising. Unfortunately, the positives have been largely factored into the stock prices of both JTH and H&R Block, as they trade at the high end of their 52-week trading range. Investors will be rewarded for their patience if they wait for better entry prices.
Mark Lin has no position in any stocks mentioned. The Motley Fool recommends Intuit. The Motley Fool owns shares of Intuit. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.