Is it smart to use tax-preparation software? Many people think so. It's becoming more and more common for people to use inexpensive software to prepare their tax returns. Now you can even bypass the software and prepare your return on the Internet for a modest fee. With these programs, you can print completed tax returns, which you sign and then mail in, or you can electronically file your return.
The main contenders when it comes to tax-preparation software are Intuit's
If you're the type who loves filling out questionnaires, you might actually enjoy (gasp!) preparing your taxes this way. It has many advantages:
- You don't have to gather any forms; they're all in the program already.
- You can revise and revise and revise, without making a mess with whiteout or an eraser. Enter your information, see what your tax liability is, and then you can make adjustments, playing out different scenarios to see which is most cost-effective. (You might see that it's smart to realize some capital gains this year, for example.)
- The software can assist you with decisions. It asks you questions and either makes decisions for you (regarding which forms to use, for example) or offers you some information and asks you to make a choice.
- You will make fewer math errors. Once the program has certain information, it will make sure that it's carried over to and entered in all the required places. Plus, it does all calculations.
- Carryovers from year to year get taken care of automatically, if you used the same program to prepare your return last year.
Letting a computer do your taxes does have some disadvantages. The main one is that you have to trust the software, even though you're still the one responsible for your return. There's always a small chance that the software caused an error -- or that you provided an incorrect number and generated the error yourself. (Of course, even manually prepared returns may contain errors.) Plus, if you're using an online service, there are always privacy concerns.
Still, you might do well to at least try it. At the very least, consider using a software program as a crosscheck for yourself. Fill out your return the old-fashioned way, and then do it electronically. Compare the results and you'll get a much better feeling for how accurate and/or helpful the software is. You can choose whether you want to file your original return or the computer-generated one, and you'll probably have an idea of which approach you want to use the following year. The online software at TaxAct.com lets you do this for free (there is a charge for filing electronically).
Perhaps the most powerful advantage of tax-preparation software is that it lets you play "what if" games and plan more intelligently for taxes. Once you've entered the necessary information, change one variable and see how the bottom line is affected. See what will happen if you get a big raise at work, sell your house, or sell some stocks for a sizable capital gain. This can be enormously valuable if you think you might have to pay estimated taxes. Let the software help you figure out whether you have to pay estimated taxes.
When buying tax-preparation software, make sure that the package includes state tax forms for your state, if you'd like it to prepare those forms as well. Verify that it's compatible with your computer system. Make sure that it contains all the forms you'll need. If you buy the software early in the year, make sure you get an updated final version later in the year, so you're preparing your return incorporating the latest information and tax-code revisions.