How to choose the right tax software

By Peter Andrew

How to choose the right tax software

When I wrote 3 tips for avoiding an IRS audit last month, I was amazed by two statistics my research turned up: The National Taxpayer Advocate's 2012 report reckoned that nearly 60 percent of federal filers hire tax preparers, while another 30 percent use commercial software for their filings.

In my mind, another icon of Americana crumbled: No longer do most moms or dads perform the annual ritual of grim evenings spent at kitchen tables, growling at passing kids and muttering under their collective breath as they wrestle with piles of forms, receipts, pencils and erasers. Now, it's all outsourcing, laptops, tablets and even smartphones -- appropriate, I suppose, for modern America.

Of course, it's the ritual, not the reality, I miss. It's hard to get nostalgic about an annual stress-fest that saw millions with lousy arithmetic skills struggle to meet their obligations. How much better to let someone else or an electronic device take the strain. And, as families cut back further on unnecessary spending, it may well be that cheap -- or free -- software applications and e-filing services could become increasingly popular. So what do you need to know when choosing your tax-filing package?

Online or on-board tax-filing applications?

The first thing you have to decide is whether you want to buy or download an application that's going to save your results onto your computer, or one that operates in the "cloud" as a browser-based e-filing service. The latter means your work is going to be held on a secure server operated by the vendor of your filing service. There are real advantages to this in that you can add to or amend your filing from any appropriate, Internet-connected device anywhere in the world -- and you won't lose everything if your hard drive corrupts or your laptop goes missing. And, being browser-based, you don't have to buy a CD-ROM or download software.

However, browser-based services don't suit everyone. When Tim Gray wrote about his choices in The New York Times in February, he said he preferred the non-cloud option, which he acknowledged was often more expensive and "clunkier," citing two advantages of the native desktop/laptop alternative:

  1. You can use it to prepare and file more than one return at no extra cost. So, if you help out friends or family with theirs, you're likely to save money.
  2. You can check what you're doing as you go along. It's generally much harder to swap between the questions you're asked and the return itself within browser-based services.

The choice, however, is yours.

Federal filing for free -- maybe

The IRS has teamed up with a number of tax-software companies to offer Free File. If you qualify (and you need an adjusted gross income (AGI) in 2012 of $57,000 or less to do so), you could file this year for nothing, providing you e-file and pay your taxes -- or apply for an extension -- by April 15.

Each private-sector company in the Free File Alliance sets its own eligibility criteria, but there's a a handy online wizard on the IRS website that can help you find one that suits you.

Paid-for filing applications

If your income's higher than $57,000 or your financial affairs are complicated, you are probably going to have to pay for your application or e-filing service. Don't panic: You might get away with as little as $8, although someone with rental properties, mutual funds, stocks and bonds, and lots of deductions could pay close to $100, but that should cover both federal and state filings.

Nobody can tell you the best deal for you because your needs are so individual. But here are some criteria you might want to employ when choosing your e-filing provider:

  1. Ease of use. Market leader TurboTax is almost universally acknowledged to be quick and easy to use. It can import information from your last return, allowing you to change only the variables -- and so avoid having to re-input information. Indeed, by many criteria (though not price), TurboTax is the one to beat. This year, TopTenREVIEWS gives it an unrivalled 10/10 across the board.
  2. Help and support. Users of H&R Block (previously called TaxCut) who are subsequently audited by the IRS get free representation by one of the company's tax experts. H&R Block also scores well for overall help and support. Other high scorers in this category include eSmart Tax and Jackson Hewitt, as well as TurboTax.
  3. Cost. It's hard to beat TaxACT for value for money. At the time of writing, its Ultimate Bundle is just $19.95, payable on filing, and includes both federal and state filings, alongside free phone support.

If you're even a bit computer literate, the chances are most e-filing services and filing applications are going to make your life a whole lot easier than your parents' during their annual kitchen-table nightmares. If you still find the chore overwhelming, think about spreading the load over the year with money-management applications such as Mint, which integrates with TurboTax to automate even more of the tax process. Meanwhile, Slice can sync with your email inbox to pull together all your e-receipts, helping you to maximize your deductions. The time's come to embrace tax technologies.

Peter Andrew has over 25 years of experience writing about marketing, advertising and management. He regularly covers consumer credit card topics for IndexCreditCards.com and other personal finance publications including Fox Business, TheStreet and MSN Money. He also writes frequently about mortgages and auto loans. Peter has spent extended periods living overseas, in the UK, France and Africa. He lives with his partner of 20+ years, and wastes too much of his time on cryptic crosswords.

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