Each New Year brings with it parties, resolutions, and the inevitability of tax season. Every American who earns money needs to file taxes, but the myriad forms, deductions, and mathematical equations make doing your own taxes by hand incredibly difficult. An entire industry has appeared around taxes. Accounting firms stay in business by helping people and businesses do their taxes every year. Individuals and small businesses who want to do their own taxes, but don’t want to fill out forms by hand can turn to tax filing software.
How Tax Filing Software Works
The tax code takes into account a huge number of factors about your life. Your marital status, the sources of your income, whether or not you have a disability, home ownership, insurance, and more can all affect your taxes. Not only will the bill change, but the forms you need to fill out and submit change too.
Tax software seeks to remove the headache of figuring out what forms to fill out and what boxes to check. Most tax software starts by having you answer a few questions about yourself. The questions are generally simple yes or no questions, such as “are you married?” “Do you run a small business?” or “did you buy a house this year?”
Once you’ve answered the questions to determine what deductions you are eligible for and what forms need to be filed, it will ask you to enter information from tax forms you’ve received. Employers, banks, and investment companies will send these forms out at the beginning of the year. They’ll detail how much money you earned from which sources.
The software will combine all of the income information you’ve entered with the answers that you provided to the questions it asked. It will then fill out all of the tax forms you need to file and help you determine what deductions you are eligible to take to reduce your tax bill. Once you’ve gone through the forms one final time, the software will automatically submit the forms to the government, or let you print them and mail them in on paper.
There are three major players in the area of tax software. Possibly the best known is TurboTax. The program’s popularity stems from the different tiers it offers, allowing you to pay only for the service that you need. Intuit, the company behind the software is also a very well-known financial software firm, giving the product some name recognition. Intuit also owns the handy budgeting software, Mint, and makes it easy to automatically import information from that application.
TurboTax’s offers a free version for people with very simple income situations who make below a certain amount. It has three paid plans:
- Deluxe, which automatically imports your taxes from last year, covers freelancers with 1099 income, and helps you find deductions
- Premier, which covers investment income and rental properties.
- Home & Business, which covers self-employment and small business income.
All three paid versions also give you access to tax experts over the phone, in case you need additional guidance.
H&R Block is in close contention with TurboTax for name recognition or tax software. Unlike TurboTax, H&R Block backs their software up with over 10,000 physical locations, making it easy to get in-person help if you have trouble on your own. The company also offers a tax refund bonus, giving you an extra 10% on your return if you use the money to purchase select gift cards.
H&R Block also comes in four service tiers, one of which is free, though the company charges an additional fee for filing state taxes. Before the fees for state taxes, H&R Block is cheaper than TurboTax at equivalent tiers, so people who live in states without income taxes can take advantage of this.
TaxAct is the cheapest of the three choices of software. Its highest tier of service costs $22, far less than either TurboTax or H&R Block. TaxAct asks far more questions that H&R Block or TurboTax, often asking things that it could have avoided asking based on previous answers. This makes the process take far longer than it would with other software. The user interface is also not as polished as TurboTax’s or H&R Block’s.
If you know your taxes fairly well and the changes in tax law, and are confident in your ability to know what sections of the software pertain to you, TaxAct is a good choice. People who are less confident in their ability to do their taxes are likely to be better served with a more user friendly, but more expensive software.
Federal Free File
Each tax filing service discussed included a free filing option for simple tax situations. Given the complexity of the tax code, the government has encouraged companies to offer free tax preparation services. The IRS even provides a list of software and the requirements you must meet to be eligible to file a free return.
People who earned less than $62,000 a year can select from a variety of programs that will help them fill out tax forms. Those who earned more than $62,000 can still file for free, but have to fill out the forms manually.
Is Getting a Tax Professional Worth It?
If you aren’t eligible for free filing because of your income or if you have a very complex tax situation, you may consider working with a tax professional. Unlike tax preparation software, which you use once a year and forget about, working with a CPA can be a year-long relationship. They will get to know your specific situation and keep on the lookout for ways to save you money by selecting the proper deductions. They can also help you avoid costly mistakes.
A CPA can serve as a resource even when it isn’t tax season. For example, if you need to buy a new car your CPA may be able to advise you on what models are eligible for environment-friendly tax credits. They can also provide you with advice for your small business when it comes to keeping it on the straight and narrow financially. Of course, by not filing taxes yourself, you’ll save some time, which can be worth some of the additional cost that a CPA brings.
Is it a Good Thing to Get a Refund?
The one thing that many people look forward to during tax season is receiving their tax refund. Your refund can be a sizable amount of money depending on how much you have withheld from your paycheck. Having a windfall to look forward to is something that makes the process bearable for a lot of people.
The problem is that from a purely mathematical standpoint, getting a tax refund is a bad thing. Receiving a refund is indicative of you giving the government a loan, interest-free. As an example, you receive a $1,000 tax refund this year. If you had kept that $1,000, and instead put the money into a bank account earning 1% interest, you would have made $10 in interest. $10 isn’t much, but if you had instead used the money to pay a credit card debt that has an interest rate of 18%, you would have saved $180. Every dollar that you give to the government that they later give back costs you money in potential interest or investment returns.
From a non-mathematical standpoint, getting a refund might not be a bad thing. If you have trouble saving for large purchases, getting a refund can act like a form of forced savings, so long as you don’t spend the refund as soon as you get it.
If you make most to all of your income from a regular job, setting up your tax withholding to prevent a large refund is relatively easy. Your payroll office should have W-4 for you on file. Generally, employees fill out a W-4 when they start a job, and that form is used to determine how much money to take out of each paycheck.
The W-4 sheet has instructions on how you can calculate the number of allowances that you may claim. For example, you may add one allowance if you are married or add two for each child you have. Once you’ve determined the number of allowances you may take, your paycheck will automatically be adjusted to withhold the proper amount to reduce the amount you will owe or be owed come tax time.
One of the most common mistakes that leads to a large refund or tax bill is not updating your W-4 to account for life events such as having a child or getting married. Checking your W-4 every once in a while to make sure that it is reflecting your actual situation is the best way to keep your tax withholding accurate and avoid receiving a big refund or owing a big bill.
Tax season can be stressful for a majority of Americans. Using tax filing software or working with a CPA can make the process a little bit easier.