Web-based tax software

SAN FRANCISCO (02/05/2004) - A bewildering array of eight leading income tax packages awaits this season, to help with your bewildering taxes. Each offers a different mix and level of services and does some tasks well and others badly.

Your first decision is whether to use a packaged product that runs the application on your desktop or to try a Web-based service. We review five Web sites and three shrink-wrapped packages to help you decide. The Web sites are CompleteTax from CCH Inc., TaxCut from H&R Block Inc., TurboTax by Intuit Inc., TaxBrain from Petz Enterprises Inc., and 2nd Story Software Inc.'s TaxAct.

Three have corresponding packaged products: H&R Block's TaxCut, TaxAct from 2nd Story Software, and Intuit's TurboTax are reviewed separately.

The short answer: If you used tax software or a Web site to file your 2002 taxes and were reasonably happy with it, use the same package for 2003. Each program imports its own data from the previous year's return with no problems. Importing a competing program's data ranges from impossible (with most of the Web sites) to error-prone. Unless you were very unhappy with the program you used in 2002 or your tax situation has changed dramatically, stick with what you know.

Here's an overview of our conclusions: If all you file is Form 1040EZ, head straight to TaxAct. Even though the site is sometimes painful to navigate, you can't beat the price--free to print and mail a return, or $8 to use electronic filing. However, if you have complex taxes, you should carefully consider which IRS schedule will cause you the most difficulty and choose the program most adept at handling that form.

Overall, TurboTax is the most thorough of the five. It charges a sliding scale from US$20 to $60 for the federal return only, depending on how many forms you use. TaxCut starts at $25. TaxBrain fees start at $20, again depending on the forms. CompleteTax costs $30, including state returns.

Each site has positive aspects. The one to pick depends on which hoops Uncle Sam is making you jump through this year.

Snapshot of a Choice

It's good that the five sites vary, because everyone's tax return differs. Figuring out which (if any) is right for you means comparing your tax return with the features and deficiencies of each site. Here's a quick guide.

- Return is little more than Form 1040EZ or 1040? You can't beat 2nd Story Software's offer: Prepare and print your return using TaxAct for free. But beware a badly designed user interface that will force you to view many more screens than necessary.

- Complicated return? Intuit's TurboTax is for you. Its interview is the most detailed and complete, but it's much too detailed for simple tax returns.

- Want a pro to review your return? H&R Block's Signature Service will do just that for $80. The reviewer will sign your return and accompany you to any resulting audit. TurboTax offers a similar service for a variable fee, but only for a review.

- Know your way around IRS forms and rules, and already know the line items? Try TaxBrain from Petz Enterprises--its site serves up the IRS forms and does the math.

- CCH CompleteTax works best if you want details, from queries to help you determine appropriate categories, or to view multiple levels of input. But it's a strange interview that wants last year's data even before you start.

Is your return complicated? Consider how programs handle the following items:

- Mileage deductions, particularly in several categories, such as medical, charitable, and business (yours or as an employee).

- Depreciation expense--which you can claim on Schedule C or Form 2106 or both. Depreciation is more complicated if it involves still expensing items purchased earlier.

- Noncash charitable contributions exceeding $500 or a large contribution to a single group.

- Anything that might trigger the Alternative Minimum Tax (AMT).

- Asset sales or complications created by the ever-changing treatment of stock sales and dividends. (For example, selling shares that you purchased at several different times; only TurboTax will calculate your cost basis.)

Site Features: Good, Bad, Ugly

The more complicated your return, the more important it is that you choose carefully.

If you prepared your 2002 taxes on any of these sites, you may want to return to the same site this year, because four of them will import older data only from their own site. Only TaxCut lets you upload a return created with TurboTax or TaxCut. However, both H&R Block and Intuit accept data from Quicken or Microsoft Money.

Some specialization is fairly narrow; if you've used the CCH GainsKeeper to track stock purchases and sales during the year, you can transfer that data directly into CompleteTax or TaxCut, automating Schedule D.

Both H&R Block and TurboTax offer add-on programs--DeductionPro and ItsDeductible, respectively--to help you put values on donations of goods and services to charity. Both guarantee you'll save at least $300 or they'll refund the purchase price of the add-on. ItsDeductible costs $20 and DeductionPro is a free download under H&R Block's Premium service.

Site Design Challenges

Web-based tax software has two basic problems: information density and navigation.

There's a trade-off between the volume of information on a screen and the number of screens it takes to complete a return. In general, the more you enter on each screen, the fewer screens involved. But some sites make this worse by asking repeatedly for the same information, or by not structuring the interview to reduce the number of screens.

The best interviews tackle each IRS form by asking a series of yes or no questions to determine which parts you must complete. Yet, each of the five sites repeated the same questions about vehicle expenses for Schedule C, Schedule A, and Form 2106. Note to tax software designers: Why not have a single questionnaire about, say, vehicle expenses that distributes data to all the appropriate forms?

Navigation is a Web-specific problem. When you're running tax software on your own PC, the entire program is available so you can jump anywhere within the interview. When you're online, only the parts of your tax return that are relevant to your current task are downloaded. That's a nuisance if you need to return to Schedule A when you're in the middle of Form 2106.

Tax Web Sites: Interviews and Advice

Did TaxAct design its interview to drive a taxpayer nuts? You enter so little information on each screen, it's easy to get frustrated waiting for the next screen to load. The most extreme examples are screens that contain only two buttons labeled Yes and No. Does it really take an entire screen to say we're blind?

TaxAct also has a problem with dates. I entered 12/14/46 for my birth date, and the program changed it to 12/14/2004. Perhaps I should always enter four digits for a year, but shouldn't the program know a birth date is unlikely to be in the future? At least when TaxBrain made the same change, the software informed me the date could not be in the future. CompleteTax, TaxCut, and TurboTax handled dates correctly.

Sometimes, the software simply doesn't provide enough choices. For example, TaxCut's selection for medical expenses is much too small. Even the IRS Schedule A offers more categories.

TaxAct is only slightly better. Its details are few, but still not as good as the IRS Schedule A Part I. At least CompleteTax provides the actual Schedule A form as the IRS prints it.

In contrast to the interview-style form completion, TaxBrain provides a condensed version of IRS Schedule A. This is adequate only for taxpayers with very few itemized deductions. For example, TaxBrain will be useful if you have only mortgage interest paid to a single lender and property taxes on a single residence.

Striking a balance is tough. If anything, TurboTax includes too much detail. For example, a ten-screen questionnaire covers medical deductions, leading you through the amounts paid for professional services, transportation costs by type, and other elements.

Navigating the Tax Seas

Ease of use is, of course, directly related to navigation. And navigation really differentiates these products.

TurboTax and CompleteTax link to a navigation screen on each page. That screen shows where you are in the return, which parts are complete, and which are still ahead. You can click on a link to move to any part of the return.

CompleteTax does this especially well, providing links within complicated forms and links to move among forms.

The TurboTax EasyStep navigation screen is also clear, although unfortunately it only lets you move to points in the interview defined by that navigation screen. For example, once you select Schedule C expenses, you must go through the entire interview until you find what you want.

TaxAct takes a unique approach to navigation. Hovering the mouse over one of the major tabs opens a menu. Mousing over one of those menu items opens a submenu. For example, the navigation around Schedule C is awkward. TaxAct forces you to go through each expense screen to find the item you want to change.

TaxBrain starts with a questionnaire designed to determine which forms and schedules you need. You can return to the questionnaire and change your answers anytime.

However, navigation is limited to individual forms and schedules. Clicking on a link opens that form or schedule. Since TaxBrain offers only simplified versions of each form, the navigation scheme is appropriate.

The main problem with TaxCut's navigation screen is finding it. You have to drill down to get there, but then the navigation links are pretty good.

Primary Features

Each of the five programs tries to narrow the number of screens you see by asking a series of questions about your tax situation.

TaxBrain does a particularly good job of this initial screening, with its readable but thorough questionnaire. TaxBrain is also nagware. It constantly provides--and updates--a little reminder in the lower left corner of your browser, ticking off the days until April 15.

TaxCut simplifies things by displaying a series of check boxes at the start of each section. Then it displays only the questions related to the items you checked.

However, the site also displays a progress bar in the lower left corner of the screen. It's suspicious: While I entered data, that bar stayed between 70 and 75 percent filled for about 80 percent of the interview. Be warned that the gauge is probably wrong; how could the software possibly know how much you have left? You haven't told it everything yet!

Customer Support

All sites except TurboTax offer asynchronous customer support when you complete an on-site form. TaxBrain and TaxCut send e-mail when they post a reply on the site. TaxAct and CompleteTax do even better, sending the reply by e-mail (along with the question, in case you've forgotten what you asked).

H&R Block offers online support as part of TaxCut Premium, which costs $40. Intuit provides only telephone or live chat support for $20 per session. Keep track of your questions and ask them all at once to save a few bucks.

I asked each site how to change my password and also posed a tax question. Only support for TurboTax and TaxAct gave the right answer to the tax question; they all replied satisfactorily to the password query.

Intuit's adviser took a minute to check IRS regulations and cited the three necessary qualifying items. 2nd Story Software did even better, summarizing the answer and pointing to and quoting the relevant IRS regulations.

Petz Enterprises let my tax question sit on the server for a week. I posted a reminder and got a lengthy answer within a day.

H&R Block promises to answer TaxCut online support questions in ten minutes or less. On a Monday morning, it took about one and a half hours to get an answer that was, basically, wrong. CCH responded in less than a day with an answer for CompleteTax, but declined to give an opinion on the tax question.

Schedule by Schedule

These four comparison reviews cover the major federal tax schedules: Schedule A (itemized deductions), Schedule C (self-employment income), Schedule D (capital gains and/or losses), and Form 2106 (employee expenses).

In general, Intuit's TurboTax and H&R Block's TaxCut Web are the strongest. CCH CompleteTax is particularly adept at filling out Schedule A and Form 2106, however.

I found little difference between the ways the Web sites and the packaged software handled these forms.

Review: Schedule A

I recommend CompleteTax in this category partly because I know my way around Schedule A all too well. For those unfamiliar with this form, TurboTax is a better solution because it gives detailed prompts telling you which receipts you should find (or should have saved). The other three are too basic for all but the simplest tax situations.

The rankings: (1st) CCH CompleteTax, (2nd) Intuit TurboTax, (3rd) H&R Block TaxCut, (4th) 2nd Story Software TaxAct, and (5) Petz Enterprises TaxBrain.

Schedule A is where you enter itemized deductions; you generally go here only if the total exceeds 2 percent of your adjusted gross income. If you are a homeowner with a mortgage, you likely easily meet this requirement.

Schedule A also includes medical expenses (deductible if they exceed 7.5 percent of your adjusted income), real estate and other taxes, charitable contributions, miscellaneous deductions, and employee business expenses. (Form 2106 handles employee expenses.)

TurboTax goes into great detail about medical expenses. Its approach is similar to that of TaxAct, with very few items on each screen.

The value of this approach is that TurboTax gives extensive descriptions to help you determine what to include. But if you've been filling out medical expenses on Schedule A for a few years, you'll probably find this approach tedious.

Still, some parts of the medical expense area are tricky. Medical travel expenses are the worst. TurboTax breaks these down by type and helps you determine which mileage qualifies as a deduction.

On the other hand, TurboTax sometimes wants too much information--and uses too many screens to get it. For example, TurboTax uses two full screens for each mortgage lender. This information could easily be gathered with a single, well-designed screen.

TaxCut begins Schedule A with a checklist of major sections. Leaving a box unchecked means you won't be asked questions for that part of the form, which is sensible.

Unfortunately, the program doesn't remain efficient. Its treatment of medical expenses is primitive, requiring extensive input. Although TaxCut provides pull-down menus for the description field, they cover only the simplest cases. The choice of categories is inadequate.

TaxCut does better with medical mileage. One gripe: It provides no category for medical mileage for two people (if they both have appointments at the same time.) Slots for other medical transportation and lodging expenses are missing entirely.

As you delve into TaxBrain, you encounter forms like its reproduction of Schedule A. The lack of detail is amazing, even compared to what the IRS provides--and it offers a number of supporting worksheets for Schedule A that aren't part of the TaxBrain interview at all.

TaxBrain is recommended only for taxpayers who know their way around the IRS forms and can do most of the work themselves.

The others take a far better approach. All the other programs show you the forms, schedules, and worksheets you'll need based on your answers to earlier questions.

CompleteTax shows you the IRS forms for Schedule A. Even this is better than TaxBrain's approach.

TaxAct falls somewhere between TaxBrain and CompleteTax in handling Schedule A. For example, as it leads you through the questions about medical expenses, TaxAct uses multiple screens when one would do.

However, its coverage of some areas is simply inadequate. In particular, medical travel by means other than automobile and medical lodging are not mentioned. You must already know your way around Schedule A to use TaxAct.

Review: Schedule C

TurboTax offers the most complete and detailed interview to help you complete Schedule C. TaxCut is almost as good, followed by CompleteTax. TaxBrain has all the questions that are on Schedule C, but very little more. With TaxAct, it takes a long time to plod through all the screens.

Many people run small businesses in addition to their regular employment. They are victims of Schedule C. Software can be a real help--or a real nuisance. At minimum, the questionnaire should duplicate the IRS categories on Schedule C. Fortunately, some of the tax packages improve on the basic IRS form.

CompleteTax tries to compromise between information density and number of screens. Sometimes this leads to a good result. For example, presenting all the expenses for which you should enter totals on a single screen is excellent.

However, this can be taken too far. For example, CompleteTax does not handle Schedule C vehicle expenses in enough detail. It asks only minimal questions such as the mileage and use (which could cause you to miss some deductions). In contrast, TurboTax drills down and asks whether other people use a vehicle, and about your documentation.

TaxCut does a pretty good job on these issues. It displays Schedule C expense items on four screens. Vehicle expenses are handled as part of asset depreciation, with specific questions related to cars and trucks.

Once again, TaxBrain does little more than show you the IRS form--which makes calculations a pain. For example, it replicates the form for the asset depreciation schedule and provides a rudimentary questionnaire regarding vehicle use.

TaxAct uses the same maddening interface for Schedule C that characterizes the entire package. The program asks very few questions on each screen, extending across several screens a series of questions that could obviously be combined. Most of the programs handle such questions with a single screen of yes and no radio buttons.

Even picking a business activity code is a challenge in TaxAct. The IRS requires this six-digit number to place your business into an industry. Most of the programs produce lists of categories and subcategories. However, TaxAct shows a single, very long list of all the numbers.

You must select from the list; you cannot simply enter the number. Worse, the list is not in strict numerical order. If you enter 5 as the first digit of your business activity code, TaxAct produces a block of numbers that start with 5. Unfortunately, the list has two or three more blocks. I had to search awhile to find my code.

CompleteTax uses a better method for handling long lists. It lets you sort the list by either code number or category. Clicking the code you want automatically fills in the space in Schedule C.

Review: Schedule D

If you have complex asset transactions, TurboTax is the only way to deal with Schedule D. If your transactions are fairly simple, choose either TaxCut or CompleteTax. Both do a good job and let you enter your data fairly efficiently.

Schedule D is the bane of the taxpayer's existence. Changes taking effect in 2003 make Schedule D even worse. For the first six months, the old tax laws apply to dividends. Starting July 1, the new, lower tax rates apply. That means your form 1099-DIV now has a new box: 1a, which shows dividends paid before June 30. Box 1b shows the amount of "qualified dividends" under the new tax law.

One complication that drives many investors crazy is calculating the cost basis for stock when they bought the stock on several dates at different prices and the stock has split. (If you've held Microsoft stock for more than five years, the stock has split several times.)

Of the programs, only TurboTax actually calculates these for you. It runs through the cost basis and summarizes the capital gains and losses.

If you need any other reason to choose TurboTax, consider this: It is the only program that recognized my investment expense carry-forward from previous years and suggested I convert some of my capital gains to income. The excess investment expense can offset the income, reducing my tax bill.

Not everyone's taxes are this complicated. But if yours are, TurboTax Premier provides these features. TurboTax Deluxe doesn't include the detailed capital gains questions.

The downside is that TurboTax Premier costs $60 ($30 for the Web-based version), which is $20 more than the Deluxe package. If you don't want to spend that much, here are some alternatives.

CompleteTax also helps calculate the basis for multiple transactions of the same stock. The documentation is perfectly adequate, but you must do your own calculations. (Entering 99/99/99 for the date purchased tells the software you bought the stock on various dates.)

TaxAct also does an adequate job. As usual, the program takes too many screens to get through the process. However, TaxAct permits only 15 characters to enter the description because that's all the IRS allows. Other programs allow more and reduce the font size when printing the return. For example, you can enter the information as "100 sh Microsoft" or "100 sh MSFT." TaxAct also leaves it to you to calculate the cost basis for each asset.

TaxCut does a better job, making more efficient use of screen space and allowing longer descriptions of transactions.

However, TaxBrain shares several of the less friendly features. Like TaxAct, it allows only 15 characters for the transaction description. Also, TaxBrain tries to use screen space too efficiently. It permits only one line for all details of a transaction. Further, TaxBrain forces you to decide who owns the transaction: The only choices are T (taxpayer) or S (spouse), not shared.

Review: Form 2106

TaxCut is the clear winner in the Form 2106 category. The program efficiently asks for many details, using only a few screens.

CompleteTax is second best, because it gets you through this form quickly. TurboTax is just too inefficient at moving through the information. TaxBrain is best suited for those who know their way around the IRS forms, while TaxAct was made to order if you like watching screens download from the Web (in the online version).

If you received a W-2 form, you probably have some employee business expenses. These can be reported as miscellaneous deductions on Schedule A. You use Form 2106 to itemize these expenses.

TaxCut does a particularly good job with employee expenses. It provides clear, efficient screens for you to enter travel expenses and auto expenses.

CompleteTax does little more than show you the IRS form on the screen. It's adequate but not particularly useful. The program could also have saved some time by not asking screens full of follow-up questions if it had noticed my wife's occupation was "None." Interestingly, TurboTax shares this deficiency.

Like the program's approach to Schedule A, the TurboTax interview leads you through a lengthy series of screens. However, at least TurboTax puts several questions on each screen.

TaxAct is clumsy in this category. It asks for information you've already entered (for example, which expenses belong to which taxpayer). Then it asks only one or two questions per screen, which is particularly annoying if you're running the program online.

TaxBrain again emulates the IRS form. If you're comfortable with IRS forms, this is the program for you.

Conclusion and Postscript Tips

Here are the highlights: If your taxes are simple enough to fit on Form 1040EZ, TaxAct is your best bet, and the price is right.

If your tax return is complex, consider which IRS schedule will be the biggest challenge, and choose the package that handles it most adeptly. We find TurboTax the most thorough, but each site has something to offer.

Also, each site produced the same results in the test tax return, indicating they are all accurate. You may get different results because some sites ask more questions than others, so some may identify additional deductions.

This review uses test data from my 2002 federal tax return. In 2002, my household had significant medical expenses, mortgage interest, real estate and personal property taxes, and employee expenses. I also routinely file Schedule C for my consulting business. We make charitable contributions both in cash and in donations.

So what's missing? Complications created by the sale of investment assets--stocks and bonds are the simplest items in this category. Sale of real business property such as rental housing makes a return even more complex.

I accessed the Web sites using conventional dial-up connections. Some were on a 28-kilobit-per-second modem, the rest at 56 kbps. The tax sites are occasionally slow, but usually only at the start. Apparently, once you've logged in, your tax data and a significant chunk of software is sent to your local computer.

A Word on Web Security

My first reaction to putting my taxes on a Web site was, "No way!" Researching these services has almost changed my mind. Internet security has improved significantly in the last few years. What's more, your desktop PC may not be as safe as it once was, due to increasingly smart viruses.

The three security points are the server, your computer, and communications between the two. An overview of Web security issues is offered in the World Wide Web Security FAQ.

As for specific sites, read the company's privacy policy. Four of the five tax site services reviewed are Truste subscribers, which means they follow the promises in their privacy statements. They won't share your tax data with anyone else. CompleteTax is the nonmember. Also, TaxAct seems the most inclined to share your name, address, and phone number with affiliates and send you e-mail newsletters.

The components of server security include user name and password restrictions, encryption, Web services, and scripting. To test user name and password security, try to create a very short user name and password. Three of these Web sites require at least six characters in each. TaxAct and TurboTax simply won't accept some words as passwords (such as password). TaxBrain took a one-character password; the site has since imposed a minimum length of four characters on both. CompleteTax requires a four-character user name and a six-character password, and did accept password as the password.

Also, examine the Web site's security certificate. Select File/Properties once you're logged in, then click Certificates. The security certificate should be current and owned by the company. Click the Details tab and look for the public key; encryption strength should be at least 512 bits, and 1024 is better.

Server Security

The other two server issues are services and scripting. The more supported, the more routes into the server. While a server needs HTTPS service, there's little need for FTP. None of the five services allow FTP access to their production servers.

Scripting tools are used to collect data online. Four of the five Web sites use Microsoft's Active Server Pages (ASP) to collect data. (H&R Block says it uses a proprietary data collection method.) ASP has its share of security issues. Each firm says its security patches are current.

Communications security means you should make sure your browser supports 128-bit encryption. Select Help/About from the browser menu to check.

Otherwise, general security practices apply. Your home PC is more secure if you've installed a firewall and keep your virus definitions file up-to-date.

In order to let you interrupt data entry for your tax return, each of the Web sites puts a cookie on your computer. This is just a small file that keeps track of who you are and helps the server identify where you stopped working on your return. All five services encrypt your password in the cookie file. However, TaxBrain and CompleteTax do not encrypt your log-in name.

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