Desktop tax software

SAN FRANCISCO (02/05/2004) - The W-2 forms have arrived, the 1099 forms aren't far behind, and it's time to choose your best line of defense against the IRS.

Three companies lead the pack for desktop tax software. By my ranking, they are TurboTax from Intuit Inc.; TaxCut, marketed by H&R Block Inc.; and TaxAct, sold by 2nd Story Software Inc.

You can find Web-based versions of these three programs, as well as of CCH Inc.'s CompleteTax and Petz Enterprises Inc.'s TaxBrain. Those online options are reviewed separately.

The shrink-wrapped programs are very different, and each is available in several versions. TaxAct is the budget deal, offering a free download (US$6 for a CD). TurboTax starts at $30 for the Basic package; most comments here are about the Premier version, however. TaxCut's pricing starts at $15 for its Standard version, though my evaluation covers the Premier version. Various rebates reduce some of the prices. On the other hand, getting support for state income taxes costs extra in some cases.

Decisions, Decisions

Generally, the higher-priced packages include a greater level of help and provide a more in-depth interview to help populate your tax forms. But their areas of focus vary--and that's a plus, because everyone's tax situation is different. Also noteworthy: Each program I tested imported its own data from the previous year's return without a hitch.

Otherwise, determining which (if any) package is right for you means comparing your tax return with the features and deficiencies of each program. Here are the highlights:

- If your return is little more than form 1040EZ or 1040, you can't beat TaxAct's offer: the download is free, and you can e-file for $8. But the interface design forces you to look at many more screens than are necessary.

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- f you're return is very complicated, TurboTax is for you. Its interview is the most detailed--in fact, it's overkill for taxpayers with simple returns. TurboTax Premier ($60) includes an outstanding treatment of asset sales, especially stock transactions.

How do you know whether your return is complicated? Consider these factors:

- Mileage deductions, particularly in multiple categories, such as medical, charitable, and business (your own or one where you are an employee).

- Depreciation expense, which you can claim on Schedule C or Form 2106 or both. Depreciation is more complicated if it involves continuing to expense 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 resulting from the ever-changing treatment of stock sales and dividends. (For example, selling shares that you purchased at several different times).

I tested the shrink-wrapped packages on two different PCs, each running Windows XP with SP1 and all current security patches installed. One system was a 2.41-GHz Intel Corp. Pentium 4-powered Sony Corp. VAIO desktop with 512MB of RAM and 60GB of disk space. The other was a 2-GHz Celeron Dell Inc. notebook with 256MB of RAM and a 20GB hard drive.

The test data came from my 2002 federal tax return. My household had significant medical expenses, as well as mortgage interest, real estate, and personal property taxes, plus employee expenses. I also routinely file a Schedule C for my consulting business. My firm makes charitable contributions both in cash and donations. The primary IRS forms--Form 2106, and Schedules A, C, and D--are reviewed at the end.

Bugs and Features to Watch

Tax data is complicated and messy, so it's no surprise that sometimes things go wrong. For example, if you try to install TurboTax on a PC with no C: drive, you'll get this error message: "Error creating necessary version files." You can download the patch on the TurboTax site.

Another TurboTax bug involves the update process. Each of the three desktop software packages urges you to download and install the latest updates before you begin. TurboTax requires that you be logged on to your PC with administrator privileges before you can download. If you object to being online while logged on as administrator, try one of the other two packages.

TaxCut had problems importing a return prepared under TurboTax. The return contained over 80 depreciable assets from previous years, most of them fully depreciated and therefore irrelevant. Still, TaxCut's error check reported over 600 errors, most of them related to these assets. I had to answer that each asset hadn't been sold that year and to note the asset class, and then TaxCut wanted the depreciation lifetime--even though the software completed this automatically, based on the asset class.

Here's the crux: If you successfully used a tax program last year, stick with it this year. The sole exception is when your tax situation becomes considerably more complex (or more rarely, when your taxes get simpler).

Add-Ons of Note

Both H&R Block and TurboTax market separate programs to help you value noncash donations to charity. H&R Block's DeductionPro costs $20 but is included as a free download with TaxCut Premium. TurboTax's ItsDeductible also costs $20 and values items based on EBay data. Both guarantee to find at least $300 in additional deductions or the vendor will refund the purchase price.

If you made numerous noncash donations to charity during 2003, either of these add-ons will be worthwhile. You should use the deduction finder companion to the tax program you choose, because you're virtually assured of compatibility.

Microsoft also offers tax advice and other information through MSN. The site provides IRS forms and many links to other tax resources, primarily H&R Block.

All of the programs pitch additional products. TurboTax and TaxCut do most of their sales work during installation (though offers for other software and partner sites are scattered throughout the program). TaxAct is the ad champ. If you choose View/Calculator from its menu, the program tries to sell you its calculator software for $10. Decline, and you'll get the free Windows calculator instead!

Program Features: Good, Bad, Ugly

Overall, tax packages could use some advice from an efficiency expert. For example, like its online version, TaxAct uses too little screen space. It will ask only a single question on an entire screen.

Even TurboTax sometimes falls into this trap. For example, requesting medical expense deductions for Schedule A, TurboTax asks about each item on a separate screen.

Meanwhile, TaxCut greets you with a strange notice, warning that the software may repeatedly ask you to register even after you have. Is this a bug or a feature?

Some areas of specialization are rather narrowly defined. If you've used CCH's GainsKeeper to track stock purchases and sales during the year, you can transfer the data directly into your TaxCut return, automating Schedule D. TaxCut also can import last year's return prepared by either itself or TurboTax. Both TurboTax and TaxAct import data from their previous year's file. TurboTax and TaxCut also import data from Intuit Quicken or Microsoft Money.

TaxAct has some nice touches. A calendar pops up to help you figure out dates, though you shouldn't need a calendar to fill in a birth date.

The TaxAct menu offers a good list of options. I appreciated being invited to submit product suggestions and to look at tax law updates.

TurboTax distinguished itself by being the only package to note that I could offset part of my investment expenses (and thus lower my taxes) by declaring all or part of my capital gains as investment income.

TaxAct was on the same track, but its explanation was muddled. The program correctly noted that I could convert capital gains into investment income. But the note at the bottom of the screen says, "Making an election to include in investment income will reduce the amount of net capital gain eligible for the lower capital gains tax rates." As Maxwell Smart used to say, "Missed it by that much!"

TaxCut's main strengths are its explanations of changes in the tax law. It provides good and timely information about confusing changes in the way capital gains and dividends are handled.

TaxCut is also good about reducing the number of blank fields you have to deal with. For example, my Schedule C often contains a number of expenses that are zero. TaxCut handles this by displaying a list of expense items and asking you to check those for which you will enter information. Then the input screen displays only those lines. Unfortunately, it still deals with only one expense item per screen, which seems inefficient.

TaxCut offers some unique data-entry features. Its data-entry fields include a small "insert" mark. Clicking on it brings up a dialog box where you can enter more details. If you like, you can check the box to designate the entry as tentative. TaxCut later reminds you to complete or change the data.

Ease of Use

All three programs have good navigation tools.

Each one lets you easily skip around throughout the interview. You can move to any major segment of a return in progress simply by clicking a tab at the top of the interview window.

TurboTax shows you your return as an outline. Checkmarked items are considered finished. TaxCut uses the same navigation format, but is missing some items. For example, I could not move to individual Schedule C expense items.

TaxAct keeps the J.K. Lasser tax guide open at the bottom of the screen. The guide automatically moves to the pages relevant to what you're working on. This is quite handy if you have numerous questions; if not, you can choose to close the tax guide.

Customer Support

H&R Block and 2nd Story Software offer asynchronous customer support when you complete a form on their Web sites. H&R Block sends an e-mail message when it posts a reply to your TaxCut question. 2nd Story Software goes one better, answering your TaxAct question by e-mail and including the question in case you've forgotten what you asked.

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

I posed the same tax question to each customer support group. Support for TurboTax and TaxAct gave the right answer. Intuit's adviser checked and cited the IRS regulations. 2nd Story Software did even better, summarizing the answer and pointing to and quoting the relevant IRS regulations.

H&R Block promises to answer TaxCut online support questions in 10 minutes or less. Unfortunately, on the Monday morning when I tested the service, it took me about 1.5 hours to get an answer that was basically wrong.

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's the summary: If all you file is Form 1040EZ, head straight to TaxAct and download the program--the price is right. You can pay the small e-filing fee or print out your return and mail it yourself.

If you have a complex tax situation, however, carefully consider which IRS schedule is likely to cause you the most difficulty. Then choose the package that handles that form best.

Another variable to consider is complications arising from 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. You might be best served by a Premier version of the product you choose.

Each packaged produced the same results with the test tax return, indicating that they are all accurate. You may get different results, however, because some sites ask more questions than others and therefore may identify additional deductions.

Again, TurboTax is the most thorough of the three, but each program has positive aspects. The one to pick depends on the year you had--and what Uncle Sam is expecting from it.

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