File Your Taxes: Accountant, Software, Or Online?

How do you prepare and file your taxes? Do you pay a person, install software on your computer, or do you do it online?

Tax Preparer

If you use software, either installed on your own computer or online, you are actually in the minority. IRS statistics show that 59% of individual taxpayers pay a tax preparer to do it for them. 30% use tax software. I don’t know what the other 11% do. Maybe through volunteers.

The best kept secret in tax preparation and filing is that for most people not running a business, a paid preparer such as a CPA, Enrolled Agent, or a trained seasonable worker at a tax prep office near you can’t get you any hidden deductions or credits that you can’t get yourself through software. Tax preparers use software too! Going with a tax guy or gal may save you time but it won’t give you a bigger tax refund.

Paying a tax preparer is much more expensive than buying software. A $500 price tag is quite normal for returns prepared by a CPA. Tax prep company Liberty Tax reported its net average fee per tax return prepared was $180 in 2013. I think the $180 number is low. Maybe a federal return plus a state return count as two returns? On the other hand my all-in cost for software plus postage for both federal and state returns is under $30.

Then why do 59% of people pay a preparer $300 to $500 rather than doing it themselves with software? Do that many people have complex returns? How can they afford to pay that much when the other 30% choose to waste their time with software? Not having the confidence that software can do the same would be one reason. I guess it also has to do with not seeing the tax refund as their own money. Some people see it as the cost of doing business in order to get money from the government.

If you use a tax preparer and you don’t run a business or have complex rental real estate, I encourage you to at least try the software once for a completed return. See what the software produces versus the return done by your tax preparer. If 30% of people can figure out how to use tax software, I’m sure you can too.

Tax Software

The next best kept secret is that tax software installed on your own computer (downloaded or CD in a box) is both more powerful and less expensive than the same software online. Yet more people use the software online instead of installing on their own computer.

Intuit reported in its annual report that total online federal units represented 78% of total federal TurboTax units. That means only one in five who used TurboTax installed the software.

As I showed in a previous post Fake TurboTax Discount Through Vanguard and Fidelity, the same software you buy from Amazon or a retail store costs less than what you pay to do it online. It comes with 5 federal e-files. You can use the same software to prepare multiple returns. You can legally install it on multiple computers. When you do it online, you get one federal return and one state return. Another family member has to pay the same all over again. When you factor in multiple returns the installed software can do, the cost is cut in half, to one third, or even less.

The installed software is also more powerful. You see what’s going onto the forms. TurboTax removed Schedule D for capital gains from TurboTax Deluxe online but TurboTax desktop product works just fine with Schedule D.

You can save multiple copies of your return when you have the software installed. Delete a W-2 from one copy and see the impact when one of you stops working. Delete your mortgage interest and see what happens. Your main copy isn’t affected. When you use tax software online, you are dealing with only one good copy.

Buy the software and install it. You will have a better product at a lower cost.

State E-File

The software you buy and install usually charges extra for state e-file. It’s completely up to you whether you want to pay for the convenience. I simply print and mail. I don’t think it’s worth another $20 just for state e-file.

[Photo credit: Flickr user Alan Cleaver]

See All Your Accounts In One Place

Track your net worth, asset allocation, and portfolio performance with free financial tools from Personal Capital.

FREE E-mail Newsletter

Join over 3,000 readers and get new articles by e-mail:

No spam. Unsubscribe any time.

Comments

  1. desper-otto says

    I keep the majority of my assets at Vanguard, and as one of their Flagship clients I get a free copy of TurboTax Deluxe each year. Also includes one free state.

    I’m also an AARP Tax-Aide volunteer. The program offers free tax preparation and e-file at sites nationwide. I volunteer two mornings a week during tax season, and have already prepared over 70 returns this year. The volunteer tax preparers aren’t “professionals”, but each is required to pass the IRS advanced qualifying exam every year, and every volunteer-prepared return is quality checked by another certified volunteer. It’s a great service for folks who aren’t computer savvy or who just don’t feel comfortable doing their own taxes.

  2. Steve says

    Maybe the other 11% file paper forms? I know at least one person who files by filling out PDFs, printing, and mailing them.

    • Steve says

      I read the original powerpoint presentation and it supports my theory.

      Also, the presentation had a few other interesting factoids. For instance, tax code complexity went up 30% between 2000 and 2007, but productivity increases and increases use of assisted methods of tax preparation made up for it, at least for the period under study.

  3. Dan says

    I file my federal returns using freefilefillableforms.com which the IRS provides (via a third party). Depending on the year, I do the forms online and print the pdfs or e-file through the website. Personally, I find using tax software obfuscates whats really going on with your 1040 and ancillary forms. So it makes for an uninformed citizen when it comes to tax policy issues.

    Then again, I was forced to learn how to manually file my taxes due to not trusting software to properly do incentive stock options and multi state returns (CA being one of them…).

    • Harry says

      I agree it’s important to understand how the numbers flow from one form to another. If not doing it by hand, at least read the completed return and know which numbers came from where.

      I gave up on doing it by hand a long time ago. The software does its best in making changes. Change a number in one place and all the affected numbers change. With all the phaseouts and worksheets, correcting an input when you are doing it by hand becomes a daunting task.

  4. OB says

    Some unscrupulous tax preparers ‘invent’ or create fake deductions and the tax filer either just trusts what the Preparer does, or just looks the other way. Preparer: I think you put in $500.00 in this church . Filer:”Oh, okay”. They just risk the chances of being audited, and for small accounts, the IRS may not bother at all. Or some would ‘bedazzle’ the hapless filer by mentioning all of these other deductions they are putting in– but not explaining that at the end it didn’t matter because of not being enough to breach the various threshold floors to do the itemized deductions (and the standard deduction is still taken). The Filer just thinks, “wow my Preparer thought of all of these things!”

    • Andrew says

      Great point…I think a lot of people think the tax preparer will find “extra” deductions or loopholes that using a software program will not. And I think many are also fine with doing certain things as you suggested with the donation where they figure the IRS won’t take the time to scrutinize. And for a lot of things, it’s unlikely that the IRS will audit them…but you never know.

  5. Andy Hough says

    I think the biggest tax return secret is that 70% of people qualify to do their tax returns for free through IRS Free File. By going through Free File I was able to complete my federal and state tax return for free using H&R Block’s online software. If I had gone directly to their site I would have had to pay about $90. My girlfriend had paid to use the same software online for years until I let her know she could use the same software for free. I’m guessing a lot of people are paying to complete their returns using online software that qualify to use the software for free.

    • Harry says

      Keep in mind only 30% use software, free or paid. If some people are paying unnecessarily to use the software, it doesn’t change that 30% number. If truly 70% qualify for free file, most of them are choosing to pay a professional.

  6. Lynne says

    Doing my own taxes just isn’t an efficient use of my time. I used to procrastinate for months, and feel guilty as each weekend went by with the taxes undone. Then I used a tax preparer after a year my taxes were a bit more complicated, and I’ll never go back. Now I just throw everything tax-related in a big envelope as it arrives, and spend a few minutes organizing it before I take it all to the tax preparer. We sit down and do my taxes in an hour, and I’m done.

  7. Thegooch says

    My taxes are simple and I get Turbotax for free, and I do my taxes as soon as have the required documentation. My withholding is very accurate as each year they owe me 4-8 dollars back.

    I have no idea why people make things more complicated than they have to be, there are exceptions of course, but most people should be able to do taxes themselves in about an hour.

  8. abc says

    I believe that you should do your own taxes. No one cares more about getting it done right than you do. To do taxes right you have to gather all the source documents and that is most of the work, which you must do anyway.
    For many years, I completed the paper forms the IRS would send in the mail each year. As suggested by another poster, the paper method is a great tool for learning how to do your taxes. Then, I stated using various software programs on my computer. In the earlier years there were lots of free offers, so I would use more than one program to verify I was getting the right answer. I have also used the free online programs through the IRS when helping my kids do their taxes.
    I now use TaxAct on my computer. This year It cost me only $9.99 during a sale. Until this year I had never needed any support from TaxAct, but this year I had one tax question and one problem with the way the program was doing a calculation. In both cases, the TaxAct customer service was fantastic.
    In the case of the calculation problem, TaxAct went back to the IRS for clarification and the IRS will be changing the instructions for the applicable form, and TaxAct will be fixing the program in the next release. While it took almost a month for the problem to be worked, I feel the delay was due to the IRS, not TaxAct. The nature of the calculation problem would only impact a very small number of tax returns. A lot of elapsed time for a $34 issue, but doing it right is important to me. I plan to continue using TaxAct.
    I agree that software on your computer is the best method of doing your taxes. It provides the flexibility described in the article, plus I feel it makes it much easier to check the results of the program and to check my inputs into the program. I believe that it is important to double check the results, so I use TaxAct and then verify each line item. Until this year, any disconnects had always been caused by me.
    Be happy to pay taxes. It means you made some money. But don’t pay more than you owe, even if it is only $34. And, I wish I could do my taxes in an hour.

  9. Steve Harvey says

    For the past few years I’ve been using a combination of methods that ensures accuracy and allows me to have some control about what’s going on in my tax life.

    I eagerly await the on-line arrival of next year’s tax software (the Fed portion is released usually in October; the State is later). I log in and start filling out everything with either ‘real’ numbers or with ‘estimated’ numbers based on my own best calculations. This way I have not only a close estimate of my tax picture for the coming year, but also a very useful planning tool. Many decisions have associated tax consequences, so it’s essential for me to know about them while there’s still time (before December 31) to change directions. As I make alterations in my financial decision making, get 1099s, year-end statements, bonuses, and other tax-related documentation, I replace the ‘estimated’ numbers with the ‘real’ ones. (I have asked two different on-line tax programs if they could provide me the ability to color code the entries, but, so far, no luck).

    When I think I know all the ramifications and I have all the documentation, I stop using the on-line tax program and I make an appointment and bring everything to my friendly AARP volunteer tax preparer at the library around the corner. They are always impressed at how knowledgeable and prepared I am and that seems to encourage them to take extra time on my special considerations. Sometimes they find a few more dollars here or there and they are able to research one-time complex issues at no charge (like stock options, or rolling over an HSA contribution from an IRA). They e-file my return for free and give me a beautiful set of copies (including all my backup paperwork) for my files for free.

    In summary, I simply use the on-line software as my planning and education tool and the tax volunteers as my quality control system.

    • abc says

      Great way of managing your taxes. I like your double check method. Is there a limit on income to use this free tax service?

    • desper-otto says

      ABC, I don’t know if my statement applies to all AARP sites nationwide, but there is no income limitation at our AARP site. No age limitation, either — some young folks are surprised that we’ll assist them. There are some complicated situations that are “out of scope” for our program. For example, we can’t assist taxpayers who have rental property income, or self-employed taxpayers whose business has suffered a loss, carries an inventory, uses depreciation, or has expenses exceeding $10K. But in practice, there are very few taxpayers who are turned away.

  10. Mike83 says

    I have used Turbotax installed software for a number of years. I use the most complex level offered. I have always found it chokes when presented with a somewhat standard schedule K1 item: medical insurance premiums. For years, including this year, it throws up a warning that it does not know how to use this information. It then sends the user to non-existent help sections. Not knowing how to manually bypass the opaque data gathering system and place orphan data directly onto the forms leaves one completely befuddled at this point.

    This year I noticed that it congratulated me and itself with exclamation points when I completed the overall filing process. It claimed a guarantee as to all required calculations and the best deductions. Then I wondered, I knew I would likely pay a penalty for not paying estimated taxes timely. But it had asked for no information on this topic. How did it make the calculation then? It turns out that it uses a default assumption that income is earned evenly throughout the year, generating a $1600 penalty for me. But like many business owners using this tax program (advertised for business owners with complex returns), my income in large part comes as a year end distribution. Manual calculation reduced my penalty by over $1200 compared to the TurboTax hype.

    Be careful.

Leave a Reply

Your email address will not be published. Required fields are marked *