How do you prepare and file your taxes? Do you pay a person, install software on your computer, or do you do it online?
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 seasonal employee 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 preparer 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.
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.
You can save multiple copies of your return when you have the software installed. Make a duplicate copy to play with. Delete a W-2 and see what happens when one of you stops working. Delete your mortgage interest and see how much you are really saving in taxes. 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.
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]
Instant diversification in a low-cost ETF portfolio. Convenient and disciplined with automatic rebalancing. Minimize your taxes. Betterment.com.