In a previous post Free E-File Is NOT Free, I said I’m going to try TaxACT this year because it’s substantially cheaper than TurboTax and TaxCut. A couple weeks ago, I got TaxCut Standard for $1 at Dollar Tree. TurboTax also sent me a trial CD some time last year. With all three major tax prep software on hand, I was able to do a side-by-side comparison.

The tested versions are (all on Windows):

* Retail prices from Amazon.com on Feb. 19, 2009.

I tested with my real data. My moderately complex return includes:

• salary on W-2
• self-employment income and solo 401k contributions
• interests on 1099-INT, both taxable and tax-exempt
• dividends, both qualified and non-qualified
• short-term and long-term capital gains distributions from mutual funds and ETFs
• investment sales with both short-term and long-term gains and losses
• foreign tax credit
• capital loss carryover from last year
• restricted stock units (RSU) sales and ESPP non-qualified dispositions
• mortgage interests and property taxes
• charity donations
• IRA contributions
• Alternative Minimum Tax (AMT)

Installation: No major problems.

TurboTax installation took a lot longer because it requires a Microsoft component called .NET Framework 2.0 SP1.

Unlike last year, TaxCut didn’t install the ad-supported pdf995 by default this time. From reading the reviews, I see it will install pdf995 only if you want to save your return in PDF. Because I already have the open-source software PDFCreator, I will not touch the “save as PDF” functionality in TaxCut.

TaxACT installation went very fast.

Update: Both TurboTax and TaxCut CD installations required updates, which went smoothly. Just follow the prompts. TaxACT download didn’t require any update because they had the latest version up on their web site.

Launch: No problem launching either TurboTax or TaxACT under a limited user account in Windows XP. TaxCut still required running as an administrator.

They all show the software registration screen but you don’t really have to register. Just go File -> New Return and skip directly to a new return.

Import last year’s data: TurboTax imports last year’s file in TurboTax, TaxCut and TaxACT formats. TaxCut imports last year’s file in TurboTax and TaxCut formats. TaxACT does not import last year’s return in any file format except its own.

I imported my TurboTax file from last year to both TurboTax and TaxCut. I had to enter my personal info in TaxACT. If I’m going to use TaxACT next year, it’s a one-time deal I’m willing to endure. I’ll be able to import next year.

Import W-2 and 1099: TurboTax offered to import my W-2 and 1099s from payroll providers and financial institutions. TaxCut does not import W-2 or 1099 from anywhere. TaxACT can import from W-2 eXpress by TALX (I’ve never heard of this payroll provider before).

I didn’t use this import feature due to privacy and data security concerns. Importing probably will save some time if it’s done accurately. However, it can also cause problems if you don’t know what were imported and what were not. You have to check each import to make sure it got everything correctly. I’ve seen other people report problems because some fields were defaulted to zero, which made the calculated tax much higher than it should be.

I think importing W-2 and 1099 is more trouble than it’s worth. It’s a lot harder to fix bad imports than entering data on your own. I don’t mind typing my numbers. It wasn’t too bad.

Import from Financial Software: TurboTax and TaxCut can import from Quicken, Microsoft Money, or TXF files generated by other software. TaxACT does not import these files.

Interview and Data Entry: Like in last year’s versions, the interviews in TurboTax and TaxCut are similar. They are both easy to complete. TaxACT, however, uses the bottom half of the screen for the tax form view. It splits W-2 entries into multiple screens. If you have to make a correction, you have to page through the screens to find the right spot.

TaxACT also doesn’t mark the required fields versus optional fields. For 1099s, it asks payer’s address, which isn’t used anywhere in the return. I ended up typing a bunch of things before I realized I could just leave them blank.

TurboTax seems to ask more obscure and sometimes confusing questions. Those questions are irrelevant to me but perhaps they are relevant to 0.1% of the users. TaxCut strikes a good balance for me.

All three software have a topic list. You can jump ahead or jump back. They all let you open a tax form directly (disabled in TurboTax trial until I pay).

TurboTax still requires splitting the 1099-INT into two if not 100% of the tax-exempt interest is also tax-exempt for the state. TaxCut and TaxACT both handle it more elegantly with an extra field in the interview.

Valuing Donated Items: As I mentioned in a previous post, valuing non-cash donations is not dependent on which tax preparation program you use. Therefore it’s not a criterion for this comparison.

Built-in Help: I am familiar with the tax ramifications of my transactions. I didn’t really use or test much of the built-in help or online support.

Refund Calculation: All three programs produced the same bottom line.

TurboTax trial does not let me see the form or print the return unless I pay. The numbers from TaxCut and TaxACT are nearly identical for all lines on all forms, except for rounding a dollar here and a dollar there.

TaxCut rounds everything to the whole dollar as soon as you enter them in the interview. A reader pointed out to me this is technically illegal (26 USC 6102). You are supposed to keep everything in dollars and cents on the worksheets and only round the total when you enter it on the form.

Both TurboTax and TaxCut were able to calculate the maximum contribution I can make to my solo 401k plan. That’s really helpful. The calculation matched what I got from my spreadsheet. TaxACT does not have this functionality (at least not in the Standard version), but it’s OK because I can use my spreadsheet.

The bottom-line result being identical didn’t surprise me. That’s the way it should be. These software are like fancy calculators. Given the same inputs, the result should always be the same.

Conclusion: All three software did an adequate job for my return, although none is perfect.

TurboTax is much more expensive. It can be confusing with its irrelevant questions. Requiring splitting one 1099 into two is lame.

TaxCut requires running as an administrator. It’s also technically illegal with its rounding method.

TaxACT should really work on importing TurboTax and TaxCut file formats and importing TXF files. The way it splits entering a tax form into multiple screens is not as convenient as having everything on one screen as in TurboTax and TaxCut. It should also mark the required fields for data entry.

After weighing the pros and cons, I decided to use TaxACT this year. Before I did this side-by-side comparison, I wasn’t sure if it can handle my moderately complex return. It did the job well. Now that I know how it works, I can easily work around the features I don’t like.

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Software picked, likely related articles at The Finance Buff:

• TurboTax Deluxe 2007 Free Download
• Goodbye TaxCut, Hello TurboTax
• TaxCut 2008 on CD for $1 at Dollar Tree Stores

This TaxCut Standard version is not limited in the kind of forms it can handle. It has Schedule C for business income and Schedule SE for self-employment tax. It probably doesn’t have the fancy help videos in premium versions. I don’t watch those anyway. Although I don’t have a Mac, the CD jacket says it also works on Mac OS 10.4 or higher.

I was planning to use TaxACT this year. With TaxACT Free Edition, I can do my federal return for free and do the state return with pen and paper. I actually already downloaded and installed TaxACT Free Edition. I haven’t done anything with it yet because I was waiting for my W-2 and 1099s. I was planning to write a review and compare TaxACT with TurboTax when I’m done, like I did last year between TurboTax and TaxCut. For $1, the price is right for TaxCut. TaxACT does not import my data (in TurboTax format) from last year. TaxCut does.

I see TaxCut still requires logging on as an administrator to run it. This is a really bad software practice. Running software shouldn’t require admin rights!

This deal has been posted on FatWallet since Jan. 17. There is also an article on CNET about it on Jan. 19. It looks like TaxCut has been doing this with Dollar Tree for a few years. So I will look out for this deal again next year. Note to self: read FatWallet more often.

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Software picked, likely related articles at The Finance Buff:

• TurboTax Deluxe 2007 Free Download
• Goodbye TaxCut, Hello TurboTax
• TurboTax, TaxCut, and TaxACT Compared Side By Side

Although I said it doesn’t make sense, Congress passed a law last year and gave an extra deduction for property tax to people who don’t itemize deductions. Kaye Thomas at Fairmark also thought it was bad tax policy and not justified. Of course what we say doesn’t count. Congress makes laws however it likes.

Taxpayers in single, head of household, or qualifying widower filing status, who don’t itemize but pay property tax, get up to $500 extra deduction; married filing jointly get up to $1,000. This was initially good for only one year (2008). Then it was extended in the bailout bill to also include 2009 tax year. There is no income limit for this extra deduction.

To claim the extra deduction f0r 2008 tax year, check box 39c on Form 1040 and add up to $500 or $1,000 to your regular standard deduction on line 40 (or box 23c and line 24 on Form 1040A). You cannot use Form 1040EZ. Nonresident aliens filing 1040NR or 1040NR-EZ don’t qualify.

To claim the extra deduction f0r 2009 tax year, check box 40b on Form 1040 (or box 24b on Form 1040A) and attach Schedule L. The extra deduction is calculated on lines 7-9 on Schedule L.

Please note this extra deduction only applies to property tax, not mortgage interest. If your standard deduction is still larger than your itemized deductions including mortgage interest, you don’t get an extra deduction for mortgage interest because it’s already included in the standard deduction. It’s also only for non-itemizers, only for 2008 and 2009 tax years. If you already itemize deductions, you don’t get any extra deduction.

If you use tax software, be sure to answer the question about property tax, even if you know you will take the standard deduction. If you don’t tell the software you paid property tax, it will not know (duh!), and it will not add this extra deduction for you.

Reference:

• 2009 Form 1040 Schedule L
• 2009 Form 1040 Instructions (pp. 35, 166)
• 2009 Form 1040A Instructions (p. 34)

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Software picked, likely related articles at The Finance Buff:

• Mortgage Interest and Property Tax Deduction for Homeowners Who Don’t Itemize
• Tax Deductions Extension: Property Tax, Sales Tax, College Tuition and More
• Tax Deduction Denied

If you use the standard deduction, you don’t have this headache. Charitable donations are included in the standard deduction. You don’t have to separately track and value your donations. If you use itemized deductions because you have more deductions than what the standard deduction allows (state income tax, mortgage interest, property tax, etc.), or because you are subject to the AMT, you must estimate the value for your donations.

The two major tax preparation software TurboTax and TaxCut both bundle a deduction estimate module that attempt to solve this problem. The program for TurboTax is called ItsDeductible. The one for TaxCut is called DeductionPro. They both do pretty much the same thing: they put an estimated value on your donated stuff based on price information they gathered from various sources. When you say you donated a sweater, they tell you how much it’s worth.

Most people probably don’t realize you can use these programs online completely free of charge. You don’t have to use the associated tax software by the same vendor. You can mix and match if you want. It’s just fine if you use ItsDeductible with TaxCut or use DeductionPro with TurboTax. You can use either program even if you use TaxACT or do your taxes with pen and paper. Both programs ask you to register but you don’t have to give your real name or address. Here are the links:

• ItsDeductible by TurboTax
• DeductionPro by TaxCut

Do they give the same values for the same items? No. I tested with a hypothetical list of items (all in medium/average quality) and here’s what they came up with:

For the test batch, ItsDeductible gave a higher value. It may be the opposite for your items. If you donated a lot of stuff, I don’t see why you can’t enter them into both programs and see which one gives you a higher value. In terms of usability, I like DeductionPro better. After you are done entering your donations in DeductionPro, you can print an itemized list of what you donated and the value of each item. In ItsDeductible, you can also print an itemized list but the list doesn’t include the value for any item. Or you can print a summary of the total value for your donations, but without itemization. It’s weird. I don’t know why ItsDeductible does it that way.

These programs are meant to be used throughout the year. As soon as you make a donation, you enter it into the program. That way you don’t forget about what you donated. While the value estimates are not perfect, using the values provided by these programs probably beats pulling a wild guess out of air.

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Software picked, likely related articles at The Finance Buff:

• TurboTax, TaxCut, and TaxACT Compared Side By Side
• Personal Finance Quiz, September 2007
• iPhone or XO Laptop, Which Is Cooler?

From Intuit (maker of TurboTax):

NEW! Free Federal Efile Included — There’s no additional cost to efiling your federal tax returns. Efiling your state personal return(s) costs $17.95 per efile.**

From H&R Block (maker of TaxCut):

H&R Block continues to be the industry leader and supporter of e-filing, setting the standard with 100% of its products and services now including federal e-file at no additional cost to the consumer.

* At the time of this writing, H&R Block is an advertiser on this site.

You have to love marketing spins. Neither of them tells you that they increased the product prices to cover the bundled free e-file. Here are the prices of TurboTax and TaxCut “federal + state” products for 2007 and 2008 tax years.

You tell me if the free e-file is really free.

When e-file first started, it was offered as a “free after mail-in rebate” option. The products included a coupon. If you wanted e-file, you first pay for it and then you get it back if you send in the rebate. Then last year (or was it the year before?), it became a paid option. No more mail-in rebate coupons. If you wanted e-file, you had to pay for it, either separately or by purchasing a premium package at a higher price. Now this year everybody is forced to pay for e-file, whether you want it or not.

I happen to not like e-file. I stated my reasons in a previous post. Why am I forced to pay for it? Because they can. Customers are like that frog in slowly-heated water. First they got some convenience for free in exchange for some hassle of mail-in rebates. Those who didn’t bother with their rebates paid the price. Then the customers who wanted the convenience were asked to pay. Some balked; some gave up and paid. Now everybody is asked to pay. It doesn’t help we have basically a duopoly in the market. If both players are satisfied with their market share, when one increases their price, another can simply follow. Then both players will be happy financially.

Am I being petty to quibble about a once-a-year $10-15 price increase? Well, part of it is based on principle. Right now state e-file still costs extra. Who knows maybe next year the products will bundle state e-file too and force everybody to pay? Thank God Intuit reversed its decision to charge $10 extra for each additional return printed. But the move to bundle e-file at a higher package price was happily accepted by its competitor. If H&R Block signals it’s willingness to follow the same per-return pricing model, next year both will charge extra for additional returns.

This duopoly is not good for the customers. I’m going to support a 3rd player this year. I will use TaxACT. I will do a side-by-side comparison like I did between TurboTax and TaxCut for tax year 2007 (see previous post).

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Software picked, likely related articles at The Finance Buff:

• Tax Software: E-File or Mail?
• TurboTax Deluxe 2007 Free Download
• Staples Sets an Example for Good Service

I wrote a mini-series on tax preparation software last year:

1. Tax Software: Online or Desktop?
2. Tax Software: TurboTax, TaxCut, or TaxAct?
3. Tax Software: E-File or Mail?

While my opinion on online vs. desktop or e-file vs. mail didn’t change, I decided to switch from TaxCut to TurboTax this year.

I was going to continue using TaxCut like I did in the last few years. I ordered the software from Staples and I even thought I got a decent deal. Together with Microsoft Money, Norton and McAfee anti-virus software, my total cost after all rebates was going to be less than $15. Because H&R Block increased their price, the deal wasn’t as good as last year when I was paid $40 after all rebates, but I thought $15 was good enough. However, after I installed TaxCut, I saw a big change this year. It requires the user to log on as a Windows administrator to run the application. This is nonsense. A user needs administrative right to install the software but the user shouldn’t need administrative right just to run the software. H&R Block developers clearly took a shortcut. Writing software that runs under a limited user requires more testing. So they decided to save some money and let their customers deal with the security risk. That’s not acceptable.

I decided to take them up on their 60-day money back guarantee. While I may be able to get around the problem by using “Run As …” I think a company must feel the consequence of screwing its customers. I wrote a short letter letting H&R Block know why I’m returning the software. If enough customers protest, I hope they will think twice before they do crazy stuff like this again. A few years ago, Intuit bundled the nasty C-Dilla DRM software with TurboTax. There was an outcry from the users. Many customers defected. That was the year I switched over to TaxCut. Intuit lost me as a customer. Now H&R Block sent me back to them.

[Update on Feb. 21, 2008]: There is a follow up to this post, TurboTax and TaxCut 2007 Compared Side By Side.

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Software picked, likely related articles at The Finance Buff:

• TurboTax Deluxe 2007 Free Download
• Tax Software: TurboTax, TaxCut, Or TaxAct?
• TaxCut 2008 on CD for $1 at Dollar Tree Stores