LOS ANGELES (MarketWatch) -- You're better off filing your tax return electronically rather than on paper in almost all instances. You'll make fewer math and input errors, your taxpayer identification numbers are verified, and refunds come faster. The trick is to find the right software or online service to prepare your tax return. TaxMama is here to help with a comparison of five of the most popular sites.
As you know, our legislators are skilled at creating ever more complex and convoluted tax laws. The IRS is making a valiant effort to create forms and temporary regulations quickly, but it's hard to keep up. Even tax software companies are a bit behind updating all the recent changes, so if you're depending on any extended tax breaks, wait a few weeks.
What's new in 2010?
Tax software is getting better and easier to use. The big push this year is user-friendliness. Tax-prep firms have dumbed-down the language and the pathways through the tax maze.
You can import W-2s and certain 1099 information, as well as prior-year tax return data. You'll see refund meters, free basic return preparation, and better support tools and services from just about every software provider. All the services offer tools to help you identify tax issues related to life changes. Everyone guarantees to give you the maximum deductions you can possibly get.
Only H&R Block and TurboTax offer software allowing you to prepare your own corporate, partnership or LLC returns. TaxMama recommends you get those returns reviewed by a professional. There are too many traps for the uninitiated. There's a reason tax professionals take 24 to 50 or more hours of classes each year.
These days, there's no reason to pay for e-filing so avoid companies that still charge for the service (you pay for the software, not the actual electronic filing).
Before you use a company you've never heard of, check to see if they're on the IRS' list of Free File Alliance providers. They had to meet rigid standards to participate. See the IRS page on choosing a provider.
Familiarity breeds content
If you've been using a company for several years and you're happy, stay with them. They will have your filing history and all your content in their database and can usually roll over last year's tax return for free. That will reduce errors related to carryover information, like unused capital losses, passive losses, charitable deductions, and depreciation schedules. If you need a copy of a prior year tax return, they often can provide it. Most tax services purge their files when people don't return.
If you prefer a change, test various companies' offerings. Each service lets you start your tax return for free and enter all your data. You can try different scenarios and test your options. Some services will handle specific forms you need better than others. Some will do a better job on your state, especially if your state has a complex form, like Ohio.
Free isn't always so
The radio, TV, Internet and magazines are full of enticements offering you free tax returns. Beware. Most of them don't tell you that the "free" is just to get started. Or that your state return is not free. Or that "free" only applies to the most basic tax returns.
You can get truly free services from the members of IRS' Free File Alliance -- but only through special links. Stay tuned for next week's column, which will cover the IRS Free File Alliance offerings. There's a good chance you may qualify for a free tax return.
Now, let's compare some of the top choices for online tax preparation.
TurboTax.com
At TurboTax.com, prices for filing a federal return range from free to $109.95 for business returns. State return prices are $27.95 to $36.95. You control the order of your input without being forced into a form funnel. You can input your data based on the order of the forms in your pile, or whatever fact springs to mind. This has always been a favorite feature of Intuit products.
When done, the software asks relevant questions about your inputs and offers more deductions. TurboTax has terrific diagnostics. Errors are noted on each screen, so you can fix them on the spot.
Last year, TurboTax added the Live Community forum to their online and boxed software. There have been 6.8 million users -- your question is bound to be answered already. There are links to common questions on each entry screen. Also, TurboTax has a nifty resource center, open to the public. Videos have been added, and tax guides on a variety of topics, including a link to ItsDeductible. Use that to value your donations of clothing and household goods and appliances. See the page.
One more freebie: until Jan. 31, you can submit a tax question and get it answered for free at FreeTaxQuestion.com.
The free audit support center identifies the letter IRS sent you and the issues that affect you. It provides downloadable letters you can use to respond. For an additional $39.95, you get full audit support if your tax return ever gets audited.
H&R Block at Home
H&R Block at Home (formerly TaxCut), at HRBlock.com/taxes offers amazing audit support this year. It comes with every product level except the free service. Call them when you get a notice. An enrolled agent, or EA, will explain the process and guide you through the audit experience. Their Worry-Free Audit Support® provides an EA to go with you to the audit.
Prices for online services range from free to $49.95. The downloadable software allows you to e-file five returns for one price. If you need to help your family, this is a good option.
Denise Sposato, spokeswoman for H&R Block is particularly excited about the Best of Both service, which for $99.95 includes unlimited advice from a tax professional. You can use your own H&R Block tax pro if you've worked with someone in the past or know someone working for them. The tax pro will review your return for missed deductions, errors and oversights, and will sign and e-file your return as preparer of record. The product comes with unlimited year-round advice from your H&R Block tax professional. This sounds like a better value than their storefront service.
State returns cost $19.95 extra no matter which product version you buy. E-filing for one state is included with each level of the downloadable software, except the basic version.
You will find the built-in advice tools helpful. The software suggests additional deductions for your industry, occupation or investment levels.
They still make the prior-year TaxCut® software available for those who need to get caught up.
CCH CompleteTax
CCH CompleteTax, at CompleteTax.com, added a new free service for 1040EZ filers. CCH now has three prices, ranging from $14.95 to $49.95. No need to decide which level is right for you: Start with the cheapest level, and when you add forms that cost more, the system will let you know. But if you start at the highest price, it won't tell you there's a cheaper option.
States cost $24.95, but Gary Lundberg, director of product management for CCH CompleteTax, says there is no provision for multi-state returns. So, if you have W-2s from several states, move on.
Lundberg is excited about their nifty error-correction tool. They give you a list of your errors or suggestions for improvement, and you can toggle from the page you need to correct to the error list, and back. That's an excellent idea. CCH CompleteTax also links you directly to the IRS site from within the program to access your prior year's information, for electronic filing purposes.
Their audit protection services are not exciting. Tax returns are open to audit for three years. To get coverage, CCH CompleteTax charges $19.95 per year, or $29.95 for all three years. Since you are rarely audited during the first year, buying one year is a waste of money.
Users have access to some of the best tax information resources, since CCH is a major publisher of information for tax professionals. In fact, they share it with you, in their excellent free resource center. See the page.
TaxSlayer
At $9.95 for federal returns, TaxSlayer.com offers some of the lowest prices. Add $4.95 for unlimited state tax returns. If you work in several states, this is the service for you. You can prepare prior year returns or an amended return cheaply. Military personnel file for free. The account page includes links to your previous years' tax returns, if you filed with them.
Their system checks your return for missing data and errors. There are frequently asked questions in the margin of each screen. You can get support from the online Help Center right on the screen, on a message board, or via email. You can enter a mobile phone number to get called back.
There is a Life Events Wizard to guide you to tax-reduction opportunities or reporting requirements, an Audit Slayer tool to point out red flags, and priority phone support. You can move through the entry process your way. For folks who know what form they want, you can select the form, instead of mucking your way through menus.
There are two major inconveniences on the site. First, logging in, there's an annoying offer to sell you services. Clicking "continue" doesn't let you out. You have to look closely to find the opt-out button.
Second, despite all the aggressive television commercials, the site doesn't quite look ready for prime time yet. The demo video isn't there. There is confusing information on the Compare page. Last year, they had a terrific resource center. But it still references 2006, 2007 and 2008 information; 2009 updates don't appear to be there.
TaxSlayer offers online service and downloadable software.
Drake Software's 1040.com
Drake's 1040.com offers two price levels: $19.95 and $34.95. The cost for state preparation is $14.95, including unlimited states. No need to choose a service level; pricing will be determined after you enter your data.
There is a rich resource center with financial calculators, information by topic, and tax estimators you can use to do planning, make comparisons, lease vs. buy decisions, retirement planning tools, and more.
Drake used to offer phone support, but they've switched to email-only support to provide the assistor with time to research your question properly.
It's not as easy to move through the input at your own pace. You need to follow their menus, at least until you answer all the income-related questions. However, Drake's questions will be guided by your answers. It will skip parts of the questionnaire that don't apply to you.
When it comes to preparing extensions, this is the easiest service. There's a button on the top of each page.
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