Finances: Software Makes it Easier to Prepare and File Your Own Tax Returns
For many people, one of the most difficult, dreaded and confusing aspects of being an American is the need to file annual state and federal tax returns. The tax laws are constantly changing, and for some people, the complexities of preparing their own tax returns are simply too much to handle. While you can’t ignore this responsibility without serious legal and financial repercussions, there are resources available to help you, especially if you’re newly divorced and must handle this responsibility yourself.
Without a doubt, the easiest, but most costly way to get your tax returns completed quickly and accurately is to hire an accountant (or Certified Public Accountant) to handle much of the process for you. Depending on the complexities of your financial situation, this can cost anywhere from a few hundred to thousands of dollars.
USING SPECIALIZED TAX RETURN SOFTWARE
A less costly option is to hire a tax preparation service, such as H&R Block or Jackson Hewitt. If you’re comfortable using a computer and possess even the most basic understanding of how to prepare your own income tax returns, you can save money using specialized tax preparation software, such as Intuit’s TurboTax or H&R Block’s TaxCut. According to the IRS, in 2006, 73 million tax returns were e-filed, which included 20 million returns filed from home computers.
If you opt to use one of these software packages to prepare your state and federal tax returns, it’s absolutely essential that you purchase the most current version of the software, either from a local office supply or software store, or by purchasing and downloading it from the software publisher’s website. Because several different versions of TurboTax and TaxCut are available, you’ll also want to purchase the version that offers the functionality you need, based on your personal situation.
TurboTax, published by Intuit (the developer of the bestselling Quicken personal financial management software), personalizes tax preparation based on a customer’s unique needs. TurboTax 2007 is the result of a singular focus on ease. “We’ve created a dramatically simplified tax preparation experience to delight customers,” explained Kiran Patel, general manager of TurboTax at Intuit. “By making TurboTax the easiest tax software to use, we help customers get the best possible outcome on their taxes.”
Depending on which version you purchase, TurboTax 2007 is priced between $19.95 and $74.95. Once the software is loaded onto your Windows or Mac-based computer, you’ll be asked a series of easy-to-understand questions that will help the software pinpoint the most appropriate deductions and forms to file. The software will also take into account major life changes, such as your divorce.
USING TAX SOFTWARE HAS MANY BENEFITS
Both TurboTax and TaxCut will help you find and maximize deductions and will walk you through how to deduct mortgage interest, charitable donations, education expenses and medical expenses, for example. In fact, TurboTax covers more than 350 possible tax deductions and credits. The software will also help you complete whatever forms are necessary to qualify for each deduction.
Using either the TurboTax or TaxCut software package, you can easily import your W-2 or 1099 information, plus import your financial data from Quicken, Microsoft Money Plus, or another popular personal finance management program. Once your state and federal returns are completed, you can use the software’s built-in E-file compatibility to submit your returns directly to the IRS electronically, via the Internet. An additional fee might apply for using the E-file feature, depending on which software and version you use. Using E-file will decrease the amount of time it takes for you to receive your refund (which is typically less than 10 days).
For most people who are recently divorced, the TurboTax Deluxe ($29.95) or TurboTax Premier ($49.95) edition of the software is most suitable. If you opt to use the H&R Block TaxCut software, the Premium+State+E-File edition ($69.95) will probably work best for you.
When you purchase either the TurboTax or TaxCut software from a retail store, it comes with a printed manual, which will help you quickly get started using the software. Both software publishers also offer several ways to obtain additional support as you’re using the software and preparing your returns. If you opt to download the software, the manual is made available to you in the form of a digital eBook, and must be read on the computer screen or printed out.
TAX IMPLICATIONS IF YOU’RE NEWLY DIVORCED
Both TurboTax and TaxCut will guide you through the tax return preparation and filing process, but you must answer all of the questions posed to you by the software accurately. As you’ll discover when you use either software package, your recent divorce will have a tremendous impact on your tax liabilities, so it needs to be handled properly. This is something both software packages handle well.
Assuming your divorce was finalized before December 31, 2007, in terms of the IRS, you’re now considered single and should file your tax returns accordingly. If you have kids living with you, you’ll probably want to file as head of household, which could reduce your taxes and entitle you to a bigger refund.
According to the TurboTax tax experts, “To qualify as ‘head of household,’ you must pay at least half the cost of keeping up the home where you live with your unmarried child, grandchild, stepchild, adopted child, foster child, dependent child or any other dependent family member.”
If you’re the custodial parent of your kids, you’re also entitled to a tax deduction for each child, which the TurboTax or TaxCut software will help you calculate and incorporate into your returns. Likewise, the software will help you determine how your alimony payments (whether you’re receiving them or paying them) will impact your overall tax liabilities. The tax benefits are typically better if you’re paying alimony, as opposed to receiving it. However, these payments must be spelled out in a divorce decree.
It’s also important to understand that child support payments (whether they’re being paid or received), have no impact on your taxes, which is again something the tax preparation software will help you sort out.A FREE ALTERNATIVE FROM THE IRS
Much to the surprise of some, the IRS actually offers something for free. For someone who has earned $54,000 or less during 2007, the IRS now offers its Free File service. As of January 2008, it allows users to file their federal returns online, via the IRS’ own website.
Using Free File, you can expect to receive your refund within 10 days (using direct deposit), and file your taxes anytime (day or night). Plus, you’ll benefit from the automatic accuracy checker built into this online application.
The Free File service is a bit less user-friendly than TurboTax or TaxCut, and offers far fewer bells and whistles which make the commercial software more intuitive and easy to use. However, Free File does offer a cost-free option for filing your taxes, if you qualify to use the service.
To E-file or not to E-File, that is the question. If you’re someone who would ordinarily prepare and file your own state and federal tax returns manually, using TurboTax or TaxCut will definitely save you time and probably some money. (You may discover deductions you qualify for that you wouldn’t have otherwise discovered on your own.)
If, however, you’re less confident in your number-crunching abilities and you’d prefer to have a professional help you prepare your tax returns, hiring an accountant (CPA), or a tax preparation service, continues to be your most viable option. For the average person, what you’d pay H&R Block to prepare and file your tax returns, for example, won’t be much more than if you’d purchase the H&R Block TaxCut software and do it yourself.
Both TurboTax and TaxCut are user-friendly programs that offer an intuitive interface. Both require only the most fundamental knowledge of personal finance matters to benefit from using them. The trick, when using either of these programs, is to take your time and utilize the help functions built into either program when you run into questions. Never guess or purposefully input inaccurate financial information when prompted for something you don’t understand.
Ultimately, using TurboTax or TaxCut, it should take you significantly less time to prepare and file your tax returns than if you were to do it manually. However, plan on spending at least several hours using either of these programs once you’ve gathered all of the pertinent personal financial data needed to complete your tax returns. Finally, as any competent accountant will tell you, never wait until the last minute to handle this dreaded task.
