Using Tax Software
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Tax software does away with the tedious calculations and math errors that can make April so taxing. It also lets you experiment with different combinations of depreciation, expensing, and Keogh or IRA contributions to save the most tax. Preparing your return electronically lets you correct your return in seconds if you discover overlooked deductions or income just as you are ready to mail the completed return, too. If you do your return by hand, the thought of redoing the entire return from scratch could be enough to keep you from claiming additional tax savings. Finally, tax software can help you gauge the answer to key tax questions such as: What are the tax effects of buying or leasing a car? How much can I save in taxes by investing in rental property? What taxes will I owe when I get my pension plan distribution?
Before you rush out to buy software (typical cost: $20 to $40 for federal returns; perhaps $25 to $30 more for state returns), remember that you still have to gather all the information about your income, deductions, and credits. Sadly, you cannot escape this scut work whether you do your return with a pencil, use a computer, or turn the whole mess over to a tax preparer. Another piece of friendly advice: If you’ve never used tax software before, it will take a while to get the hang of the program.
Tax software performs two functions. It stores and organizes your income and expense records and uses this information to prepare your return or analyze tax strategies. Although the major tax programs are fax from being clones, they all offer certain basic features: • Selecting the right forms. If you don’t know a Schedule E from a Form 2106, one of the brightest benefits of tax software is its ability to tell you which form you will need. The software asks you a series of questions and from your answers lists the forms to be completed. When you are done, the program checks to see if you have been thorough and tells you when a form seems incomplete.
• Matching the right number to the right line. The program lets you select a tax item from a list, such as church contributions, and carries the dollar amount you enter to the correct line of the correct form.
• Mathematical accuracy. With tax software, you can usually avoid worrying about any math errors. The exception: when there’s a bug in the software, as happened to many users during the 1995 tax-filing season. Fortunately, software makers tend to be extremely apologetic when bugs are discovered and go out of their way to help customers resolve any problems.
• Internal consistency. That $2,532 capital gain on Schedule D will show up where it’s supposed to –on line 13 of the Form 1040 –and as $2,532, not $2,352 or some other transposed figure.
• Spotting omissions. You don’t have to worry about forgetting to include a critical piece of information to make your return complete. Case in point: To claim a child care credit, it’s not enough to enter the amount you spent, you also need to include the name and identification number of the child care provider. If you forget, your software will remind you so that no form is left undone.
• Technical advice. At a minimum, you get the IRS instruction booklet online, with specific form and line instructions keyed to those places on the screen. The amount of additional advice you get depends on the software.
• Tax forms. No more last-minute trips to the library for forms the IRS never sent. They’re all in your computer; at least they are if your software includes your state’s forms, too. If you have a laser printer, you can print forms that look just like the IRS version, with your tax information already typed in.
• Importing financial data. You will save hours at tax time if your tax information is already stored in a banking software program. The tax program then can read your income and deductions from your checkbook files and transfer the data directly to your tax return. Make sure the tax program you choose supports your banking program. For example, Turbo Tax imports data from Quicken and Managing Your Money.
• Auditing. When you have finished your taxes, the program checks for inconsistent or incomplete items, which could draw unwanted attention from the IRS.
The leading tax programs are Intuit’s Turbo Tax (Windows or Macintosh, $39.95; deluxe edition, $49.95). You can also now file your taxes electronically on-line with Turbo Tax Online ($9.95; www.turbotax.com). In a 1998 review of the software programs, MONEY rated Turbo Tax deluxe best. The magazine said that this software, produced by the maker of the popular Quicken financial management software, was especially good at offering tax planning advice. But if your tax return is simple and you’re looking for a good, quick, cheap way to fill it out and get it to the IRS, the Turbo Tax Online site is worth a shot.
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