Daniel C.
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Last updated:
August 4, 2024
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(0)
Although the IRS doesn’t specify exactly how tax returns should be prepared, filling out the necessary forms with the aid of a dedicated tax preparation program is definitely easier than doing the whole process manually. In fact, those who aren’t afraid of dealing with their taxes on their own and therefore don’t require the services of a certified tax expert, such software is without a doubt the best solution. Tax programs are simplified to such extent that even the least tax- and tech-savvy people will understand them and be able to create fully IRS-compatible returns with relative ease.
To be honest, tax software does exactly the same thing that a certified tax expert would as it also conducts thorough interviews to get to know users better, allowing it to then offer the right service based on the answers. The biggest difference between personal assistance and tax programs is that by opting for the latter users will not only conduct the interview for themselves but they don’t have to leave the comfort of their homes to do so. There is absolutely no need to figure out a single sum, either, since every calculation is done by the software itself, therefore reducing the possibility of an erroneous return.
You don’t even have to know exactly which forms have to be filed as part of your return because the software automatically selects the necessary forms based on the answers provided during the interviews, meaning that you won’t waste any time by looking up the documents you’ll need for filing. Simply put, the only things needed to start tax preparation with tax software are the return from last year and any documents related to the relevant year’s income and deductions.
The fact that the tax return is prepared by simply answering questions is a huge asset, but tax software still ups the ante by providing data importing, too. For instance, such a program can fill out almost the entire return with little to no human interference, though usually this is only the case if you prepared your previous year’s return with the same solution. However, these programs are often also capable of pulling data from returns created through other means as well as from electronic W-2s. And when it comes to W-2s, many tax companies provide mobile applications, which comes the added bonus of being able to snap a photo of your W-2 which will allow the program to fill out the digital version of the same document in no time.
The good news is that regardless of which online tax solution is chosen, you’ll be able to e-file your returns without hassle – unless it’s a return related to a previous year, in which case the only option is to file via snail mail. However, one thing that’s certain is that filing federal tax returns is always free of charge no matter which version of a program is chosen and whether extra services like IRS audit assistance or ID theft protection have been purchased.
A huge advantage of tax programs is that they allow users to pay the service provider by simply deducting the cost from their earned refunds. Although this payment method costs extra – usually between $25 and $40 – settling the invoice this way is not only highly convenient but is barely noticeable if you’re claiming back thousands of dollars in federal and state refunds. And if you think about it, deducting service fees from the refund amount essentially makes using the software free of charge.
With tax software on board there is no need to worry about whether the IRS has accepted the return or not, in fact the program will not only inform you about the status of your return on its homepage but it will also send out automated email messages whenever anything noteworthy happens. While refund status isn’t tracked by the software – this has to be done on the dedicated page of the IRS – at least knowing that everything is all right with the returns is a huge relief for any taxpayer.
Whether you’re an SMB, self-employed or just an ordinary taxpayer, software that assists with the preparation of the right tax returns for you needs is undoubtedly helpful.
But is tax software itself deductible and, if so, what are the requirements to be able to claim the tax back?
Before 2018 tax preparation fees were deductible for all taxpayers but only if they itemized their deductions and the amount of their miscellaneous deductions exceeded 2% of their adjusted gross income. Sadly, these days are over: as of 2018 wage- and salary-earning employees who itemize their deductions on a Schedule A cannot take advantage of deducting the tax from their tax preparation fees at all due to the suspension of the rule concerning the 2% threshold for miscellaneous deductions. The only exceptions to this rule are self-employed taxpayers – i.e. SMB owners and people employed as contractors – and anybody else that must report business incomes and expenses on a Schedule C.
Even if taxpayers running a business can deduct tax spent on tax preparation software, it still isn’t quite as black and white as it might first seem simply because the law states that the only eligible tax deductible business expenses for tax prep fees are those that are strongly related to the business itself. Simply put, tax prep fees are fully deductible provided that they were spent exclusively on preparing business tax returns and not personal ones.
Thankfully, this can be easily achieved by turning to a certified tax expert that can create business tax returns without merging them with personal ones, or by opting to use tax prep programs that deal only with business forms such as TurboTax Business. With online tax solutions, however, you have to pay attention to multiple things. For starters, these solutions are mostly intended for creating personal tax returns, which means that the majority of them are excluded from being deductible by default. As such, only the top-tier online tax prep products are eligible for tax deduction since those are the only versions that can handle business-related tax forms.
But even if all these criteria are met, there is still no guarantee that the full purchase price paid for the top-tier product can be deducted from your business taxes. In fact, taxpayers are only entitled for a partial deduction if the program is used for personal taxing as well, which happens rather frequently to those who have other sources of income and/or consider their businesses to be little more than a side job. If that’s the case, then you have no choice but to calculate the price difference between the top-tier and the next best product and claim that amount as a deduction.
We could fill an entire book explaining why you should use tax software instead of doing everything manually or with the help of a certified tax expert, but if you really need to know why then here are just some of the most important reasons:
While a desktop tax prep program is a huge asset, it’s actually online tax software that is the best solution primarily for its ability to prepare taxes as conveniently as possible. For starters, all taxpayers need is a browser to start putting together their returns, but thanks to the software’s cloud-based nature there is also the option to continue filling out the same forms on the go using the program’s mobile browser or bespoke app versions. In addition to that, online tax solutions reduce manual data entry to a minimum as not only can they automatically collect the required forms for you based on the answers given during the interview process, but they are also capable of importing various documents like W-2s and the details from the last year’s return.
There are many different iterations of tax software but if there is one aspect that they all share it is the fact that they all conduct thorough interviews to better understand the needs of the user and then to guide them to and through the forms that they need to file. This alone means that the tax process becomes ridiculously simple with the use of such software, making them the perfect pick for first-time filers as well as for those who want to prepare their returns on their own but aren’t that familiar with current tax laws.
One of the best things about tax programs is that they are capable of satisfying the needs of any taxpayer, so that no matter how complex your tax situation is you’ll be sure to find a suitable version of the chosen tax software. In fact, aside from the programs that are mostly intended for individuals, there are even special products that cater towards businesses, too.
In addition to that, there is no need to worry even if the wrong online product is chosen, since the program constantly monitors the answers of the user and if the current version doesn’t contain a form that the user needs it will automatically prompt to upgrade to a higher-tier version that includes the necessary document – which can be performed manually as well.
By far the biggest reason to use tax programs is their prices. Whereas certified tax experts can provide their tax prep services for hundreds of dollars, tax software is much cheaper – even if the top-tier version is chosen. Sometimes tax companies even provide a free version of their programs with which taxpayers that only need to file simple tax returns can do so in a fast and convenient manner. Online tax prep programs can typically be used entirely free of charge until the returns are filed and in fact the service can be paid for by deducting the final bill from the taxpayer’s claimed refunds.
It doesn’t matter how convenient tax software is if users cannot move forward with filling out their returns when becoming stuck with a question they don’t understand. Tax program providers know that, which is why they also offer live assistance conducted by certified tax experts to any user that opts for higher-tier products. Additionally, taxpayers also have the option to purchase additional support in the form of services like IRS audit assistance or ID theft protection with which they can make sure that they’ll be protected by the company should anything unexpected occur.
While having choice can only be a good thing, when it comes to tax software there can actually be too much choice, making it hard to actually know if you’re even using the solution best for you. Because these kinds of programs cater to a variety of clients and each provide different features and extras, it’s quite easy to end up with a solution that won’t satisfy your particular taxpaying needs. However, all it takes to find the right choice is to think about your needs and the right software will present itself in no time.
Admittedly, local tax programs and their online counterparts share a fair number of features, but there are plenty of key differences as well. For instance, desktop tax solutions are more secure and can manage multiple tax returns for free – sometimes even including one or two state tax returns – but usually the software is expensive and quite often have the exact same features as online equivalents. With online software, however, there is everything typically related to the convenience of cloud technology, such as seamless data importing from previous years’ returns, competitors’ documents, or even electronic W-2s. These programs are typically cheaper than their desktop counterparts, too, and often the most basic versions is free to use.
Another important aspect when selecting the right tax software is whether the program is able to prepare state tax returns as well. The good news is that almost all solutions that we have tested so far are capable of managing state taxes; in fact, many tax programs can even copy data from the federal return to the corresponding sections of the state return. The only thing to consider is that state taxes are never provided free of charge in online solutions, meaning that you may end up paying after all – even if a free tax solution is chosen.
Tax programs are known for being quite thorough with their interviews, which is a must to ensure that all relevant tax topics are covered and that users receive the biggest refund in the end. However, there are actually two different approaches when it comes to this thoroughness. The first approach is applied by programs like TurboTax that tend to cover the smallest of details multiple times during the interview, making it ideal for those who aren’t that familiar with the tax process. The other approach caters towards more tax-savvy users by allowing them to skip certain topics, which doesn’t provide the same thoroughness but can significantly reduce the time spent on preparing tax returns.
Most tax companies have designed their programs to allow upgrades to a higher-tier product covering particular tax forms as well as to purchase additional features like the option to deduct fees from the refund amount or to receive assistance against identity theft or with IRS audits. But in order to avoid any frustration arising from selecting the wrong solution and being unable to downgrade without having to start the return from scratch, it’s better to initially choose a product that covers all relevant tax situations:
It’s wishful thinking to believe that one tax software should be enough for life but to put it bluntly, yes, you will have to update the software every year that you want to prepare a tax return with the help of a program, regardless of whether you previously used a desktop or an online solution. This seems unfair perhaps – especially for those who have no choice but to purchase the top-tier version of the program due to their needs – but there is a logical explanation as to why a new solution is required every year.
Few things change as much in U.S. law than those surrounding tax. Whether it’s for the better or for the worse, tax law changes are so frequent that once they enter into effect it’s way easier for tax software providers to release a new program rather than to implement the modifications into all previous versions.
To better understand why tax software providers cut the Gordian knot this way, here is an example: before the 2018 tax year, individuals had the option to deduct tax from miscellaneous expenses that exceeded 2% of their adjusted gross income (AGI) on their Schedule As. However, in 2018 this option was suspended, meaning that every tax program version before this year would incorrectly count this 2% AGI threshold rule, and therefore claim tax back on items that aren’t deductible anymore. This is an enormous change in itself, but there is no guarantee that the following year won’t surprise us with a new change even more radical. As such, abandoning last year’s version – which, if you think about it, becomes outdated the moment it’s released – and replacing it with a new version is indeed the most logical thing that tax software providers can do.
With all this in mind, you may be wondering why these companies recommend that users don’t get rid of previous versions as soon as the latest software is out. This is because the old programs are actually more useful than they seem and not just because they continue to receive regular system updates until the company has decided to pull the plug.
For instance, online tax prep software keeps returns preserved for three years, meaning that if users transfer from the previous year’s version to the current version of the same company, then they can simply create their new accounts with the same login credentials and easily import last year’s tax return into the latest program with a single click. This process can also be done manually by importing previous tax returns as PDFs, which is the only option for downloadable tax software users or for those deciding to switch to a completely different solution to do their taxes.
However, this isn’t the only reason to keep older tax prep programs since it is necessary to use the correct corresponding program when creating a tax return for a previous year, allowing you to put together the necessary documents and then print them to be mailed to the IRS.
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