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Should you use tax preparation software?

Should you use tax preparation software?

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April 15 seems to come around quicker each year. Visit any post office around tax time and see the number of IRS tax booklets and instructions and you'll understand why more Americans are resorting to software products to navigate the rocks and shoals of our federal and state tax systems.

What would motivate someone to buy a software product that costs over $40 and can be used but once? What advantages do products out today (Turbo Tax, Tax Act, etc.) have over taking a shoe box of papers to your tax accountant, or simply using the "stubby pencil" method of filling and filing by hand?

The answer is partially due to how complex our tax system has gotten over the years. Understanding our tax system is mostly a matter of learning the new rules about exemptions and credits, avoiding the creeping alternative minimum tax pitfalls, and avoiding penalties of not giving the IRS enough of their cut of your earnings throughout the year through deductions.

Then there are people whose learning styles are counter to the way the IRS presents its arcane information in its pamphlets: "To see whether you're eligible for the married persons mutual discombobulation credit, fill out the worksheet on page 200 of IRS Form, then subtract 50 per cent of the ratio, unless that ratio exceeds the amount listed on item 15(a)(3) of IRS Form 1240, not yet published."

Also, many state income tax systems are joined at the hip with the IRS. Often deductions and credits are based on percentage formulas that result in calculations that reach into the decimal thousands place. What about income earned from other states (pensions, self-employment, etc.)? When that occurs, you will be filling out yet another form with percentages of percentages and then deducting the resulting number from the state you lived in all year long so that you don't pay double taxes.

Another reason to resort to tax software is this: tax software asks the right questions, does all the math, and spits out the forms (either on your printer or electronically). Pay a little extra and buy the state software along with the federal, and everything you record on the federal side will be transferred seamlessly when you're ready to do your state.

When the software is downloaded (or installed from a CD) it looks to see if you have used the same software last year. If you have, much of the tedious data entry process is automatically picked up (personal data, W-2s, deductions, etc.).

If you are new to tax software, you simply follow your nose and answer the questions. Of course, you should have your tax forms (W2s, etc.) handy. You'll need to enter all that stuff into the blanks provided. You can stop at any time and take up where you left off. H&R Block's product, for example, provides a running total of amount of taxes owed or potential rebate, depending on where you are in the process. It's kind of exciting watching numbers change as you enter more data into the program.

When you have answered all the questions and obeyed the prompts at the end of the program to correct any entry problems, you are ready to file. H&R Block's federal and state deluxe version provides five free e-filings for federal returns. Many prefer to run the tax forms off the printer, write a check and send everything off in an envelope. There's something comforting about knowing that the return will be among the blizzard of paper files that the IRS needs to go to. Sending it electronically just seems creepy to older tax payers.

For the thrifty filer with uncomplicated finances, there are quite a few free tax filing programs that can either be filled out online or downloaded. Many of the programs involve a sort of "bait and switch" approach, where for an additional fee you can buy their "upgraded" version, which nearly always includes the state income tax software. Of course, like anything else, you get what you pay for.

So if your annual taxes are daunting enough that you are considering going to H&R Block or a tax accountant, consider moving to commercially available tax software. You'll save a bundle of money. According to About.com: Tax Planning, when going to a tax accountant "expect to pay between $125 and $200. If you are self-employed, a landlord, or have brokerage trades to report, expect to pay between $200 and $450. If you claim the Earned Income Credit, expect to pay between $150 and $200 due to the complexity of the EIC tax form." And that does not include state tax preparation.

Contrast that with about $55 for H&R Block's federal and state income tax software, and the savings mount. Also, popular tax software products offer free online or telephone consultations and assistance in the event you are the target of an IRS tax audit.

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