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IMPORTANT THINGS TO KNOW WHEN USING “DO IT YOURSELF” TAX SOFTWARE!

Note: “Do it yourself tax software” includes, among others, TurboTax, TaxCut, and FreeFile.

FIRST!  This is a very important disclaimer.  As far as I know, all of the major publishers of “do it yourself” tax software are very good, honest and reputable companies.  Each of the companies make strong efforts to produce quality software that will produce accurate tax returns.

That being said, it is the nature of the “do it yourself” tax software that brings a whole set of problematic issues.  I would like to make you aware of these issues as I explore them here.

  • The “do it yourself” tax software makers assume that you will read every word of every line of their questions and of their instructions.  This actually is a very reasonable assumption.  In point of fact, it is unreasonable to expect to get the results one might wish from any product if one does not read all of the instructions.  Unfortunately, it is a fact of life that the vast majority of us do not read all of the instructions.  Even the ones that we do read, we frequently scan over them very quickly and easily miss important information.  Due to the extreme complexity of the tax laws, this can create major problems in tax preparation software more so probably than in any other software.
  • The “do it yourself” tax software makers assume that you will understand all of the instructions and all of the terminology in the instructions.  Once again, this is a very reasonable assumption.  Once cannot expect to complete an accurate tax return if there are words that aren’t understood.  This does not just mean obscure words.  Even common words may mean one thing in normal usage but something totally different in relationship to a tax return.  Here is just one out of many examples: The word “dividends” can mean three (3) different things as they relate to a tax return.  I have found that even a lot of so-called professional tax preparers do not know that.  Here are the three uses:
    • Dividends on stock go on Schedule B, Part 2.
    • Dividends on insurance policies are not taxable at all except in the extremely rare situation when the cumulative total dividends exceed the cumulative total premiums paid.
    • Dividends on a savings account at a Credit Union are actually interest and go on Schedule B, Part 1.

If a person is not aware of these differences as well as many other terminology differences they may pay more or less in taxes than they should.

  • Even very highly intelligent people can make major errors with “do it yourself” tax software.  We have highly educated clients come to us every year who have received letters from the IRS related to errors on their tax returns prepared using the “do it yourself” tax software.  They may be the best banker, school teacher, doctor, lawyer or any other profession, but that does not mean they will know how to get the most benefit from the tax laws.  Even if one does take the time and trouble to read all of the tax laws, they may not know the importance of when and where to deduct certain items.  Here are just a few out of many examples:
    • There are up to four (4) different ways to deduct education expenses, depending on the circumstances.  Each one carries a different benefit and while one may be the best in one year, it may not necessarily be the best in another year..
    • State tax refunds are NOT always fully taxable and may not even be taxable at all.  This is true even when you itemize you deductions.  Most self-prepared returns automatically assume, however, that when you itemized in the previous year, the state refund is fully taxable.
    • For those who are educators, there are at least two different ways to deduct educator expenses.  Your choice affects your tax bill.
    • There are two ways for a self-employed person to deduct their health insurance premiums.  One way almost always provides a substantially larger tax benefit.  Just because one is better in one year does not necessarily mean it will be the best in other years.
    • There are two (2) different ways for a self-employed individual to deduct vehicle expenses.  One may be better than the other.
    • If a person qualifies for an office in home, there may be two (2) different way to deduct mortgage interest and/or real estate taxes.  One may be better than the other in one year and that may change from year to year

There are many, many more choices such as those above and most of the “do it yourself” tax software programs either do not address some of these issues at all or are at least very unclear in how they are addressed.

  • The tax software companies do NOT guarantee that there will not be errors on your return.  They only guarantee is that their software will calculate your return accurately based on the data you enter into the program.  In other words, the old saying applies, “Garbage in, garbage out.”
  • The IRS regularly notifies you if you have done something incorrectly on a tax return, HOWEVER, they are far less likely to notify you if there is an error in your favor.  This does not mean that they are trying to cheat you.  There is a very good reason why this occurs.  It is simply because many of the strategies needed to lower your tax bill require you to do things on the tax return that the IRS does not require or even know you are eligible for.  Here are just two (2) examples:
    • If there are deductions or credits you are entitled to, the IRS (in most circumstances) will not require you to take that deduction or credit.  They do not object to your kind willingness to pay more than your fair share of taxes.
    • Secondly, if there is an option to take a credit or deduction it in more than one place on your tax return, the IRS does not require you to take it in the place where it will benefit you the most.  Once again, they do not object to your kind willingness to pay more than your fair share of taxes.
  • For those who use the so-called FreeFile, it usually ends up not being free.  Why?  Because, while the Federal return is free, the state return usually is not.  That is the only way the FreeFile providers can afford to do the Federal return for free.  They must charge enough for the state to cover their costs of doing both the Federal AND the state!  There are frequently further charges for other items.  The bottom line is that FreeFile is not necessarily free.

I would like to summarize by reminding you that these points are NOT meant as a criticism of any tax software company. It is merely a reflection of the realities associated with using “do it yourself tax software”.

We invite you to give Heritage Income Tax a try. We guarantee that our fees will save you a minimum of $50 over what was paid to any other paid tax preparer the previous year.

Thanks for reading!

There are even more and different reasons why you should consider using Heritage Income Tax.

Click here to read “8 reasons to consider using Heritage Income Tax”

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Heritage Income Tax Service, Inc. | 4303 Portsmouth Blvd., Portsmouth, VA 23701
(757) 488-7232 | Fax (877) 488-7232

Heritage Income Tax offers a full range of tax preparation services. Located in Portsmouth, Virginia, we serve the entire Hampton Roads area including the cities of Chesapeake, Virginia Beach, Norfolk, Suffolk, Newport News and Hampton.