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

Note: This includes, among others, TurboTax, TaxCut, and FreeFile as well as others.  Yes, this even includes the FREE Federal online filing that we provide a link to on our website.

FIRST!  A very important disclaimer.  As far as we know, all of the major producers of “do it yourself” tax software are very good, honest and reputable companies who make strong efforts to produce quality software that can be used to produce accurate tax returns.

So it is NOT the makers of the software but it is the nature of “do it yourself” tax software that brings a whole set of problematic issues into play.  We would like to make you aware of these issues as we explore them here.

1. 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 and  even the ones that we do read are frequently scanned over very quickly resulting in our missing 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.
2. 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.  One 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 a multitude of examples: The word “dividends” can mean three different things requiring three different actions on 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, mistakes may be made and one may pay more or less in taxes than one should.
3. 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.  Being the best banker, school teacher, doctor, lawyer or any other professional does not mean one 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 different ways to deduct education expenses, depending on the circumstances.  Each one carries a different benefit and while one may be the best on one year, it may not be the best in another year..
   • State tax refunds are NOT always fully taxable and may not even be taxable at all.  Most self-prepared returns automatically assume, however, that 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, at the least, are very unclear in how they are addressed.
4. 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.”
5. Intuit, the maker of Turbo Tax makes a professional version of TurboTax.  In fact, they used to call it TurboTax Pro but have changed the name.  The professional version sells for over $2000 for personal tax returns.  Is it logical to assume that a “do it yourself” tax software for which you pay $50 or less will be equal to software for which a professional pays $2000+?  If you agree with me that there must be a big difference, the next question would have to be, “Is that difference important to the preparation of my tax return?”  Well, the answer is that it might be and it might not be.  It may depend on the complexity of your tax return.
6. 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 most 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 three (3) examples:
   • First, 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 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.
   • Thirdly, the IRS does not even know if you are entitled to most deductions and credit.  You must let them know.
7. 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!
8. You may notice that throughout this list, I have referred to “do it yourself” tax software.  I constantly repeated that term because I felt it important to emphasize the fact that it all comes back to you because we are talking about “do it yourself” tax software.  It doesn’t matter how good software is if you do not use it properly and accurately.
   • Read ALL instructions and questions carefully.
   • Research any word whose meaning is not 100% crystal clear to you.
   • Do not take for granted that words mean the same thing in the tax world that they mean in everyday world.
   • Look for the multiple ways that a deduction can be taken.  If you are not sure which way is best for you, try it in every way or combination of ways for which you qualify.  Do not settle for the obvious way as your sole option.
9. Example of car repairs.
   • Years ago, a man used to do his own car repairs.  Since that was not an area that he did work in all the time, he found that it took him a lot longer than it did someone who did do it all the time.  Since he did not have all the up to date training, tools and manuals, he had to do more research than the guy who was a car repair professional.  If he did something wrong, he had to do it all over again at his own expense.  If his error caused other car repair problems, he was stuck paying for and doing that repair as well.  As the years went by and cars became so much more complex, he decided to turn it over to a professional.  To his surprise, he found that it made his life much more pleasant.
     1. It didn’t take as much of his time.
     2. He didn’t have to worry about it being done right.  The mechanic guaranteed the work.
     3. He no longer had to go out and buy parts and tools and manuals and such.
     4. The mechanic even showed him ways to save money on future repairs and on fuel consumption and other areas.  As a result, he calculated that he didn’t even spend much more , if any more money but still had far more time and peace of mind.  In fact, in most years, the mechanic saved him money.
   • Compare that to professional tax preparation.  What happens when you use a professional tax preparer instead of using “do it yourself” tax software?
     1. You no longer have to buy tax software or pay online services.
     2. You no longer have to pay penalties and interest for errors you made when you prepared the return yourself.  Most reputable tax preparers will guarantee their work.  Click here to read our comprehensive guarantee.
     3. If you are one who wants to really be sure you are doing your tax return correctly, you no longer have to wade through all that time reading endless questions and hundreds of lines of instructions or researching the options that are available to you.  You no longer have to get cauliflower ear while waiting on the phone with the IRS to get an answer to a question that is puzzling you.
     4. You no longer have to wonder if you arrived at the absolute best and most accurate result on your tax return.
     5. You no longer have to worry about letters from the IRS because you know your tax pro will handle all of that for you.
     6. When you calculate in your time savings and the increased refunds, you actually find that you come out far ahead financially than if you had prepared the return yourself.
     7. Best of all, you now have PEACE OF MIND.  You know everything is done right and that your tax pro will handle any problems that may develop.
     8. On top of that, your tax pro provides you with suggestions of ways to save on future taxes so you know you’ll save even more money in the future.

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.

Now, if you are a little bit leery of using the “do it yourself” tax software after reading this, we invite you call us or come by our office and give Heritage Income Tax a try.

If you still feel like you want to go the “do it yourself” route, then at least allow us to save you some money by directing you to a website that will allow you to file you Federal Income Tax Return for FREE.  Click here to go to the website for FREE online filing of your Federal Tax Return.

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”

“Tax Software is no substitute for Tax Knowledge”

NOTE:  The information on this page is accurate as of the date it was written.