Tax Preparation

Many of us prepare our own income tax returns, and that's probably a good sign.  After all, the IRS is supposed to ensure that the average American can actually understand a tax form.   Fortunately, the age of the Internet has made that process even simpler by giving us direct access to tax preparation software programs.  These applications literally walk us through the process of preparing an income tax return.

You have at least four choices when it comes to preparing taxes.  The first is to pull out a pencil and calculator, and start reading the Form 1040 instructions.  The next option is to visit your local CPA or H&R Block office, and make an appointment to discuss your taxes in-person.  The final two options are more popular today:  purchase tax preparation software or use a hosted solution.

Preparing Your Own Income Taxes

Before the electronic age, if you wanted to prepare your taxes by yourself, you had to sit down with your Form 1040 and start on Line 1.  We'd read through each line, and if we completely understood what information the IRS wanted from us, then we would fill in that number on the form.  We'd repeat this process until we were done preparing our taxes.

Unfortunately, once in a while we'd run across a line item that we didn't completely understand.  The IRS helped us by supplying a 70 page book of instructions that we could reference.  Hopefully, we could figure out what that particular line item was all about.

Tax Preparation Software

For many of us, those days are over and tax preparation software packages have replaced the pencil, calculator, and that 70 page instruction book. At first, this software revolution started small, and was restricted to applications you loaded directly on your home computer.  Today, there are three industry giants that dominate this area.  Each of these offers you the chance to prepare both your federal as well as state income tax return.

TurboTax by Quicken

TurboTax has the honor of being the leading tax preparation software package on the market today.   The program can quickly import financial information from Quicken or QuickBooks if you're already using these products for budgeting or financial reporting for your small business.  TurboTax is arguably the easiest program to use, and offers comprehensive income tax advice and explanations as it walks you through the process of preparing your tax return.

TaxCut by H&R Block

TaxCut is another giant in this area, and like TurboTax, it uses an "interview" process to walk you through the chore of preparing your taxes.  TaxCut has a relationship with Microsoft Money personal finance software, which competes with Quicken.  TaxCut can easily import information from Money to speed up the process of preparing your return.

TaxAct

TaxAct is the least well known of these three giants, but the approach is basically the same.  The software walks you through an interview process, and when you're done answering all the questions, your done with your income tax return.

All three of these programs allow for e-filing - electronic filing of your tax forms.  The benefit of e-filing is that your information is instantly sent to the IRS in an electronic format.  This electronic exchange of information reduces the time it takes to receive a tax refund.

It is nearly impossible to compare prices, since competition is fierce and heavy discounting often occurs during the annual tax preparation season (January through April 15th).  Typically, you can pay anywhere from $0 to $90, depending on whether you are upgrading or bundling this purchase with another software program.

Tax Preparation Websites

Today, the power of the Internet gives us access to tax preparation software residing on servers miles away.  Just like the software you can load on your personal computer, the entire process consists of an interview method.  You can stop when you want, and conveniently continue where you left off at a later date or time.

Some of the nicer features of all these programs include onetime entry of information such as your Social Security number, automatic calculation of formulas, and even a process to check your forms when they are completed.  For example, you can compare your previous tax year's tax return information with that of the current year to see if you missed anything.

These companies have the process down to a science, so it's pretty hard to miss any tax deductions or tax credits you should be taking.  They also include convenient features such as the ability to import the information from your federal income tax forms into your state income tax forms.  The software can even flag information that might trigger an audit of your income tax return.

Free Income Tax Preparation Services

The IRS website supplies Americans with a list of free tax preparation service providers.  In fact, in 2010 / 2011 they have roughly 20 online service providers that will take care of your tax preparation needs for free.  Just make sure to read the fine print on some of these offers.

For example, if your adjusted gross income or AGI is below a certain threshold, then you qualify for free preparation and filing of your tax return.  Others offer free preparation and filing to all taxpayers, but there is one small catch.  The free offer is usually for their "standard" tax filing process.  This will have fewer features than a premier or deluxe offering.

Another item you should be aware of is that this free preparation and filing is usually limited to federal income tax returns.  While nearly all websites can provide services to file your state tax return, there may be a nominal fee associated with electronic filing of your state income taxes.  These fees are usually in the $10 to $35 range.

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