This article was updated on February 23, 2011.
Everything we do, we do online. We meet and chat and date. We plan and play and pay bills. Kids text, celebrities tweet and boomers post snapshots on Facebook. Our pay stubs are PDFs, our health care comes via HR portal, and our photos have migrated from shoebox to hard drive to remote server. You may have communicated with your college roommate yesterday, but when was the last time you actually spoke?
So given all the supremely personal acts that we have happily relinquished to software, why do 60 percent of Americans use a real live tax pro to do their taxes? TurboTax costs less than $100 for most people, and it’s probably a breeze compared with open enrollment. Yet only 21 percent of Americans use tax software. Nearly as many, 17 percent, use a pencil.
To find out what some guy with a green eyeshade can do for you that software and circuits can’t, we put ’em all to the test. In a competition the likes of which hasn’t been seen since John Henry took on the steam engine, we pitted New York City CPA Howard Samuels against three tax programs to see who could get the biggest refund from Uncle Sam. May the best number-cruncher win. (Our sister site, CNET, skipped the CPA but evaluated six different software/online filing options. Here are their results.)
About my family: I’m a self-employed journalist and my husband works as a commercial real estate broker. We are new parents (2009 deduction!) and rent a New York City apartment.
Here’s how the contest played out.
- Cost: $15.90 ($7.95 for federal, $7.95 for state)
- Tax refund: $13,914 for federal, unable to complete state
- Total savings: Inconclusive
The price of the software was appealing: just $15.90 for our federal and state return. Since my husband and I earned too much in 2009 to qualify for the IRS’s Free File program, this is about as cheap as it gets. At first, everything went smoothly. OnLine Taxes asked questions and I answered them.
Then things got hairy. Some of OLT’s questions were cryptic and clicking on “Help” was no help. (“Have you filed form 4029 and have you received IRS approval by filing Form 4029?” I have no idea.) The program’s instructions were full of typos, and a few sentences were so odd they seemed as though they’d been written in another language and run through a translator. I couldn’t figure out where to input my self-employed 401(k) contributions and I’m pretty sure I put my business income in the wrong place. The program marked some entries as too long, but with no character limit given, the process led to a drawn-out guessing game.
After about an hour of wrestling with OLT for our federal return, the end result was ludicrous. Sure, I’d take a check for nearly $14,000, but there’s no way that was accurate. I decided it was pointless to repeat the exercise for my state return and moved on to another inexpensive software.
- Cost: $17.95 for federal and state
- Tax refund: $3,421 ($2,742 federal, $679 state)
- Total savings: $3,403.05
TaxAct worked the way tax software should. Its questions helped me input information about life events, W-2 income, business income, deductions, and credits. Adding information was a snap until I got to my state return, where I became bogged down with unfamiliar forms. (The Metropolitan Commuter Transportation Mobility Tax Return? The Unincorporated Business Tax Return?) They seemed related to my being self-employed, so I slogged through them.
The program could have offered a little more guidance. Searching for terms often yielded zero results. And the help topics weren’t always user-friendly. But the “Alerts” function was useful, catching inconsistencies that I quickly fixed. (One estimated tax payment was entered in the wrong place, for instance.) And if I were to get really tangled up, TaxAct offered free e-mail support (and phone support for a one-time $7.95 fee).
In the end, TaxAct was fairly easily navigable, thorough, and I would have received a sizable refund. For $18? Not bad.
- Cost: $111.90 for federal and state
- Tax refund: $3,491 ($2,751 federal, $740 state)
- Total savings: $3,379.10
TurboTax is wildly popular and it’s easy to see why. Every question was coherent and accompanied by a “Help” section. And this software was packed with great tips: For instance, TurboTax noted that if I’ve filed jointly with my husband in the past, we should list ourselves in the same order again. (Apparently the IRS prefers that.) The program’s “flag” function let me earmark a section and return to it later. That came in handy when I misplaced one of my 1099s. If we had organized all of our information in Quicken, TurboTax would have imported it. I’ve heard some complaints about TurboTax pushing end users to upgrade, but since my self-employment required me to use its top-of-the-line personal package, I never ran into that problem.
I wasn’t a fan of its “Community” feature, where you can input a question and wait for an answer from other taxpayers using TurboTax. How would I know if they’re up on the tax laws? Seemed risky. TurboTax offers guidance from a pro, but that costs $29.95 for the first 20 minutes and $19.95 for each additional 20 minutes. H&R Block’s At Home tax prep includes free, live tax advice from experts with its premium products.
Overall, the process was painless, but TurboTax never mentioned some of the state forms TaxAct brought up, making me wonder if I needed them. I later learned that indeed I did, when the accountant completed those documents for me. Although my refund was slightly higher than TaxAct’s, I wouldn’t have saved as much overall, because TurboTax cost more.
The Software PackagesOnLine Taxes (also called OLT)
- Cost: $400 for federal and state
- Tax refund: $3,831 ($3,016 federal, $815 state)
- Total savings: $3,431
The advantage to hiring a pro was undeniable: I wouldn’t have to spend time and anguish doing our taxes myself. The $400 fee seemed steep to someone used to paying for software, but handing over all our tax stuff was a relief.
Samuels had me fill out a Microsoft Word document with our financial information and an Excel spreadsheet with our business expenses. Two days later, he was back with sharp advice to lower my taxes.
He pointed out that I’d been conservative valuing my non-cash clothing donations and, according to the Salvation Army’s Donation Value Guide, I could write off higher amounts.
He also recommended adjustments to my business and home office deductions that the software programs didn’t. For instance, I’d neglected to include the storage space for my work files when calculating the square footage of my office. And he cleared up my confusion about deducting tax prep fees. Turns out, I can deduct half the cost as a self-employment business expense. But since my husband isn’t self-employed, the other half of the fees get lumped in with our other miscellaneous itemized expenses and only the amount exceeding 2 percent of our income would be deductible.
Samuels also suggested putting money into a New York 529 college savings plan for my infant daughter, since we could deduct the payments on our state return.
This type of advice isn’t unusual if you go to the right CPA. A good accountant will look at your situation, suggest ways to save on taxes now and in the future, and suggest other types of advisers, such an estate lawyer, who can help you with sophisticated moves requiring special expertise. A good tax pro will also tell you if anything on your return might raise an audit flag with the IRS. And if you do get audited, the accountant can steer you through the process (for a fee, of course).
The key phrase is “the right CPA.” Not every accountant is going to ask you about your estate planning. “With some CPAs, you give them the numbers and they give you back a return,” Samuels says.
In our case, Samuels raised the size of our refund by a few hundred bucks compared with the software. Even though he charged far more than the tax programs, we’d still come out ahead. The human element made a big difference because our tax situation (self-employment, dependent child) required some tax machinations that software can miss. But even Samuels acknowledged that if our taxes were simpler, TaxAct or TurboTax might have won the competition: “For the guy who has one job, one bank account and rents, the accountant will be pretty darn close to the tax software numbers.”
What’s more, we’ll put Samuels’ tips to work to save on taxes in future years. Computers may be able to beat chess masters, but when it comes to Schedule A, humans still have the edge.
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