Anne Angelopoulos is moving against the electronic tide. For the past three years, she has filled out Form 1040 on her PC using Quicken TurboTax. But now she has decided that doing taxes for her family of four is no longer a do-it-yourself job. After a merger eliminated her job last September, Angelopoulos started working from her Coconut Creek (Fla.) home as an independent contractor for an executive-search firm. "Now I have a home office, commissions, business expenses, and no withholding," she says. "I don't want to mess up."
Last year, 25% of taxpayers--close to 30 million--filed using tax-preparation software. An additional 2 million will switch this year, Microsoft says. Tax preparation is one of the fastest-growing uses for personal computers--a prime reason why the Lords of Redmond just launched their own entry, Microsoft TaxSaver. The tax software producers would have you believe few situations are beyond the reach of their programs. "Our product is designed to do even the most complex returns," says Monica Muilenburg, marketing director for Intuit's tax products. Intuit founder Scott Cook does his taxes on TurboTax, she says, "and that's one complicated 1040."
But don't fire your accountant just yet. True, tax software gets better every year. But our review of the three major programs--TurboTax, TaxSaver, and Block Financial's Kiplinger TaxCut--shows that all still have definite limits.
Using data on sample taxpayers provided by accountants Ernst & Young, we prepared three returns on each program. In all nine cases, our PCs produced tax bills within $1 of the figure Ernst & Young computed. All three offer free electronic filing, which speeds up refunds and reduces errors. (President Clinton's proposed $10 tax credit to encourage e-filing won't apply to 1999 returns.) Our first pass through the complicated return took just two-thirds of the 6.5 hours that the Internal Revenue Service estimates you'll spend on a paper-and-pencil 1040. And even our most complicated return didn't explore all the backwaters of the tax code that these programs can navigate.
Of the three, we liked TurboTax the best. Its well-honed interview anticipated most of our needs, and its frequently asked questions (FAQs) were clear and concise. The new entry, TaxSaver, needs to beef up its Q&As to help filers sort out messy factual situations. (Like other Microsoft products, TaxSaver also forces users to load Internet Explorer--a 45-minute exercise that crashed our PC twice.) TaxCut, while best organized to handle simple returns, needs to spiff up and improve its navigation tools to match those of the others'.
But all three had a common failing. On such complex subjects as figuring the cost basis of an investment or calculating the worth of stock options, these programs default to the IRS directions--the murky language that the user hoped to avoid. Cost basis, which bedevils owners of taxable mutual funds, is the most disappointing lapse. TurboTax has a welcome description of four methods for computing a fund's basis, but worksheets would have been much more helpful.
True, some tax situations are beyond any hope of simplification. Take the alternative minimum tax (AMT), a parallel code designed to catch filers who make heavy use of tax breaks. All three programs alert users to the AMT. But follow their warnings and you're soon lost in a maze of ill-defined terms, such as "patron's adjustment" and "preference items." Odds are, none of these apply to you--but your PC is not giving you the reassurance you hoped for.
Who should skip the software and pay for a professional preparer? Frank Degen, an enrolled agent in Setauket, N.Y., calls his prime prospects "Cs, Ds, and Es," after the 1040 schedules used to report business income, capital gains, and income from partnerships, estates, and trusts. Self-employed taxpayers are particularly vulnerable to "the gray areas, like where you draw the line between business and personal use of your car," says Degen.
Major changes in your life--marriage, divorce, having a child, sending one to college, inheritance--could also send you to a pro. Congressional efforts to help families are mucking up their tax preparation. "The new child credit and education breaks [Hope Scholarships and Lifetime Learning Credits] are among the most complex items I've ever seen for ordinary people," says Martin Nissenbaum, Ernst & Young's director of personal tax planning.
Job changes and moves get many do-it-yourselfers in over their heads. And as stock options become more common, more taxpayers are beating a path to the pros: Nonqualified options require tricky annual calculations, while the less common incentive stock options run the risk of landing you in the AMT.
APE THE ACCOUNTANT. The good news is you don't have to take such issues to a preparer every year. Once you've seen how a pro handles, say, alimony and child-support payments, you can follow that template year after year. Conversely, if you're doing your own taxes, it might be smart to let a preparer review your figures every third year. If you've been overlooking income or entering numbers in the wrong places, you have time to file amended returns to fix past errors.
The best thing a pro can give you is advice--help in structuring your investments and benefits for the most tax savings. "The one thing all my clients say is: `Give me a preparer who'll tell me what to do to save more,"' says Mari Adam, a certified financial planner in Boca Raton, Fla. And while a tax planner can work off a return you completed, accountants say they get a better feel for your situation if they prepare your schedules themselves.
Ultimately, the choice of doing your own or going to a pro comes down to how you like to use your time. "There's nothing simpler than mowing your lawn," notes Degen, "but millions of people pay someone else to do it." Tax software is making the task of rendering unto Uncle Sam easier every year. But if you've got an especially complicated situation--or if you just figure you've got better ways to use your time--pack up your shoebox of receipts. Your neighborhood accountant awaits.