Filing Yourself? You'll Need Help

After hearing all the talk about 1997's complex tax law changes, you've worked up your courage and peeked at a couple of the new forms. Guess what? It's worse than you thought.

Take the new Schedule D: The form for reporting capital gains, which was 19 lines last year, now goes on for 54. Congress cut capital-gains taxes, but in the process the lawmakers created a maze of rates, holding periods, and effective dates guaranteed to drive taxpayers to distraction. At the same time, the alternative minimum tax, originally designed to make sure the very wealthy paid their fair share, is now hitting middle-class workers. Those with big deductions and as little as $45,000 in income can get hammered. Others may have to work their way through a mind-numbing form just to find out they don't owe the tax.

Still, most do-it-yourselfers can muddle their way through. The vast majority of taxpayers have relatively simple returns, so filling out the forms doesn't require any special magic. And even those who must contend with thorny tax issues have a lot more helpful tools at their disposal than a No.2 pencil and a pocket calculator.

REAL PEOPLE. You could start with the Internal Revenue Service itself. The agency provides two sources of assistance--a Web site ( and a telephone help line accessible through local and 800 numbers around the country. The Web site is pretty basic, but it's a fairly easy way to get forms and publications. You'll need Adobe Acrobat to download the forms, but you can get that from the IRS site as well. And it's much improved over last year. Back then, the site was difficult to access, and even when you could sign on, downloading information was almost impossible.

The phone help line is another matter. The IRS offers recorded answers to simple questions and real people to answer more complex queries. Unfortunately, it can take several days for an IRS person to return a call. For an agency whose last name is Service, that's not exactly lightning speed. And it's only January.

A reliable alternative is a tax guide. They're by far the most popular source of tax help, far outstripping software programs and World Wide Web sites. My local chain bookstore carries seven titles. I looked at three, Taxes for Dummies, J.K. Lasser's Your Income Tax, and The Ernst & Young Tax Guide.

Dummies offers both tax and basic investment advice and is written in a breezy style (or at least as breezy as a tax guide gets). The Ernst & Young book is the Joe Friday of tax references--just the facts. Along with its own explanation of tax issues, E&Y tosses in snippets of the IRS's overall tax guide, Publication 17. If you can handle sentences such as: "Your distributive share of the partnership losses is limited to the adjusted basis of your interest in the partnership..." then this is for you. For me, Lasser's is a happy medium. The explanations are in relatively simple English, but not so dumbed-down as to be useless. But, then, I'm a guy who took home Selected Readings on Tax Policy for a weekend's reading.

The problem with the books, of course, is that you still have to fill out the forms and do all the math. And unless you know to look at a topic, it can be easy to miss important issues. Those problems don't usually bedevil users of tax-preparation software, which walks you through the forms line by line. Last year, some 10 million returns were prepared with such programs, and thanks in part to the tax code's new complexities, that number will rise sharply in 1998. In fact, December sales of the leading program, Intuit's TurboTax, were up 250%, says Bob Meighan, vice-president of the company's personal tax group. Although the tax-software market is growing, many publishers have fallen by the wayside. Now, TurboTax and its chief competitor, Kiplinger TaxCut, are the only two products available on most store shelves.

To put them through their paces, we asked accountants Grant Thornton to pull together a sample return. Both programs allow you to either fill out forms directly or use a question-and-answer format. We used the Q&A for the deluxe version of each.

I didn't find a lot of difference. Neither stumbled over the issues raised by our test return. Both were fairly easy to use and provided lots of help. But neither was perfect. I found that some TaxCut questions were confusing. And I ended up double-counting some mortgage interest because I couldn't figure out just what the program was looking for.

Our test also included points paid for refinancing a mortgage. But TaxCut kept asking about "amortizable points," hardly the most user-friendly language. The rule is that when you pay points in a refinancing, you can't write them off up front, you've got to deduct them over the life of the mortgage. That's amortization, all right, but how many taxpayers know it?

TaxCut prefers that you use its Q&A format. Filling out forms directly is a struggle. With TurboTax using either method is equally simple.

While I found it easier to work with TurboTax's Q&A format, the program had its own problems. While both promote quick links to their Web sites for updates on their products, I found it impossible to link to TurboTax's Web site from its program. It didn't work with my pre-Windows 95 version of America Online or with my office's direct Internet connection. TaxCut, however, smoothly handled both.

WRONG ANSWER. TurboTax's other big sticking point was the foreign tax credit--an important issue for those who earn foreign-source dividends through mutual funds and American depositary receipts. The IRS makes you allocate certain deductions such as interest payments to such income. And the calculations are just awful. TaxCut does most of the number-crunching for you. TurboTax simply stiffs you. It took me about two hours to run a return through TurboTax. But I spent 25 minutes struggling with this one stupid form. Why doesn't TurboTax run the numbers for its customers? A spokesperson says not enough taxpayers use the form. Wrong answer.

While the base version of each program can be had for about $10, I would go for the pricier deluxe models, since they both offer access to more detailed advice and will file your return electronically with the government at no extra cost. TaxCut Deluxe lists for $39.95 and TurboTax Deluxe for 10 bucks more, though with some shopping you can find them both for around $35. You'll also have to buy a separate CD-ROM costing $25 for your state return, although TaxCut puts most states on one CD-ROM while TurboTax makes you buy a separate program for each state.

The truly brave can go online to do their taxes. At least a dozen sites either walk you through a return, or provide actual accountants to do one for you. SecureTax ( is one of the best online sites. It looks a lot like TurboTax or TaxCut. The questions are straightforward and clear. Any IRS form you would want is available on the site. And a quick review didn't turn up any problems. The downside: There are fewer help resources than with shrink-wrapped software. If you want a real, live accountant to do the work, consider a site such as TaxLogic ( For $100 or so, it will collect necessary information about your income and deductions and arrange for an accountant to contact you with follow-up questions.

The online services will also file your returns for you, electronically, if you prefer. The big fear of many potential online taxpayers is security. If you're thinking of going this route, it's essential that you check the bona fides of the people running the sites. SecureTax and TaxLogic are legitimate outfits that appear to make a real effort to protect your privacy. But other online tax specialists may not.

Better software and handy Web sites are helping taxpayers stay even with the folks who write the tax code. The bad news is that the code is going to keep getting even more complicated. The good news is that for those of us too stubborn or too cheap to hire professional help, there are lots of ways to make a painful job a bit easier.

Before it's here, it's on the Bloomberg Terminal.