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The latest statistics from the IRS show that of all the e-filed individual tax returns for a recent tax year, 59% were done by tax professionals and 41% were self-prepared. That 59% number is still surprisingly high to me, but today we focus on the 41% self-prepared returns.
When you are part of the 41% who do your own taxes, software makes it a lot easier than doing it directly on forms. Some software such as FreeTaxUSA are purely online. Others such as TurboTax and H&R Block offer both an online service and software for download or on a CD, which you install on your own computer. Most people choose to use the online service. TurboTax reported 80% of the returns it handled came from its online products. When you have a choice between buying the software you install on your computer and paying to use the service online, you are better off with buying the software download/CD.
Operating System Compatibility
Online software is compatible with a wider varieties of devices. You can use it with Linux, Chromebook, or tablets, whereas the software download/CD typically only works with Windows or Mac. Sometimes the software also requires a more recent version of the operating system.
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When you use the software online, you don’t have to worry about installing the software and possibly dealing with any errors that pop up. The installed software usually requires several updates before it’s finalized. The online software is updated automatically in the cloud.
Online software clearly has an advantage here. However, if you have a Windows or Mac computer and you are proficient in installing and updating software on it, it’s not that big a burden. It typically takes just a minute.
Possible to Get It Free
Through a partnership with tax software companies, the IRS offers Free File to people with income below a threshold. The cutoff is $66,000 in Adjusted Gross Income (AGI) for the 2018 tax year, which covers 70% of all taxpayers. Unfortunately only about 3% of all taxpayers actually use Free File for whatever reason. Free File is completely online. There is no software download option.
It’s also possible to get it free from the tax software companies themselves. FreeTaxUSA offers free federal returns with no limit on income or any restriction on features. TurboTax and H&R Block both offer a free edition with limited features. If you choose to use FreeTaxUSA or if you don’t require any of the features excluded by TurboTax or H&R Block, it’s possible to get to use the online software free of charge. Again, all these possibilities are only online. There is no free. software download/CD unless you get the software through a financial institution due to your relationship with that financial institution.
Online software has an advantage here if you are able to get it free.
Prices
If you must pay, prices for online software are usually higher than software download/CD.
I compared the prices for federal-only, without state on a random day:
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| Online | Download/CD (Amazon) | |
|---|---|---|
| TurboTax, Deluxe edition | $40 | $30 |
| H&R Block, Deluxe edition | $30 | $25 |
I also compared the prices for federal plus one state, including e-file for both federal and state:
| Online | Download/CD (Amazon) | |
|---|---|---|
| TurboTax, Deluxe + State edition | $80 | $60 |
| H&R Block, Deluxe + State edition | $67 | $55 |
When you do a state return online, the prices automatically include state e-file. The software download/CD with state return only includes the preparation part of it. E-filing the state return requires an extra $20 fee. I added $20 to the prices of the software download/CD for an apples-to-apples comparison.
I think $20 for just e-filing the state return is too high when the whole software with all the complex logic for both federal and state returns is only $40. If you are willing to print and mail the state return, you can save the $20 and get the software at almost half the price for doing it online.
Features
Not only is the software download/CD less expensive but it also has more features than the same named edition online. For instance if you sold investments with capital gains or losses, the online Deluxe edition of TurboTax or H&R Block software can’t handle it. You’d have to upgrade to TurboTax Premier or H&R Block Premium. However, the Deluxe edition of the software download/CD includes handling capital gains or losses. That makes the software download/CD even less expensive when compared to a required higher edition of the online product.
The software download/CD also makes it easier to access the tax forms. If you are familiar with the forms you can toggle between the interview and the forms to confirm that you answered the questions correctly.
Lower prices and more features give an advantage to the software download/CD.
Multiple Returns
The online product is designed to be used by only one person. If other people in the family need to use it, they must register separately and pay again (unless they can get it free, see above).
After you install the software download/CD to your computer, you can use it for multiple returns. It can be for a married couple filing separately. Or it can be for filing returns for children or parents. The software download/CD includes 5 free federal e-files for this purpose. If you need to do more than 5 returns, the additional returns can be printed and mailed.
Access to Previous Years
With the software download/CD, if you ever need to amend a previous year’s return, you can always fire up or re-install the previous year’s program. If you used online software, by the time the year rolls over, the online software is automatically updated for the next year. There’s a process to get to a previous year’s return but it’s much more difficult.
Filing versus Planning
Online software is designed for after-the-fact filing. You work on only your actual return. It’s difficult to create multiple versions under the same user and compare the effects of different moves. If you’d like to see how much that 1099 cost you in taxes, you can delete it but you will have to re-enter it before filing.
The software download/CD works on a data file. It’s very easy to create a copy of the data file and name it something else. Then you delete that 1099 in the copy and compare the results. You won’t mess up your good copy. For instance you can see the effect of how making more money will affect your ACA tax credit, how contributing to Traditional 401k versus Roth 401k will affect your taxes, what if you earned more interest and less dividends, and so on. Besides filing your tax return, the installed software is also a very powerful planning tool.
It’s much more difficult to do this type of what-if analysis with online software. You can register with two different email addresses, one for filing and the other for planning, but you will have to enter your data twice and be careful to keep them in sync. You will have to remember to undo the changes you made in the planning profile to go back to the baseline before you make additional changes for planning purposes.
Switching Vendors
If you ever want to switch from one vendor to another, it’s very easy with software download/CD. TurboTax is able to import the previous year’s tax file created by H&R Block and H&R Block is able to import the previous year’s tax file created by TurboTax. When you use online software, it’s more difficult to switch because the competing online software can’t get into your online account with another vendor to import your data.
Who Holds the Data
When you use online software you data are with the software vendors. Although we haven’t heard any hacking incidents at tax software vendors, many other places have been hacked. It’s also possible to fall for phishing. When you use software installed on your computer, you have your data file. You can store it on offline media.
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Conclusion
Except operating system compatibility and the possibility to get it free, all other factors give the advantages to software download/CD. Although it sounds like more old school, if you must pay, the software you install on your own computer is both less expensive and more powerful.
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If you already use online software, it’s possible to switch to software download/CD by the same vendor and carry over all your data. TurboTax gave these instructions: How do I switch from TurboTax Online to the TurboTax software? Contact H&R Block support if you’d like to do the same with H&R Block.
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