Do you know the best method for preparing your taxes?

Which tax preparation method should you choose? There are so many options, and after all we're talking about your money that is at stake! You certainly want the best method, but which method is that?

Before I go any further I should mention that tax laws are not my hobby and I have absolutely no official training in tax matters. Personally, I'd much rather be outdoors hiking. Yet for the past few years I've always done my own taxes for the simple reason I never knew how well I could trust those computer programs out there. How reliable are they? Are they worth the money? Well, I finally decided to lay the issue to rest this year by testing it out.

The test

Overall my taxes are relatively straightforward. The biggest complication is definitely the student-tuition deduction. Does the IRS intentionally make the rules difficult with many different choices on what deductions to take and what not to take? Why can't they just say "put the number from box 2 on your 1098-T form here"? I sometimes wonder if they get a perverse pleasure out of making tax time confusing and miserable.

The contenders

It's not an exhaustive list of options out there, but I think it covers many of the common methods people use to prepare their taxes. Also, I want to make it clear I am not trying to promote or put-down any particular method. Everybody will have their preferences ... what follows is just my personal experience for my particular tax situation. Perhaps I hit the strengths of one method and all the weaknesses of another.

What is the best way to prepare your taxes?
myself TaxCut (purchase)1 accountant TurboTax (online)2
1 produced by H&R Block     2 produced by Intuit     3 relative to filling out the forms myself
cost $0 $24.95 $100 federal = $0
state = $24.95
time more than 2hr
+1 week of e-mail
1hr 45min 20min + travel 1hr 30min
federal refund3 $0.00 $278.61 $9.61 -$7.39
state refund (AZ)3 $0.00 -$286.00 $47.00 -$1.00
pros
  • cheap out-of-pocket cost
  • confidence in researching it all myself
  • larger apparent refund
  • e-filing available
  • easy to adjust numbers and navigate through program
  • helpful tax tips on how to optimize future returns
  • interactive tax advice from knowledgeable person
  • fastest method (by far)
  • federal return handled correctly
  • e-filing available
  • clear language/questions made filing relatively easy
  • federal return handled correctly
  • state return handled correctly and thoroughly
  • e-filing available
  • cheap out-of-pocket cost for federal return
cons
  • frustration with having done it myself
  • uncertainty in whether I got ALL the deductions
  • confusing questions and lack of tax advice lead to incorrect numbers entered
  • worthless state tax section
  • most expensive method
  • serious clerical error = returns placed in incorrect envelopes
  • did not include simple clean elections refund on state form
  • additional cost for state return
  • navigating through pages to change things can be confusing
  • can be somewhat slow using dialup modem

Read more details of the results.

Conclusions

So, what is the best method for preparing your taxes? From my experience there is no single correct answer. If you are short on time, have some questions you would like answered and don't mind spending a few dollars, I would definitely recommend finding a good tax accountant. There's something I find very comforting about having a living person there who can decode some of the IRS jargon and the confusing forms. Be careful though. I have also had a bad experience (some years ago) with one of those chain stores specializing in taxes where I swear I knew more than the guy on the other side of the desk. The other extreme end of the spectrum is the do-it-yourself person who is willing to spend the hours understanding the tax codes and reading all the publications. It's definitely a pain in the posterior, but if you want to make sure it is done right, then ultimately you will need to do something of the sort. One advantage of this is that it can also save you money. In my trials, not a single one of the other methods I tried kept the pennies in the calculation. Usually this will amount to less than a dollar difference, but in my case, the end result of this rounding short-changed my refund by $7.39.

Based on my experiences with this test, I recommend the average person with no major life changes should use the free online e-filing system for their federal taxes. Of the two programs I tried, TurboTax does a superior job in regards to ease of use, and it seems to be very thorough. For those who don't mind getting their hands a little dirty and don't have any special circumstances, I also recommend doing the state taxes on your own because the state forms tend to be considerably simpler than the federal ones. Following a previous year's result will make things considerably easier.