/ / Online Tax Filing Benefits & Drawbacks (An Accountant’s View)

Online Tax Filing Benefits & Drawbacks (An Accountant’s View)

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Taxes suck!

Paying taxes sucks!

Organizing your tax stuff sure as heck sucks!

And actually filing your taxes????

Fuggedaboutit!!!!

It could be your business tax return.

Or your individual income tax return.

Some people would actually prefer going to the dentist!

I really can’t blame them.

And with all of the changes to “simplify” things, it’s actually worse now.

There always seems to be a big discussion when it comes to filing income taxes.

Do you pay a tax preparer to file your taxes?

Do you use an online tax service or app to file your tax return?

Do you just say screw it and not even bother?

That last one is a joke–I DO NOT ENDORSE OR CONDONE THAT AT ALL!

But there is always confusion among people about how they should approach it.

And there are always people who will give you their opinions.

As a tax accountant, I wanted to give you my insider view of the subject of online tax services in general.

Why I Don’t Recommend Tax Services

This isn’t like payday loan services…I’m not totally against tax apps or services entirely.

I do recommend them, but only in certain instances.

And, if I’m being honest, I do have problems with them for people who have more complex or especially fluid situations.

After-The-Fact Solutions

What I mean by this is that tax apps can only look backwards once the year is over and you have the numbers to process; not able to look forward for guidance during the year.

They are aggregators of existing data, unable to assist in any kind of mid-year or year-end tax planning.

There are no calls during the year to ensure that estimates are being made.

No check-ins to inquire how things are progressing, particularly in the case of those who have business income from a Schedule C or a K-1.

There’s no one to call throughout the year to ask for advice before making an investment or purchase decision.

They can’t sit with you at any time during the year and tell you that you should be adjusting your tax withholding in order avoid owing underpayment penalties or prevent you from leaving too much paid in until you file and claim your refund (especially with the rise in tax fraud).

Basically, in a world where so many decisions have tax implications, they provide no value other than preparing tax returns.

No Safeguards Against Incorrect Deductions

Don’t get me wrong, I certainly don’t expect the average person to know all (or even a fraction) of the rules involving tax deductions.

That’s kind of the point of using a program or app to file your taxes.

Unfortunately, there are a few ways in which you can (honestly or not) claim deductions you should absolutely not be claiming and have way of knowing.

I’ll give you a couple examples:

Self-Employed Health Insurance Deduction

I’m not going to go into terrible detail, because I already wrote a pretty in-depth article covering the Self-Employed Health Insurance Deduction.

Two of the rules which must be followed are:

1. You or your spouse cannot be eligible for group coverage–whether or not you take it–to claim this deduction, and

2. The insurance has to be in the name of the business or the owner. 

Many people have already left comments on my article asking about various situations and most of them end the same–with me saying that they don’t qualify to take the deduction.

Unfortunately, you can enter your insurance premiums and no program will have the capability to tell you that it’s not permitted because you don’t qualify.

Charitable Giving

Another topic I’ve written pretty extensively about–what qualifies as deductible charitable contributions?

Did you know that if you receive value in exchange (ie: dinner) then you deduct the fair value of what you received when calculating your donation?

Did you know that games of chance (lottery, raffle) are not deductible donations?

Were you aware that if you give money to a friend who is collecting donations, then you aren’t the one who gets to claim that charitable deduction?

Do you even care?

There are some people out there who won’t and, once again, no program will prevent people from entering those figures into their tax returns.

This confusion also applies to non-cash contributions, particularly with valuations.

Do you value your donations at the same price you paid?

Do you value your donation at the price it is currently in the closest retail outlet?

You could put any amount you wanted regarding what you donate to charity and there would be no one to let you know that you’re doing it wrong.

Medical Expenses & Health Insurance

Just like the previous two examples there are rules that must be followed.

For something like medical expenses certain items are specifically excluded such as dietary supplements, gym memberships, elective surgery among others.

They absolutely do not belong included with legitimate medical deductions on your tax return.

With health insurance, there are a lot of folks who already have their premiums taken out pre-tax through payroll check deductions or via an HSA account.

Those people are not allowed to deduct the premiums on the tax return because that is double-dipping–taking a deduction for something that was already exempt from income tax to being with.

And, just like the previous examples, there is nothing any tax app can do to prevent people from breaking the rules.

There are so many more areas of abuse that this applies to such as

  • Business expenses
  • Mileage/auto use
  • Child care costs
  • Education expenses
  • and more

Look, I am in no way perfect at anything, no professional is.

The point is that an experienced human tax preparer with ethics would not use those items in the preparation of a tax return, where someone doing their own has no clue and the apps have no way to prevent these mistakes.

All Experts Aren’t Created Equal

Now a lot of tax services are offering live experts to review your returns.

Anyone who has ever heard or read my thoughts on the subject know how I feel–and I’ll repeat it here for those who are new:

You need to work with someone who understands and has experience in your particular situation.

Not all CPAs are well-versed in every aspect of taxes–hell, some don’t know shit as their fields of expertise lie in auditing, valuation, etc.

Not all tax professionals are familiar with online solopreneurship, or the nuances of post-secondary education, or rental properties.

Just because these tax apps are giving you access to an “expert” doesn’t mean they are providing you value there.

The best way to find a tax accountant is to interview them to see if they “get” you and your specific situation.

And there is no guarantee that the “expert” assigned to you by sheer luck of the draw is not really helpful.

Marketing Tactics

This is a short one.

Some would dare to call this nit-picking, but I would strongly disagree.

Show me any piece of marketing for any tax program–print, online, radio, tv–and they all focus on one thing:

TAX REFUNDS

They all emphasize the largest refunds.

That is just plain wrong.

The focus should be on one thing and one thing only:

ENSURING THE MOST ACCURATE TAX RETURN AND EASIEST PROCESS!

Why?

Not everyone gets a refund.

If everyone doesn’t get a refund, then what is the value proposition?

If everyone doesn’t get a refund, then what separates one from the others?

The focus is on the wrong thing.

This, obviously, was a look at online tax services and apps in general. If you’re looking for something that focuses more on specific services and which are the best for specific purposes, go visit this comparison of The Best Tax Software at The College Investor.

And for my Canadian people, I have you covered as well. You can check out The Best Canadian Tax Software Options from Maple Money.

Why I Do Recommend Tax Services

Hey, it’s not all bad when it comes to online tax preparation tools.

While it may seem like I did a lot of bashing, there are some positive aspects that I like a heck of a lot.

One thing I love about electronic filing is the fact that it’s an identity theft protection measure.

It’s a lot harder for people to steal your identity off of tax records when the filing and payment/refund are all done electronically vs. on paper sitting in your mailbox!

So without further adieu lets look at some other reasons why I recommend using these products:

Simple Is Ok To DIY

I’d have to say the most common question about tax preparation is:

Should I pay someone to prepare and file my taxes or use an online tax program?

Almost everyone who starts a conversation with me about the subject

My honest answer is always the standard answer for so many financial-based inquiries: it depends.

And to be completely honest I always advise extreme caution when considering do it yourself projects.

It depends on how comfortable you are in preparing your own taxes.

It depends on how complex your situation is.

And it depends on your ability to pay for someone to do it for you.

All in all, if you are the type that has a relatively simple return–just W-2(s), interest, dividends, maybe some capital gains and student loan interest you should have no reason not to try it yourself.

There generally isn’t much that would trip you up, and the few questionable parts can be solved with the program-based support options.

The best part is that if you are a little skittish about your results you can always get a pro to review your return before hitting “file now” (or whatever the button says to finalize the return).

And the reason I say it’s something you should be able to get done on your own is because…

The Interfaces Make Taxes A Breeze

One of the best things about most of the top tax preparation apps is the interface.

Rather than sitting with the forms and instructions side by side on your desk, you get a simple-to-use, aesthetically pleasing input method.

Many take you through a questionnaire in order to both make sure you are putting everything that’s required but also not miss anything that could cause you any problems.

It’s like a logical progression that follows the lines and forms of the tax forms almost perfectly.

You are asked simple, easy to understand questions to determine whether or not a particular area/line item applies to you.

No more going line-by-line trying to decipher the instructions in order to try to figure out what you should be putting and where.

Organization is key element in making sure that a tax return is filed accurately and completely. 

And the way everything is presented is in plain English, as opposed to industry jargon since we all know how frustrating it can be when we’re talked to in terms we simply can’t follow or understand.

It also helps that you are only presented with a small section at a time so it doesn’t feel so overwhelming.

The Price Is (Often) Right

Cost is one of the biggest issues for a lot of people.

I’ll be totally honest, for those who come to me asking to pay me to file a return with just a W-2 and some interest or dividends, I send them to TurboTax.

There is simply no way I can look myself in the mirror if I take someone’s hard-earned money for doing something they should be doing themselves.

And if you qualify for the free filing option it’s even better.

The purpose of the whole “tax reform” was to make it simpler for the majority of people to file their returns by simplifying it.

That gives this same majority even more reason to not spend hundreds of dollars on a professional–I’ve actually seen H&R Block charge $280 for just a W-2 return a few years ago.

The positive is that even if you don’t qualify for free filing, you will at least only have to pay a nominal fee vs. a professional tax preparer’s invoice.

There are always going to be people who have their opinions on how you should prepare your taxes.

The “DIY” group will almost always say that you should do everything yourself.

The “go pro” group will almost always say that you should outsource everything you aren’t an expert in. (I lean more in this direction for the most part).

The important thing is this:

DO WHAT IT RIGHT/BEST FOR YOU NOT WHAT ANYONE ELSE SAYS TO DO!

This is just to provide you with a different look at online tax services in general but from a professional tax preparer’s point of view.

If you’re looking to cut your time significantly my personal recommendations are TurboTax and Tax Slayer.

TurboTax is the granddaddy of them all. You’d have to be pretty special & smart to outlast everyone else that’s come and gone in the online tax program space all these years.

Tax Slayer is one of the best and brightest of a new crop of online tax apps. It’s a great program that has exploded in user-base in a short period of time based primarily on being better than the rest.

Your Turn

How do you file your income taxes? Do you DIY with an online tax program or do you pay a tax preparer? have you ever messed up and ended up having to pay a pro to fix it anyway? Have you done both and found one to be a better option than the other? (remember, what works for one doesn’t always work for everyone and vice versa)

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Kathleen O'Malley Celmins

Great review. This year I think it’s a little too complicated for Turbo Tax. Plus I trust a professional more than myself to help me categorize “ordinary and necessary” expenses.

Eric J. Nisall
Eric J. Nisall
8 years ago

Thanks K! Sometimes the best thing you can do is recognize when something is above your paygrade and look to an outside source to do it. It’s the same reason I won’t bother to spend time researching legal code or go to a legalzoom or other website if I have a situation but instead will call a lawyer so I know that it’s taken care of the right way.

JoeTaxpayer
8 years ago

On the flip side, there are good tax guys, great tax guys, and those who are not providing value added. Years ago, my Mother and Father in Law mentioned they were working on their taxes. This meant they were gathering up information for their tax guy to fill out their return. In February, he sent a sheet, a checklist, either they would fill in some blanks or bring things like their W2s 1099s, etc.

They showed me the prior year’s folder.

I saw the questionnaire pretty much reflected the final return. In other words, the guy wasn’t adding any value at all, in fact, he had a clerk just copy over the numbers.

I’ll admit as well, there are times a pro is needed, but when a couple’s finances can be narrowed down to a dozen fields that need entering, I’ll suggest the software any day.

On a lighter note, TurboTax will sign in to your payroll dept’s computer to suck down the W2 info, and into your broker’s system to pull all stock transactions. Amazingly cool to watch. I’m left with mortgage info, a few 1099s, and donations. My taxes are done in less time than it would take to drive into town where the pro was located.

Eric J. Nisall
Eric J. Nisall
8 years ago
Reply to  JoeTaxpayer

Believe me Joe, I know what you mean. I am that “clerk” so to speak–my employers charge their rate (an outrageous amount) for a tax return that I prepare.

On the other hand, in my personal business I charge much more reasonable rates and provide things such as a personalized cd containing not only a pdf of the tax return itself, but another pdf file containing the clients’ source documents separated out by section and bookmarked as such. This way, they not only have a record of all of their annual information, but it is also easily searchable should they need to submit information for a loan or financial aid for their kids, etc.

Greg@ClubThrifty
8 years ago

Nice review! I prefer the H&R Block version, but it takes me several hours to complete our taxes. They are a bit complicated, but not so much that I can’t do them myself. Having one of these programs really helps. However, if I was running a complex business, I would definitely be using an accountant.

Eric J. Nisall
Eric J. Nisall
8 years ago

Thanks Greg. I have had issues with H&R Block for the longest time, ever since I had a client come back from using their retail service only to find that not only did the tax returns get prepared without taking any prior year information into account (she had massive capital loss carryovers which were ignored) but it appeared that there was no supervisory review either considering how many “inexperienced” preparers they employ. Anyone with real experience would have seen that she had current losses and should immediately have asked if there were prior year losses as well. Not only that, but there was no info on the Block 2-year comparison so I was left asking if they even looked at her history at all.

Granted, the software may be set up differently than the way some of the retail locations are run, but my preference if I had to choose would be TurboTax over any other, and to avoid the chains unless you can be sure the person doing the return is experienced and that the return will be reviewed by someone experienced if that isn’t the case. (sorry for the tangential rant!)

Greg@ClubThrifty
8 years ago
Reply to  Eric J. Nisall

Ha! No need to apologize for the rant:) The first year we had our rentals, I used an H&R Block tax preparer. From then, I just decided to buy the software and do it myself. Like I said, though, our taxes aren’t that complicated…although they do become a bit more complex each year. This is our first year with an LLC, so that may change my thinking in the future.

Jeffrey Trull
8 years ago

I’ve been using Tax Slayer the past couple of years and was always happy with it while my taxes were simple. It costs about half that of Turbo Tax and yielded the same results for me (I filled in all my info last year just to compare).

This year, I started working with a (reasonably-priced) accountant that I’m happy with. But if it weren’t for being self-employed, I’d probably still be using online tax software.

Eric J. Nisall
Eric J. Nisall
8 years ago
Reply to  Jeffrey Trull

Self-employment really makes things a bit more difficult. I saw a couple ads for Tax Slayer here and there, and noticed that they sponsored some racing car, but was leery of the company for some reason. You’re actually the first person I know who ever used that service

Money Beagle
8 years ago

That’s a great review. We have a family friend who is a CPA and has done our taxes since I was born (he’s a friend of my dads) so thankfully I have never had to deal with any of this, but I know he’ll retire one of these days and I’ll have to probably turn to something like this if I don’t feel the need to transition to a different professional. Thanks.

Eric J. Nisall
Eric J. Nisall
8 years ago
Reply to  Money Beagle

It’s always hard to make that switch, especially after such a long time. Finding someone with the same rapport takes a bit of time, if it ever happens.

Kim
Kim
8 years ago

My tax return is uber complicated, at least in my novice eyes, so I’d never go that route. The last time I did my own taxes was when I was a resident. I did them online, then I had some questions about a moonlighting job I had taken and went to talk with an accountant. She asked to see my prior year’s taxes was able to file an amended return and get me $500 back, even though I wasn’t concerned with the prior year. I was sold from that point on.

Eric J. Nisall
Eric J. Nisall
8 years ago
Reply to  Kim

I always have new clients bring in the past few years of returns just to give them a second look. Since there is a fairly long window to amend them, it’s worth a shot to see if there was anything that was missed or done incorrectly, especially if it was done on their own. It amazes me when people think that it’s so easy to do their own returns with the help of services like this, but I always end up going back to my views on certain DIY stuff: it’s always better to spend the money to make sure it was done right the first time since the fix can be much more expensive and annoying to deal with.

Funancials
Funancials
8 years ago

The unfortunate thing I’m finding is that the more money you make from various sources, the more complicated your taxes become. It really makes you wonder how many more entrepreneurs there would be if our tax code was simplified. This year, I don’t think I’ll be able to get away with “the free return.”

Eric J. Nisall
Eric J. Nisall
8 years ago
Reply to  Funancials

I don’t think it should have any effect on people becoming entrepreneurs. As I, and so many others say, people should concentrate on doing what brings in the cash and have others who are experienced in those areas handle the rest of the stuff. After all, that’s why we have lawyers, accountants, web designers, etc. The point of going into business is to do something you excel at or specialize in better than others, so that’s where the focus should be, not in worrying about wasting time with other tasks–the revenues earned by spending time in the right areas should more than make up for the cost of paying outsiders to do the things that would be a waste of time for the business owner relative to how much they could be bringing in while focusing on the business.

Grayson @ Debt Roundup

Great review. I have been using Turbo Tax for years. I find it easy, but I think this might be my last year using it. Since we now have a child, investments, and my business, I am not sure I will be able to handle the return with Turbo Tax. I have had a business for years and never had a problem with my tax returns, but with all of the other stuff, I want to make sure I have it right.

Eric J. Nisall
Eric J. Nisall
8 years ago

Adding one thing usually doesn’t make it much more difficult, but when you pile on all that stuff at the same time, it can get a bit overwhelming to get ahead of the curve. You could always try it out, and if you find it isn’t working bring it to a tax preparer. Who knows, you might end up being able to do it on your own and save the extra cash for something fun!

Stephanie
Stephanie
7 years ago

Great review and info! Thank you!