Warning: Rant on Tax Software

[jacob]

My vote would be for just doing it by hand with a pencil and a calculator. All the tax software does is put the questions given on the 1040 instructions up on a computer screen while hiding all the calculations. The instructions for the forms that have been in usage for a while are pretty damn fantastic. It does require the ability to follow them [the instructions] literally. It's no more difficult than tracing a non-threaded computer program.

The amount I've saved on taxes based on learning how the calculations actually work and then arranging sources of income accordingly has been my greatest source of alpha by far.

[Simple Del]

If your residency is abroad you are automatically granted a 2 month extension on filing your taxes.

[enigmaT120]

If you do your taxes by hand, how do you file on line?

I've been using Turbotax for years because a guy I know keeps sharing his copy with me. It's faster and easier, especially the way it imports the information from my previous returns and getting my various W2s and 1099s and stuff via the internet.

[JL13]

The amount I've saved on taxes based on learning how the calculations actually work and then arranging sources of income accordingly has been my greatest source of alpha by far.

Have you come up with a ballpark figure?

I agree it's been pretty huge for me as well.

[jacob]

@enigmaT120 - https://www.irs.gov/uac/Free-File:-Do-Y ... s-for-Free

@JL13 - I'd say $2000--5000 per year when comparing random to optimized. Probably more if my only income had been W-2 but that was never the case. I do have a lot of sympathy for those with SE income only (like a 1099 contractor) and no clue about deductions. They pay way way more taxes than I do.

In terms of income to effort, learning taxes has been my highest ROI ever. I spent 35 hours learning to do it the first time. Subsequent years were 2-4 hours (because I could mostly just copy my previous years). Then my wife became a tax-pro and now she does it. I have had different marginal rates (e.g. 40% for selfemployment, 25% for employment, and up to 15% for investment income) and making tax-efficient choices can bring some of those marginal dollars down to 0%. For example, for investments, I tax harvest optimally every year and my various types of investments are almost optimal in terms of income being in tax-deferred, foreign being qualified but taxable (to get the credit), etc. For earned income we optimize [the amount of] work so our income falls in the maximum "YMOYL life-energy" wage possible after taking various deductions and credits into account. Taxes are a very good argument for income diversification. Each type of income has its own little ceiling ... so it's generally better to spread it out.

[bryan]

did both turbo tax and tax act this year (promise I'm not a masochist, though it's no doubt intuit is a sadist). TT actually found me a few hundred extra dollars. Kind of pisses me off they don't match. Ended up getting a pretty hefty refund since 1) I was out of (CA) state for more than I anticipated and 2) somehow my allowances went back to 0 sometime last year without me noticing.

Haven't filed yet.. wonder if I should file an extension to try and save on TT.

[jennypenny]

I used TurboTax and Taxcut. There's a $1700 discrepancy between the hightest tax (TurboTax) and the lowest tax (Taxcut). TurboTax performed the worst wrt the business and Taxcut performed the worst wrt to real estate transactions. I've got all of the forms from both printed out and in piles on my desk. I'm going to go form by form and compare them tomorrow. I hate wasting money on these but it's too much money to get wrong.

There's also a difference in my state tax of over $300, but I haven't looked into that yet. And I still have to do my daughter's return.

[JL13]

@JP this is exactly my point. You're paying for nothing. The value provided by these tax software packages is literally less than 0. It takes more time than doing by hand and does a worse job.

[jennypenny]

I wouldn't say I was paying for nothing. I had several new items this year and it would have taken me much longer if I had to wade through the IRS website not even knowing where to begin. At least with the software, I know which forms and publications to use. I just need to see how each program filled out the forms and why there are discrepancies. If my income comes from the same sources next year, I'll know what to do and won't need the software to get me started.

Is there a way to download data from banks and brokerages without using tax software? That's another benefit of using the software.

[Chad]

Is there a way to download data from banks and brokerages without using tax software? That's another benefit of using the software.

Most of them will provide data in a spreadsheet format.

[IlliniDave]

Taxes are an area where I'm sloppy in my frugality. I get a good deal of peace of mind for a hundred bucks. I do always go back through and make sure I understand how each number is calculated and verify that all the information imported from brokerages and the like is correct. So I could do it with a pencil and a few hundred pages of instructions/publications and a few additional hours of time if I wanted to; and I think I've retained significantly better than a layman's understanding of how taxes work for me and how they will work for me in the future. My W-2 income is high enough I have to test for AMT liability every year, and I have a fair bit of investment activity that requires a couple other forms, but otherwise my situation is nothing special. Nonetheless, slogging through all of that without the aid of a computer program is an exercise I find stressful and unpleasant.

[jacob]

Not to speak my book, but getting an expert to look at it (much more expensive) could also be worth it in rare cases(*). For example, this year the difference in our return went from owing 900 to getting 1500 back due to me prodding my favourite Enrolled Agent (DW) about HSA deductions and her looking into some obscure exceptions that made it possible to deduct an entire years worth of deduction because we fulfill some weird conditions. I think neither of us would have found it on our own. I knew the right question. She knew the right answer. But not both of them together.

Pretty sure this one would have slipped right through the software solution being an unknown-unknown.

(*) Which means if you got a boring return/financial situation, you're probably wasting your money paying for a human. But in case your return is interesting/complicated, a fishing expedition might be valuable. Note that in order to catch good fish, you can't just rely on the guide.

[jennypenny]

#$@&!!!!!

OTOH, I did run into an issue today that really drove home jacob's point about above the line v. below the line. And I can also see how to make the most of the home office deduction now.

Is there a rule of thumb for how much self-employment income warrants incorporating?

[JL13]

@JP,

No rule of thumb that I know of. The main benefit of going S-corp is the non-wage portion of your self-employment income (sort of an oxymoron) escapes the 15.3% self-employment tax. In short, you pay yourself a W-2 wage for a fair salary, and the rest of the profit is considered a dividend which is not subject to SE tax. See MMM recent tax post for more details.

The costs of filing W-2 and 941 and a S-corp form are easily $1,000 - $2,000. More if you hire it all out. So I guess a rule of thumb would be:

If theoretical dividend income of business exceeds $2,000/.152 = $13,157.

The trick here is figuring what your fair wage is. Essentially, what would you pay someone else to do all the work? That's what you then pay yourself. If there's more on top of that, that's your owner's profit. It's an exercise in multiple personality disorder (which you is the worker and which you is the owner?)

[enigmaT120]

Most of my business income (timber sales) will be in the form of long term capital gains. Whee! I'm pretty sure they're exempt from the self-employment taxes. So far it's always been losses as I manage as the trees grow so it hasn't been an issue.

[jennypenny]

tick tick tick ... am I the only one not done?

At least I resolved the final issue last night. I'm going to fill out a new set of forms today now that I know where everything goes. I wrote up extensive notes so I'll know what to do next year, although if my income is the same or higher I will probably incorporate. (then I'll have to learn how to do those taxes LOL)

Turbo Tax was better than Tax Cut, but I wouldn't rely on either.

[JL13]

Welcome to the dark side. I promise it's not so bad!:D

What were the main complications, if I may ask?

[jennypenny]

We had three real estate transactions (two sales and a refi) that one didn't handle well. I was really surprised at simple mistakes like Taxcut didn't ask for the points even though they are fully deductible under a certain level*. The other issue was the home office calculation. Some home improvements can be expensed instead of depreciated, and it wouldn't let me do that. The biggest problem I had with both was that when I adjusted something on one form related to real estate, it would automatically adjust other forms. It was like a game of whac-a-mole. I couldn't find a way to adjust both forms without it overriding something on me that I didn't want it to touch.

Maybe it's just me? We're kind of at the 'peak tax' stage I think with income from salary, trading, gambing, business, and royalites, as well as foreign investments, education expenses, real estate transactions, and excess medical expenses. I'm a little stunned at the amount of supporting paperwork I have to scan when I'm done. It can be measured with a ruler. Actually, looking at the pile, I'd need a yardstick. Nuts.

Not to sound like an asshole, but I'm not an idiot and I struggle with this. How do people who don't like math or aren't methodical or detail-oriented do this? Do they all hire people? Do they do it incorrectly and hope for the best? Do they not report anything complicated?

*edit: I misspoke a little. It did ask for points but defaulted to spreading them out instead of taking the full deduction this year. Both programs seemed to default to this. They treated all home improvement expenses this way by default even though some can now be deducted in full. The second part is a big deal because someone can purposely keep home improvements under a certain level to expense them all at once. At least, that's how I understand it. Maybe I have it wrong?

[jacob]

@jp - Like health insurance, those who can't do math or read legalese(*) don't have the ability to deal with multiple forms without making a single error and who don't have the money to pay someone who can will often pick the option to "not do it at all and hope for the best". This strategy can work for many years until it doesn't. At that point the resulting fall-out can be spectacular. It's not a surprising strategy/consequence either when dealing with a system whose complexity has been optimized to benefit the smarter than average cookie. The other strategies are also common.

(*) Compare the requirements for dealing with a tax form to the results standard adult literacy tests and you will see that a surprising large fraction of adult population lack the skills to deal with them. And so they often don't.

Also consider the different levels of tax services. A typical walk-in tax preparer or a typical piece of software will only ensure that the numbers you give them are filed correctly. They are in no way intended for tax-planning (you aren't getting tax planner services) and thus won't do more than trivial optimization.

It's a case of knowns and unknowns. Software operates in the known-known space. It will only do what you tell it to do. It won't tell you what you don't know or what you should do. It won't deal with stuff that you don't know and which wasn't programmed into it.

PS: Home office deductions and depreciations is advanced stuff. Even experts go wrong (due to ignorance) or fail to fully optimize and those who don't become legendary because the differences often amount to thousands of dollars.

[IlliniDave]

Mine are far less complicated than jp's, but somewhat more complicated than average, and it can often be a struggle for me even with a decent tax software package as an aid. I fully "get it" when it comes to the comments about the absurd level of complication a person can quickly get in to. It's one of the reasons I tend to favor things along the line of flat/"fair" taxes, or a simultaneous repeal of the 16th amendment and establishment of a VAT (both would need to happen together). I get a fair amount of advantage from the present system, and stand to benefit even more in the future, but akin to what jacob said, the present system disadvantages a lot of people, especially those who it's arguably intended to be more "fair" towards (people with moderate income and moderate financial sophistication).

I've actually considered getting into the tax prep arena as a part-time gig during the time of year it's too cold to enjoy "my" lake. The one time I sought professional help with my taxes I wound up figuring out and ultimately teaching the paid preparer how to do what I was uncertain about. Waste of $330 bucks.