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RISMEDIA, Feb. 26, 2008-(MCT)-Few Americans relish the annual chore of preparing their tax returns. Two out of three taxpayers, including me, simply hand the job to a pro. But that still leaves more than 50 million do-it-yourself die-hards.

If you count yourself among them, you face a growing set of taxing decisions before you even pick up an IRS instruction booklet:

Should you use software or stick to pencil and calculator? If you turn to software, should you pop a disk into your PC or complete it online? And which program is best for you?

Competition among software vendors is growing online, where 19 companies are offering to prepare federal returns for as many as 95 million Americans at no charge through the Internal Revenue Service’s Free File program. But the field is dominated by Intuit’s TurboTax and H&R Block’s TaxCut, which offer both free and paid services.

Whichever vendor you choose, software provides the illusion of simplicity and reliability to a generation of who-needs-a-manual users. But the tax code is often baffling-and misunderstanding the rules or misinterpreting the software’s guidance can trigger costly errors.

It doesn’t help that software’s guidance isn’t always clear. Consider how TurboTax leads taxpayers through the complex rules that determine who can qualify to claim a write-off for a child. At one point, it asks if the child is a “qualifying child” or a “qualifying child for me and somebody else.” That’s a nuance that requires digging deeper into the tax rules, and some taxpayers will pick the wrong answer.

Similarly, I was flummoxed in a test run because TaxCut repeatedly determined that two live-at-home kids failed to qualify as dependents. Offered no explanation, I retraced my steps several times, then gave up and contacted H&R Block. It turns out it all hinged on my failure to plug in Social Security numbers several pages earlier. How many taxpayers would miss that, believe the software knew more than they did, or bang their heads against their keyboard because they couldn’t fix the error? (H&R Block said it would clarify the instructions in its next software patch.)

I cite these two examples because they come early in the interview process and seemingly involve fairly straightforward factual issues-before you dig into the meaty numbers on your tax return.

Last year, an Inspector General test of programs available through the IRS-sanctioned Free File Alliance found that 45% of the vendors had inadequate interview questions to determine the dependency exemption, and 25% incorrectly denied credits to one hypothetical divorced parent.

The report didn’t say whether TurboTax or TaxCut were faulty, and it provided too few details for me to recreate the test for this review. And in fairness to the software makers, this is a tangled area of tax law. Just last month the IRS relaxed the rules that determine when unmarried couples can claim write-offs for a child.

But from my vantage point, many taxpayers would be wise to seek out a well-trained pro. That list begins with registered domestic partners in California, who now must file as married couples on their state returns even though Uncle Sam doesn’t recognize such unions. Then I’d throw in most Silicon Valley workers who have exercised or sold stock options, along with taxpayers who have tripped into the alternative minimum tax, have complex real estate deals, own small businesses or lost their home in foreclosure last year.

There’s a middle ground, though, between handing your forms over to a pro and trying to complete them yourself. H&R Block offers three online services-Signature, Tango and Online Office-that enable you to consult with tax professionals when you need handholding. And Intuit’s Personal Pro services allows you to electronically dump your shoebox of records in a preparer’s lap, walk through a questionnaire over the phone, then let the pro do the rest.

Tax software certainly beats doing your taxes with pencil and eraser. You can save time and eliminate keypunch errors by importing financial data from personal finance software such as Quicken or Money, or by downloading data from your W-2 wage reports or brokerage statements.

Software eliminates math errors and frequently will flag suspect or missing data. And this year’s software has an extra advantage over doing your returns on paper: It incorporates tax changes that lawmakers made after the Internal Revenue Service sent instruction booklets and forms to the printers.

TurboTax and TaxCut both have friendly, generally logical interviews that walk you through the tax return. Both readily display tips and clarifications, and TurboTax Online fosters a “Live Community” where “SuperUsers” and techs field live questions pertinent to each page of the program. Assuming you interpret the rules correctly, the programs will steer the numbers to the right places automatically.

Unfortunately, software sometimes can add to your frustration. Technical problems can arise when you load the software, while you’re online or when you try to e-file. TurboTax got a black eye last April when a meltdown caused about 200,000 customers to miss the tax-filing deadline, spurring Intuit to offer $15 million in refunds. And in January, another TurboTax “outage” blocked early filers for most of a weekend.

My test drive through desktop and online versions of TurboTax and TaxCut turned up a bunch of nits. A sampler:

TurboTax didn’t warn me–or if it did, I missed an alert–that new rules require a receipt for $100 in cash I wrote off as a charitable donation.
The fees add up. A program for your state tax return can cost you $20 to $35. I gulped when I learned that phoning H&R Block could trigger a $20 consultation fee in some cases. Likewise, TurboTax’s desktop program charges $18 for each return you e-file.
When I hit the “Back” button during TurboTax’s “Guide Me” process, instead of taking me to the previous page it took me back to the beginning of the series of questions. That required me to repeat the gantlet of questions. In the process, the software cloned the dependent, whom I had to dispatch.
My search for information about the “savers credit” came up empty initially. That’s because TurboTax’s index calls it the “Retirement Savings Contributions Credit,” and TaxCut lists it under “Credits.” And don’t search for “401(k)” in TaxCut; it’s under “Retirement plans.”
TaxCut didn’t warn me until I had finished a 1040 for a registered domestic partner in California that I’d first need to complete a second, hypothetical federal return for a married couple. TurboTax is smarter. Even though Uncle Sam doesn’t recognize such unions, the online program’s checklist for filing status includes registered partners. Checking that status triggers an immediate alert that outlined the ordeal that lay ahead. A TurboTax tech monitoring the “Live Community” advised that domestic partners will save time, headaches and money if they buy a desktop program instead. That way partners can create the hypothetical federal return at no extra cost.
TurboTax also includes a feature that some might consider of dubious value. For instance, what should you do if you learn you’re in the red zone on the chromatic “Audit Risk Meter”? If you’re an honest taxpayer, should you dial back deductions you’re entitled to? Or if you’re a tax cheat, should you pare your fake write-offs?

Those nits aside, some taxpayers will discover some surprises. My favorite was the ItsDeductible tool in TurboTax that values goods donated to charity. Who knew you could write off $5 for fuzzy dice that once hung from your rear-view mirror, $18 for a Water Pik, and $4 for a nail-care kit? Not to mention $9 for skorts. Were skorts worth $9 even when brand-new?

© 2008, San Jose Mercury News (San Jose, Calif.).
Distributed by McClatchy-Tribune Information Services.