Tax prep step by step: it's easier than ever to do your taxes by computer - here's how. Plus: 11 tax-preparation packages reviewed - includes related article on Internal Revenue Service resources - Buyers Guide

Home Office Computing, March, 1993 by Stephen L. Nelson

Every income-tax season, without fail, readers of both personal computer and financial magazines are bombarded with reviews of the popular tax-preparation packages. This time, we decided a little different approach was in order, something more than merely pointing out which shrinkwrapped box to buy. Even though software evaluations are usefnl--and you'll find ours in the comparative chart "Tax-Prep Software 1992"--we thought we could help you even more by showing you how the software works.

To provide a visual backdrop, we'll demonstrate how to use tax-prep programs step-by-step using several different packages. This approach should deliver a number of benefits. First, if you haven't yet decided whether or not you need tax-prep software, you'll learn just what's possible and what you get for your money. If you're trying to pick a package, we can help you with that, too, by depicting what you can do with the package. Finally, if you have already purchased a tax-prep program, you'll learn about how you get from the part where you install the software to the part where you mail your return to the Internal Revenue Service--which is, after all, the real reason to buy this software.

IMPORTING TAX DATA

But first, a few notes. If you're one of the millions who use a checkbook program like Quicken or Microsoft Money, you may wonder about importing information into your tax-prep program. As long as you have used income and expense categories in your checkbook that match the input lines of the various tax schedules and forms, this whole process is a snap. In Microsoft Money, for example, you print an on-screen version of the Tax Form Report. Then, you export the data it shows to a standard Tax Exchange Format (or TEF) file format. Then you use the tax-prep software's import command to bring in your TEF file.

While the mechanics of the process are very easy, there are a couple of things to keep in mind about importing checkbook data. First, remember that you're really exporting only a couple of dozen numbers; so in many cases it's just as easy to print a report of tax categories and then manually enter, say, the 20 inputs you need.

Second, it's very likely that your checkbook program doesn't contain all the data necessary to complete your tax forms. To export W-2 information, for example, you must do more than simply record payroll checks as net deposits into your checking account. For each check, you'll need to record the Social Security and Medicare taxes, the federal withholding, and any state taxes. If you've got a mortgage, you won't be able to use the property-tax component of your mortgage payment as your property-tax deduction--which is probably what you will have recorded into your checkbook--but rather the amounts the mortgage company actually paid out of the property-tax escrow account.

A BUYER'S WARNING

One last point that should be made about income-tax software really amounts to a warning. Tax-preparation software is basically a calculation and forms-generation tool. So you can't use a tax software package as a substitute for tax-planning advice from an accountant or tax attorney. What's more, unless you use a package with a strong interview feature-- like that available in the various TaxCut programs--you can't use tax software as a substitute for understanding how tax preparation works.

10 STEPS TO DOING YOUR TAXES

Follow these 10 basic steps to see how straight. forward it is to prepare a federal tax return using software.

STEP 1: Enter general taxpayer information.

Whether you're preparing your income taxes manually or using tax-preparation software, you'll first need to identify which 1040 form you'll use: the 1040EZ form, the 1040A short form, or the regular 1040 long form. As you might guess, tax software makes most sense for those taxpayers filing the long form with its attendant supporting schedules. Once you've picked the appropriate 1040 form, such as this one from TaxCut for Windows, filling it in is a snap. To enter things like your name, address, and filing status, you simply move the cursor to an input field and type in the appropriate chunks of text or numeric values. Any item that can be computed-such as the number of personal exemptions you'll claim--is calculated automatically.

STEP 2: Find help along the way.

TurboTax for Windows, like all of the Windows and Macintosh programs, provides screens that look like actual IRS forms and schedules. Most people find it easier to work with electronic forms that exactly reproduce the paper tax forms they've filled out in past years. While every program we looked at lets you enter data directly on-screen, many of the programs also provide an interactive approach to completing the return. TurboTax, for example, provides something called EasyStep, which guides you through the steps to complete the necessary forms and schedules. All versions of TaxCut, MacinTax, and Eas.vTax provide similar capabilities. People who need help deciding which forms and schedules to fill out will find these online interview features invaluable.