Doing taxes by hand is often tedious and confusing, and it can open you up to making costly mistakes. Using commercially available tax software will ease tax preparation for many Americans. If you’re an individual looking to file your taxes online, you may be wondering whether one of the biggest products out there, Intuit’s TurboTax, is right for you. Here’s what you need to know about this software.
A financial advisor can help you optimize a tax strategy for your financial needs and goals.
How to Get Started With TurboTax
For TurboTax, as with all tax software, you can start with a no-frills version for free. The TurboTax free edition is a clean, easy-to-use program that can handle W-2 income with the standard deduction, simple investment yields and above-the-line deductions.
And for most taxpayers, this is more than enough. If you made your money only through employment, meaning you got paid with a W-2, and if you take the standard deduction, you don’t have any tax issues to maximize. Use the free edition.
If you would like more, such as complex deductions and investment issues, you will need to upgrade to either their Deluxe or their Premier versions.
What Is TurboTax Deluxe?
TurboTax Deluxe is an upgrade of the free version of TurboTax. It will cost you $59 to file a federal tax return plus another $54 per state. So, for most taxpayers, TurboTax Deluxe will cost $113 to file. Note that, while the company’s website advertises one-on-one help as part of TurboTax Deluxe, this costs extra.
As with TurboTax’s free edition, Deluxe is cleanly laid out and easy to use. The software is well-designed with a conversational tone. It guides you by asking specific questions about your spending and finances, then tells you how that changes your taxes and deductions. For end-users, especially those not well-versed in taxes, this is a strong design.
While it will not save you the painful accounting of having to actually dig out your paperwork, receipts and numbers, TurboTax Deluxe is good at helping you understand what numbers you need and where to find them.
The Strengths of TurboTax Deluxe
The Deluxe edition of TurboTax is designed to calculate line-item tax credits and deductions. With the Free Edition, you can only take the standard deduction and any above-the-line deductions and credits. TurboTax Deluxe lets you take itemized deductions and below-the-line credits.
This is the correct choice for taxpayers who make their money through employment, meaning they got paid with a W-2, but who will itemize their taxes instead of taking the standard deduction.
In particular, the TurboTax Deluxe might be a good option if you own a home, have significant medical or educational expenses or made significant charitable contributions. For example, the popular mortgage interest deduction is a below-the-line option, meaning that you must itemize your taxes in order to claim it.
The (Possible) Weakness of TurboTax Deluxe
However, Deluxe is not a good option for taxpayers who have complicated investment income or who are self-employed in some capacity. It does not include the forms for these two categories of taxpayers.
What Is TurboTax Premier?
TurboTax Premier is the next upgrade from Deluxe. It will cost you $89 for a federal filing, plus another $54 per state return. So, for most taxpayers, TurboTax Premier will cost $143 to file. As with Deluxe, the company’s website advertises one-on-one help as part of TurboTax Premier. This is available for an additional charge.
Premier shares the same design strengths as both TurboTax Free Edition and TurboTax Deluxe. The company’s software has a conversational throughline that approaches taxes by asking you for information, then explaining the significance of that information as you provide it. This is both useful and accessible.
TurboTax Premier is designed for investors. It shares all of the features of TurboTax Deluxe, meaning that it lets you itemize your taxes and take below-the-line credits. However, it also includes the forms necessary to claim income, losses, credits and deductions related to investments.
This includes standard securities, such as stocks, bonds and funds, as well as more exotic assets such as cryptocurrency. It also includes investment property such as rental homes and related passive income.
This is the correct choice for taxpayers who have investment income beyond simple interest and dividend payments. It is also the correct choice for taxpayers with any capital gains or losses, who sold significant property such as real estate in the past year and for taxpayers who have income or losses from passive activities such as a rental home.
You will need the forms included with TurboTax Premier regardless of the scope of these gains or losses. The IRS does not have a de minimis exception for claiming investment income.
The Downside of Turbo Tax Premier
Premier is not a good option for taxpayers who have self-employment income or who run their own businesses. There can be some overlap between investment and business operation, for example, the IRS may consider an Airbnb either passive income or business activity depending on your circumstances.
However, if you own a business with some corporate structure, if you get paid with a 1099 or if you intend to deduct business expenses, you cannot use investment forms to file those taxes. For that, you will need TurboTax’s Self-Employed edition. Premier gives you access to the forms for securities, asset sales or income and passive activities only.
TurboTax offers some of the best tax preparation software on the market. Use TurboTax Deluxe if you make your money through W-2 employment and intend to take line-item deductions instead of the standard deduction. Use TurboTax Premier if you have investment income or losses.
Tax Planning Tips
- Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- A financial advisor who specializes in tax planning can help lower your 1099 income taxes by harvesting your losses. This means that you will be able to use your investment losses to reduce taxes on 1099 income.
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