Tax Day

I mailed my tax returns Monday on the way to work.  I used to do my returns by hand but for the last few years I have been using TurboTax and did so again this year.  Tax software does make the process easier but TurboTax at least is far from perfect.  I had several problems with it this year.  A general complaint is that TurboTax seems to discourage using alternative more complicated tax calculation methods even though they can sometimes save substantial amounts of money.  I suppose they are worried that users will get annoyed if they work through a more difficult and complicated calculation only to find it has not saved them anything whereas if they stick to the simple method they will never know about any money they might have saved with a little more work.  This came up in two places on my return, tax refunds and estimated tax penalties.

Regarding tax refunds, these count as taxable income if you deducted the taxes in a previous year but only if (or to the extent) that the deduction saved you money.  In my case it hadn't because I was subject to the AMT (alternative minimum tax) which does not allow you to deduct state and local taxes paid.  Showing this requires refiguring your prior year's taxes which ideally TurboTax would automatically do for you (assuming you used it in the prior year) but which in any case isn't that complicated (assuming you were using TurboTax) although TurboTax explains it badly.

Regarding estimated tax payments the government doesn't want to wait until April 15th to get its money.  So it withholds taxes from your wages (and some other things) and requires quarterly estimated tax payments to cover the taxes on income (such as dividends or capital gains) not subject to withholding.  If you don't pay enough in estimated taxes you will in certain circumstances owe a penalty.  This includes cases where your total estimated tax payments were sufficient but you didn't pay them in equal installments throughout the year.  However you aren't required to predict the future, if your income comes in unevenly during the year your estimated tax payments can be uneven as well as long as they keep up with your income as received.  In my case I had large capital gains in December and made a large estimated tax payment in January.  If my income had come in evenly through the year I would have owed a substantial penalty but as it was I didn't.  However demonstrating this is a fairly involved process.   You have to figure your income (and deductions) for the first 3, 5 and 8 months of the year, annualize them, figure the tax and then show your payments (withholding and estimated tax) covered at least 90%  of the prorated tax amount.  There is unavoidably a lot of work in figuring your partial year income and deductions but once you have entered the amounts TurboTax should be able do the computations automatically.  But for some reason it doesn't, while it figures the regular tax on the annualized amounts it makes you figure the AMT yourself a fairly complicated calculation.  And then it uses the wrong threshold for the June 15 estimated tax payment.  This should cover 37.5% (90% of 5/12) of your annualized tax but TurboTax uses 45% (90% of 6/12 as if June was the seventh month of the year instead of the sixth).  This is not entirely its fault as it is following an IRS example with the same error (I am assuming this error hasn't actually been written into the tax laws).  Fortunately this didn't matter for me. 

As I recall TurboTax warns you the alternative computations above are a lot of work without providing useful guidance on when they are likely to save you money.  As a result I suspect some people are paying more in taxes than they are legally required to.

I found other aspects of the program irritating, it tries to sell various upgrades and when I printed out one copy of the return to mail and one for my records I got two copies of stuff like the filing instructions which is just a waste of paper (and ink). 

All in all I am not inclined to go back to doing my taxes by hand but I find the program irritating also.  Probably not enough to try a different program next year though.