TurboTax vrs H&R Block

It is tax season again and as in prior years I have been using TurboTax (published by Intuit) to do my taxes. A friend was visiting with a similar H&R Block tax program so I decided to compare the two programs. This proved somewhat painful as although the H&R Block program is able to import TurboTax data from 2013 easily as best as I can tell there is no way to import the TurboTax data from 2014. So I had to enter all my 2014 data again. When I had done so the H&R Block program produced similar but not identical results. Some differences were due to the way the programs round to whole dollars. For example TurboTax sums up all my dividends received and then rounds while H&R Block rounds each entry before summing. This sort of thing makes a difference of a dollar or two here and there.

The biggest difference was in their handling of a state tax refund. These are taxable if they are for a year in which you had previously deducted state income taxes and received a tax benefit for doing so. I normally deduct my state income taxes and receive a benefit on my ordinary income tax for doing so. However since I am also subject to the alternative minimum tax (AMT) which does not allow deductions for state income taxes my tax benefit disappears once the AMT is added in. So my state income tax refunds are not taxable. It seems to me that given your prior year's return a tax program should be able to figure this out for you. But neither program handles does. As I have complained before TurboTax makes it quite complicated to exclude such tax refunds from income. H&R Block is better in that it is simpler to tell it that the refund is not taxable but you still have know that it isn't. Fortunately I know this from doing my tax returns by hand but many people won't and will end up paying extra taxes. Recently the Obamacare tax on investment income has added a new complication. Because this tax is on net investment income you are allowed to allocate and deduct a portion of your state income taxes paid from your gross investment income. But this means if you later receive a state tax refund you deducted too much and are required to adjust your investment income in the current year appropriately to compensate. TurboTax (given your prior year's return) helpfully figures all this out for you and automatically computes the appropriate value. H&R Block just gives you an opportunity to enter an adjustment but provides no useful help in determining when such an adjustment is needed or how to compute it. Given that the Obamacare tax started last year so that this is the first year that this adjustment may be needed I expect most H&R Block users will have no idea about what to do and will just assume this doesn't apply to them (which is what I did). Even if a user did realize an adjustment is needed they would have to compute it by hand which is the sort of thing people buy tax software to avoid. So TurboTax definitely wins here. In fairness to H&R Block both companies have a range of programs of varying cost and capacities and possibly a more expensive version of the H&R Block program would have handled this.

Overall this H&R Block program seemed similar but a bit inferior to TurboTax. So given my familiarity with TurboTax I see no compelling reason to switch.

Book Review

I recently read "The 5 Mistakes Every Investor Makes and how to Avoid Them" a 2014 book by Peter Mallouk. The book makes the case for a mostly buy and hold investment strategy using stock and bond index funds. This is reasonable but the arguments for it are familiar to me so I didn't find the book too exciting. The book assumes a certain basic familiarity with the financial markets, if the investing world is completely foreign to you this book would not be a good introduction.

Mallouk is an investment advisor and the book reads like an extended client pitch. It is good about ways to identify and avoid bad advisors, perhaps less good about how to decide whether you need an advisor at all and what constitutes a reasonable fee. The new robo-advisers (which offer automated advice from computer programs) are not discussed at all.

I would sum up Mallouk's advice about mistakes to avoid as 1) Don't try to time the market, 2) Don't try to pick individual securities, 3) Take the long view, 4) Be wary of biased advice and 5) Don't ignore taxes. (This merges two mistakes in Mallouk's list and adds another). This seems generally sound (although I personally don't follow it 100%).

I think Mallouk slightly overstates the case for stocks, although probably a good bet they aren't really a sure thing even in the long run. People pitching stocks generally reference the historical performance of the US stock market. As the US market has always recovered from setbacks to reach new highs this gives an optimistic outlook. But looking at foreign markets gives a more mixed picture. The Japanese market for example is currently at about 1/2 the level of its 1989 high (I don't think this counts dividends but even so its performance has been dreadful). In particular I believe (contrary to Mallouk) that there is something to be said for cash as an asset class. Mallouk concedes that although bonds have a lower expected return than stocks they have a place in a portfolio to moderate volatility. But the same argument applies to cash which in turn has a lower return and is less volatile than bonds. Or to put it another way if going from 10% cash to 0% is a no-brainer (as Mallouk suggests) why not go further to -10% (buy on margin)? Clearly at some point (which will vary with the individual) the added expected return is not worth the added volatility. That said many individuals probably do have too much cash. Me for example although more because of laziness (I am paid in cash and it piles up in my bank account out of inertia) than because of any considered decision to hold cash. Perhaps a sixth mistake to avoid is laziness.

To sum up while I think the advice in this book is largely sound I am doubtful there is enough of it to make the book worth reading particularly if you are already familiar with it from other sources. Of course some people (possibly including myself) may need to hear the same advice repeatedly to get up enough motivation to actually act on it so perhaps this book will be helpful in that regard.