Computer assisted tax preparation; choosing and using tax software packages. Russ Lockwood.

With only a month and a half left before the day of reckoning, millions of taxpayers prepare to undertake the dismal task of filling out their tax returns. Shoe boxes emerge from closets, scraps of paper smother dining room tables, and blood pressures inch upward. Calculating and recalculating, taxpayers spend hours muddling through another year of receipts, law changes, and forms. There must be a better way, right?

You bet your refund check there is--a computerized tax package. More and more do-it-yourself tax prepares are discovering that pairing their computer with a tax program helps organize receipts, examine alternative tax strategies, fill out forms, and sometimes, even pre their tax bills too.

Tax software should save you time or money or, preferably, both. Tax preparation is painful enough without complicating matters with time consuming data entry and superfluous calculations. Consequently, ask yourself if you really need a tax package. Slick marketing notwithstanding, many people really don't.

First, to make good use of a tax program, you must have a reasonable understanding of our tax system. This includes knowing which expenses qualify as deductions, which forms to use, and how certain tax strategies affect the tax you pay. A tax program does not provide advice on income averaging, capital gains, tax credits, or any other of the more involved aspects of tax preparation. If you are a total tax novice, a tax program is not likely to help you.

Second, your taxes should be complicated enough to require a program. For example, if you are single and file form 1040EZ (sometimes referred to as the short form), you certainly do not need a tax program--unless you want to explore the ramifications of filing a regular Form 1040.

On the other hand, if you intend to file Form 1040 and any of the attached schedules, a tax package may be just what you need. In general, the more complex your financial situation, the greater your need for a tax package.

But what if you take your return to a certified public accountant? If you do not mind paying a professional to make sense out of whatever collection of receipts and cancelled checks you may have accumulated during the year, you probably do not want a tax program. However, most CPAs charge by the hour, and presenting organized information decreases the timeit will take one to prepare your return. In many cases, the amount you save on fees will exceed the cost of the software. As a bonus, your CPA can concentrate on creative tax strategies rather than laborious data collection.

Tax programs divide into three categories: record keeping, tax planning, and tax preparation. Of course, many packages cover more than one category. The trick is to choose the program that offers the features you need.

Almost anyone can use a record keeping program. In essence, this category combines the shoe box with a calculator. The program allows you to divide expenses into several categories and attach a comment to each amount. The program keeps a running total for each category and a grand total for all categories. In the more complete tax packages, you can automatically move these totals to the appropriate lines on the tax form.

If you have ever filled out a Schedule A or Schedule C, you will appreciate a record keeping program. If you are diligent and enter your expenses as the occur, an end-of-year printout provides a tidy listing. When tax time rolls around, you can concentrate on tax planning and preparation.

Tax planning software lets you examine various tax scenarios and stratigies. These programs help you explore the tax implications of different combinations of income, investment, and expense. For example, you can see what happens to your return when you place money in an Individual Retirement Account, take a lump sum distribution of pension money, or use investment credits.

While a program cannot advise you what to do with your money, it can analyze your options and present you with the results. As always, the choice is up to you. If your tax return is sufficiently complex that speed of number juggling is important, you should consider a tax planning package. It may suggest a strategy you have never had time to consider.

Tax preparation programs help you fill out the multiplicity of forms released every year by the IRS. In most cases, the forms are reproduced on screen and you plug in all the numbers you have. Preparation programs can usually move numbers from the various schedules directly to Form 1040.

Some preparation programs come with IRS-approved forms that load into your printer. You can use the resulting printout as your return. With other software, you transfer the numbers by hand from a printout to the actual forms and schedules.

Whether record keeping, planning, or preparation, all tax programs are either stand-alone packages or templates to a spreadsheet. A stand-alone package runs independently of other software. It may be part of a family of tax programs, but you can plug it into your computer and run it by itself.

A template is a specialized application that runs with another program. Several companies offer tax planning templates for popular spreadsheet programs such as Lotus 1-2-3 and Multiplan. The labels and formulas are already set up for you; all you do is enter numbers.

Our discussion involves primarily federal tax programs. However, many companies offer state tax programs too. The features to look for in a federal or state package are practically identical. Financial Features.

The features you want determine the type of package you need. People who want a record keeping program to organize and present data to an accountant or tax preparation service do not need a full-featured package. Likewise, a businessman filling out a return for a sole proprietorship or small business requires certain specific schedules. Certain features, however, should be present in all types of tax programs.

Any tax program, for example, should allow you to insert, delete, and replace any number easily and then recalculate totals automatically. If a program cannot do this simple substitution and arithmetic function, steer clear of it. Every year the IRS receives thousands of returns with arithmetic errors. Any error, intentional or not, that results in underpaying your taxes leaves you liable for interest and penalties. A program that can cause such an error if you forget to press a key to update the totals saves you neither time nor money.

You should be able to call up forms, categories, and schedules from anywhere within the program, along with appropriate safeguards to save your work before erasing it from the screen. Obviously, some computers, like the Macintosh, can do a better job at this than others. However, the principle is the same: ease of movement within the program.

Also, a tax program should allow you to print out anything types into the computer, including subtotals, totals, forms, and schedules. In many cases, looking at a hard copy printout proves easier than switching between screens.

On a more nebulous note, the documentation should explain the program fully, with extensive examples and perhaps even a sample run. We prefer manuals that provide too much information to those that offer too little.

A word about speed: Obviously, the faster a program performs calculations, the better. However, in most cases speed is a function of hardware. For example, the same package will run faster in an IBM PC AT version than in an Apple II version. For most people, speed is not a primary consideration; other features shoudl weigh far more heavily in the selection of a tax program.

If you are looking for a package, you may want to consider side by side comparisons of various tax strategies on the screen. If you are deciding between two or more strategies, it is better to see all of them on the same screen rather than complete one strategy, print it out, complete another, and so on.

Furthermore, tax planning programs should cover the more esoteric tax computation options, such as income averaging and alternative minimum tax. Income averaging is a viable option should you find that your income in this year is substantially higher than in the four previous years. This means the program must be able to accept five years' worth of tax data. For an explanation of aspects of alternative minimum tax, see the sidebar below.

The right tax preparation program for you must include all the forms and schedules you plan to use. Not every program incorporates the entire bingo card of forms and alphabet soup of schedules. If you need Form 2441, Credit for Child and Dependent Care Expenses, and Schedules R and RP, Credit for Elderly, make sure the package has them before you buy.

On the other hand, if you require only Form 1040 and Schedules A (Itemized Deductions), B (Interest and Dividend Income), D (Capital Gains and Losses,) and E (Supplemental Income Schedule), then buying a high-powered and equally high-priced tax package represents overkill. To generalize, the more forms and schedules the better, but, beware of paying for extra features you will never use.

The information on each schedule should be easy to add onto the main Form 1040. You should never have to transfer subtotals from schedules by hand. Once gain, make sure the program automatically updates the totals.

Tax preparation packages must use the current tax tables. A program that gives you 1983 tables is useless for 1984 tax returns. The inevitable changes in tax law can cause you to overpay or underpay taxes. Overpaying certainly does not save you money, and we all know the potential penalties for underpaying.

Many companies offer yearly updates to their package for a modest fee. These prolong the life of your package by providing the current rules, regulations, and equations necessary to prepare a correct return. Man Versus Machine

Before you consider dumping your CPA for a tax program, remember that a program does not provide advice on filing your tax return. A tax package is only as good as the information that is put into it. And where the information is put into it can be important, too.

In general, CPAs know more about taxes than non-CPAs; after all, that is their profession. A qualified CPA can navigate the maze of tax laws, identify deductions, and help you pay the least tax possible.

The expertise of a CPA extends beyond tax preparation and into tax planning. The date and terms under which you obtain income, for example, from the sale of stock or a house, can affect future taxes. Retirement and pension plans further complicate matters. A CPA can aid you in this sort of tax planning.

Finally, if the IRS computer picks your return to be audited, a CPA can describe how your taxes were prepared and explain the options open to you. That is support no software company can offer. Line 12: Business Income or (Loss)

Everybody thinks about deducting the cost of his computer. That is all well and good, expect certain changes in the law have tightened up requirements for deducting computer costs (see sidebar on page 39).

In the broadest terms, a computer is like a car; you may deduct certain costs if it is used for business purposes. The same is true of peripherals like printers and modems. Software, however, can be tricky. In some cases, you can deduct it as a one-time expense. In other cases, you must deduct it over five years. This is certainly a matter to discuss with your CPA, not your tax program.

A business may also be able to avoid certain taxes if it buys and receives software over a modem (see page 44).

Incidentally, tax preparation can be a business expense, and your costs can be deductible. This includes the price of a tax package. Likewise, time spent using a tax program may count as a business activity, which increases the percentage of business use of the computer. Return of the Tithe?

The biggest variable in buying a tax program this year may be the tax reform proposal currently before Congress. The so-called flat tax would simplify tax forms, requiring you to pay a set percentage of your income. With very few adjustments to the income, most tax packages would become superfluous.

However, the proposal does not change 1984 taxes, and with opposition from special interest groups, the future of the flat tax remains uncertain. Tax year 1984 remains firmly in the grasp of the progressive income tax.

With microprocessor speed and precision, a computerized tax package can help you organize receipts, plan tax strategies, and fill out forms faster than by hand. Reducing mental and physical wear and tear is important to many people. That in itself may be worth the price o a tax program. And maybe, just maybe, one of these tax programs can increase the size of your refund so you can look forward to April 15 this year.