New Tax Laws in 2014 and How to Plan for Them

Sally Herigstad  for The Fool.com writes: We're not expecting a bunch of new tax laws in the 2014 and 2013 tax years -- although it's not too late for some surprises. Learning about these tax law changes and planning for them may help you keep more of your hard-earned cash.
Here are a few of the most significant recent changes that you should be aware of.

1. The health insurance mandate

The law: Thanks to the Patient Protection and Affordable Care Act, you must carry a minimum level of health insurance for yourself, your spouse, and your dependents starting in 2014. If you fail to do so, you could possibly pay a fine. This fine in 2014 could be up to 1% of your yearly income or $95 per person for the year, whichever is higher. The penalties go up for 2015 and again for 2016.

You won't see this item on your 2013 tax return; the mandate begins in 2014.

What to do: If you're already covered through work, a government program, or coverage you pay for yourself, you're set. If you have little or no income and are therefore not required to file a federal income tax return, you also don't have to worry about it. If, however, you have income but no insurance, you'd do well to start shopping. Unless further rule changes are made, you must be covered by March 31 to avoid the fine.

2. New 3.8% Medicare investment tax

The law: Starting with 2013 tax returns, Obamacare includes an additional 3.8% Medicare tax on investment income, including interest, dividends, capital gains, rentals, and royalty income. You pay this tax if your modified adjusted gross income is $200,000 or more ($250,000 if filing jointly, or $125,000 if married filing separately). It's in addition to capital gains or other tax you already pay on investment income.

What to do: There's little you can do to reduce this tax for 2013, but you can try to reduce its impact in 2014.

Timing is everything, especially if your income fluctuates from year to year or is close to the $200,000 or $250,000 amount. Try to realize capital gains in years when you are under these limits. Because the limits penalize married couples, realizing investment gains before you tie the knot may help in some circumstances. The use of depreciation, installment sales, and other tax deferment strategies suddenly becomes more attractive with the addition of this tax.

3. New Medicare health insurance tax on wages

The law: If you earn more than $200,000 in wages, compensation, and self-employment income ($250,000 if filing jointly, or $125,000 if married and filing separately), the Affordable Care Act also asks you to pay a little more of your wages. It levies a special 0.9% tax on your wages and other earned income.

What to do: You'll pay this all year as your employer withholds the Additional Medicare Tax from your paycheck. If you're self-employed, be sure to plan for this tax when you calculate your estimated taxes.

If you're employed, there's little you can do to reduce the bite of this tax. Requesting noncash benefits in lieu of wages won't help. They're included in the taxable amount.
If you're self-employed, you may want to take special care in timing income and expenses, especially depreciation, to avoid the limit.

4. Energy credits

The law: You can still get an energy efficiency tax credit for qualifying energy-efficient products such as solar hot water heaters, solar electric equipment and wind turbines. The credit is 30% of the cost of these products you installed in or on your home.

There is no limit to the amount of credit you can take, and you can carry forward any unused credit to future tax years. This credit has been extended to 2016.

What to do: The sooner you install energy-efficient products, the sooner you'll start saving money on heating and cooling your home. The energy credit is a bonus -- if you're a homeowner, don't pass it up.

5. Simplified option for home office deduction

The law: In the past, taking a deduction for a home office has often seemed more trouble than it's worth, as you prorated utilities and other expenses to the portion of your home you used for business. Starting in 2013, the IRS offers a so-called "simplified option" for determining your deduction, based on $5 per square foot of home use for business (up to 300 square feet.)
Even better, when you use this simplified option, you can still deduct mortgage interest and real-estate taxes in full. When you sell your home, you won't have to worry about calculating depreciation on your home or recapturing depreciation.
What to do: If you qualify for the home office deduction, there's no better time to take it. It's worth even designating a room of your house to your business, assuming you meet the qualifications.

6. Medical expenses

The law: Another recent tax change is the floor for deducting medical expenses. In the past, you could deduct medical expenses once they passed 7.5% of your adjusted gross income. Starting in 2013, you can only deduct them to the extent they exceed a whopping 10% of your adjusted gross income. (If you or your spouse is over age 65, the old 7.5% floor still stands.)
What to do: If you have big medical expenses, try to pay them in a year when you can take advantage of the deduction. Medical expenses are deductible in the year you pay them, not necessarily when you incur them.

For example, say you're putting braces on the kids' teeth. If you stagger the ordeal out, perhaps making payments to the orthodontist, you may never get a deduction for the expense. However, if you pay for as much orthodontia as possible in one year, you could easily pass the 10% floor and get some consolation in the form of a tax deduction.

7. Same-sex marriages

The law: Starting with 2013 tax returns, taxpayers who are in a same-sex marriage on the last day of the year and who were legally married in a state that recognizes same-sex marriages must use the "Married Filing Jointly" or "Married Filing Separately" filing status.
They also have the right, but not the obligation, to amend their returns for up to three years back.

What to do: If you're already married, start tax planning as a couple now. Don't wait for surprises when you file next year. Being married changes your tax outlook in more ways than you might expect. You may be able to offset each other's investment gains and losses, for example, or qualify for a spousal IRA. If you have similar incomes, you may get hit with the "marriage tax" and pay significantly more tax as a couple than you did as two single taxpayers. It's a great motivation to start planning your taxes more aggressively.
If you're not married yet, consider the effect of getting married on your taxes. You probably won't base your decision to get married on your potential tax return. However, if you're thinking about getting married near the end of the year and discover that you can save thousands of dollars by putting off the wedding for a few weeks, you might be convinced.

Tax Strategy Steps Toward Financial Fitness, for This Year and Beyond

JAN M. ROSEN for the NY Times writes: For a vast majority of Americans, the current tax-filing season will be business as usual, with few changes to the ground rules of recent years. For the very affluent, it may bring sticker shock.

Tax rates have increased and deductions and credits have been reduced for many affluent people. But at nearly every income level, dealing with the tax code is often a frustrating business, and discovering the best way to manage the burdens and benefits can alleviate some of the distress.

Barbara Weltman, a tax lawyer in Vero Beach, Fla., says that some people whose “income looks good on paper are cash-short and will feel socked” when they learn what they owe for 2013. Still, all taxpayers should file their returns on time to avoid a late-filing penalty, and some might consider requesting an installment agreement. If you file Form 9465, such an agreement is automatic up to $25,000, Ms. Weltman said, and almost automatic up to $50,000. A convenience fee and interest are charged, but the cost will generally be less than if you pay by credit card, she said.

Ms. Weltman, the author of “J.K. Lasser’s 1,001 Deductions and Tax Breaks 2014,” as well as a contributing editor to “J.K. Lasser’s Your Income Tax 2014,” (Wiley & Sons), is among the tax experts who cited both opportunities and traps for the current filing season, and who offered some tips for getting personal finances in shape for long-term tax efficiency:

Working in a home office? The calculations have become simpler. Thomas James

Simpler Home-Office Math

The Small Business Administration says 52 percent of businesses are home-based, but according to Ms. Weltman, many people who qualify fail to take a home-office deduction. In the past, that may have been because the paperwork was too daunting. Now, for 2013 returns, there is an easy alternative: simply deduct $5 a square foot for a home office, up to a maximum of $1,500.

To qualify, a home office must be necessary for a business, and must be used regularly and exclusively for it. But the office does not need to be a separate room, or even partitioned off, Ms. Weltman said, so long as it is a clearly defined space. There must be enough income to offset the deduction; the difference cannot be carried forward to future years.

Deduction of medical expenses must meet a higher threshold. Thomas James

Medical Deduction Whittled

Feeling pain at tax time? You may feel more. Previously, taxpayers who itemized deductions and had high unreimbursed medical and dental costs could deduct them if they exceeded 7.5 percent of adjusted gross income. But last year, the threshold was raised to 10 percent for people under age 65. Beginning in 2017, the 10 percent threshold will apply to all taxpayers.

The Tax-Break Fog

Altogether, 55 tax breaks that Congress had long renewed annually expired at the end of 2013, Ms. Weltman said, but some may be renewed and made retroactive. She advised people over age 70 1/2 who want to make charitable contributions directly from an I.R.A., for example, as well as business owners who want to take a big upfront write-off for buying equipment, to check whether Congress has renewed those provisions retroactively before doing so. One expired provision that Julian Block, a tax lawyer in Larchmont, N.Y., is confident will be renewed that way is the option to deduct state and local sales taxes instead of income taxes on federal returns. (He noted that Florida and Texas, two states that do not have an income tax, have big Congressional delegations.)

A Free Calculator

One way to get a handle on what you’re likely to owe in April is to use the free and simple Total Tax Insights calculator, offered by the American Institute of Certified Public Accountants at totaltaxinsights.org. It tells users much more than their projected income-tax bills: By clicking on your state and filling out a form, you can gauge the impact of more than 20 different federal, state and local taxes.

Edward S. Karl, the institute’s vice president for taxation, says the goal is to help people develop “a broad picture of their financial situations.” It isn’t meant for tax preparation, he said, and entries are not saved or stored electronically. Information is cleared when users leave the site or click the “clear data” button.

Harvesting Losses

Larry Krause, president of Tessara Financial Advisors, an independent wealth advisory firm in Larkspur, Calif., notes that many investors hate to sell any holding at a loss, hoping that it will bounce back in price. But capital losses offset capital gains dollar for dollar, so if you are going to recognize a gain, look for an offsetting loss to sell, he said. If you like the investment, you can replace it after 31 days or look for a similar holding now. Many people held gold as a hedge last year, he said, but it lost value, so when they took gains on stocks, he advised them to sell gold as the offset.

Saving for Education

Mr. Krause is enthusiastic about qualified tuition programs, often called Section 529 plans after the section of the tax code that authorized them. These plans are operated by states or educational institutions and offer a wide range of investments. The account owners — typically parents, grandparents or other relatives — retain control over the money. The beneficiary is the prospective student, and, what’s more, the beneficiary can be changed.

The money put into the account is not deductible at the federal level, but some states, including New York and Virginia, offer tax breaks, he said, and the account’s growth is tax-deferred. Money paid out of it for qualified education expenses is exempt from federal taxes. If money is withdrawn for unapproved reasons, the owner will owe taxes and a penalty, but over time the money earned in the account may offset those costs.

Relief for underwater mortgages may now be taxed as income. Thomas James

Underwater Uncertainty

Many people owe more money on their home than it is now worth and would like to have their mortgages reduced. But a tax problem could loom, according to Mr. Block, the author of several tax books including “Julian Block’s Home Seller’s Guide to Tax Savings.” Normally when a legal debt is forgiven, the amount is deemed taxable income. A special provision from last year, under which qualified home buyers were exempted from that tax obligation, has expired. As a result, anyone seeking to renegotiate a mortgage this year should check into possible tax consequences.

Strategies for Giving

If you’d like to give money to someone, there are no tax consequences for individual gifts of up to $14,000 a recipient, or up to $28,000 if members of a couple give individually to a recipient, because each spouse is counted separately. For higher amounts, it’s necessary to file a gift-tax return on Form 709, but no gift tax is owed until the total exceeds the lifetime credit of $5.25 million, according to Mr. Block.

Tax rates are up and deductions are down for the wealthy. Thomas James

How the Rich Are Hit

Who qualifies as rich? The answers may vary, but provisions of two laws that came into effect for 2013 returns will certainly raise taxes for people at the top of the income distribution. For more than 95 percent of filers, the American Taxpayer Relief Act, passed on New Year’s Day last year, made permanent the Bush-era tax cuts, which had been scheduled to expire after 2012. But the relief act raised the rate for the upper echelon. And that group also faces two increases on 2013 returns from the Affordable Care Act, which was passed in 2010.

The American Taxpayer Relief Act sets a top federal income tax bracket of 39.6 percent for single filers with taxable income above $400,000 and for couples filing jointly with taxable income above $450,000, and it raises their rate on qualifying dividends and long-term capital gains to 20 percent from 15 percent.

In addition, the act limits itemized deductions and personal exemptions. Itemized deductions will be cut for joint filers with adjusted gross income above $300,000 and for single filers above $250,000. The cut will be the smaller of 3 percent of all itemized deductions, or 80 percent of certain itemized deductions — those for medical and dental expenses, investment interest expense, casualty and theft losses of personal-use or income-producing property, and gambling losses. Each personal exemption claimed by a married couple filing jointly is reduced by 2 percent for each $2,500 of adjusted gross income above $300,000. At $425,000, their personal exemptions are completely phased out. The threshold for a single filer is $250,000, and the exemption is completely phased out at $375,000.

The increases related to health care are a surcharge of 0.9 percent on wages and self-employment income above $200,000 for single filers and above $250,000 for joint filers, and a surcharge of 3.8 percent on net investment income for people whose adjusted gross incomes top the $200,000 and $250,000 thresholds. Investment income is broadly defined, including rent and royalty income and passive income, as well as dividends, interest and capital gains.

Sidney Kess, a New York tax lawyer and C.P.A. who acts as counsel to the law firm Kostelanetz & Fink, notes that many upper-income people have trusts, which will be hit especially hard by the two laws. Trusts with undistributed income above $11,950 owe $3,090 in income tax, plus 39.6 percent of the amount above $11,950, as well as the 3.8 percent Medicare surcharge on net investment income.

States Getting Aggressive

Many states are stepping up efforts to collect taxes, Mr. Kess said, and that can have consequences for people who often travel on business. They may need to file multiple state returns, generally claiming a credit for income tax paid to another state against the liability due their home state.

In Fringe Benefits, Audit Flags

While a fringe benefit may seem like a great perk, some can bring tax problems to both employees and employers, especially small-business owners who may not have a separate tax department. Richard C. Farley Jr., a director of PricewaterhouseCoopers in New York, listed what his firm sees as the top five fringe benefits that auditors often found taxable to the people claiming them: company aircraft use for personal travel, spousal accompaniment on business trips, travel away from home for work, trips awarded for attaining performance goals, and company-provided cellphones and tablet devices.

“There is not much guidance” regarding these benefits, Mr. Farley said. “A company needs to look at the facts and circumstances.”

If you can show a legitimate business purpose — if, for example, you have a German-speaking spouse who served as your translator on a business trip to Germany — an auditor may agree that the cost of that spouse’s trip isn’t taxable income to the employee. In such a case, however, the cost is not a deductible business expense to the employer.

Of course, it’s always important to document expenses when incurred, and to keep records in case of an audit.

401k rich, cash poor

Over at Reddit we came across the following discussion:

401k rich, cash poor (self.financialindependence)

submitted 20 hours ago by DesertPlain

I'm 43, married. We have 800k saved in retirement accounts that can't be touched before retirement. We also have around 250k in home equity (400k value/150k mortgage), plus something like 50k in "normal" investments and savings.

In running FI scenarios, is it better to run simulations and think in terms of a single net portfolio of 1.1M? Or should I think in terms of two time periods, "before 401k available"/"after 401k available"? Logically, I'm thinking the latter makes more sense, but that unfortunately means that I'm nowhere even close to FI because 300k in non-retirement assets won't get me far. Is that the reality? Have I over invested in 401k accounts that I can't touch until retirement?

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[–]bernoulli33 17 points 20 hours ago

Rule 72(t) will allow you to take payments from your retirement savings before age 59. http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Substantially-Equal-Periodic-Payments

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[–]kyleko 9 points 19 hours ago

This and Roth conversions are your answer. You can now think of this as one total portfolio.

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[–]one_two_three_potato 3 points 15 hours ago

You can think of it that way after the tax hit. Also, a 72(t) isn't a good idea for someone that retires very, very early.
As for the OP, I wouldn't say that you're over-invested, but I would consider your "long-term" money relatively well funded. If you can be as diligent in investing in your more "short term" monies (ETFs, individual stock, MLPs, etc) as you have been with your long term, you should be pretty well set in a few years.
Obviously this all depends on savings rate, tax rate, and retirement goals.

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[–]tempacct111 1 point 15 hours ago

EIL5?

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[–]pled 3 points 9 hours ago

With 72(t), aka SEPP, you can take regular payments out of your 401(k) at any age without penalty.
These payments are calculated with one of a number of different methods, all of which are based mostly on your life expectancy.
i.e., you can expect lower payments the younger you are.
These payments are called Substantially Equal Periodic Payments (SEPP). You have to keep these payments up every year until you reach normal retirement age. If you fail to take your payment, you pay a huge penalty, and you still have to keep taking your payments out.

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[–]pled 7 points 9 hours ago

You should think of it as 3 time periods, really: Before 401(k) available, After 401(k) available, and After mortgage is paid off. These 3 time periods represent vastly different investment and spending behaviors.
You can access your 401(k) money by rolling it over into a Roth IRA (paying normal taxes on that "income"). You can then take those rollover contributions out tax-free after they've been in the account for 5 years.
So your goal should be to build enough in liquid investments to float you for the first 5 years, then you can live off of those rollover contributions as they mature each year (or a combination of rollover contributions + other investments).
You didn't give us any details about your spending, but the math is pretty straightforward. If you're using a 4% withdrawal rate and you spend $40k/year, you need $200k in liquid investments to float you the first 5 years, and a 401(k) at $1M, allowing you to roll over 4% ($40k) every year until you die.
If your liquid investments grow in the 5-year wait period, then you obviously don't need the full $200k. You can do the math yourself and figure out exactly how much you need.
Lastly, I wouldn't consider your home equity as part of your investment portfolio in your retirement calculations, since it's not money that you can actually spend unless you downgrade into a less expensive home and pocket the difference.

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[–]warriormonk5 6 points 16 hours ago

72t isn't horrendously helpful to a 40 something in the current interest rate environment since it's based on I think the federal intermediate rate.
Roth conversions are going to be your best bet. You will need taxable savings to bridge the 5 year gap. Plus pay taxes on the conversion.

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[–]bernoulli33 1 point 6 hours ago

It starts to gain traction in your 40s. According to http://www.bankrate.com/calculators/retirement/72-t-distribution-calculator.aspx OP could take $26k/yr now.

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[–]warriormonk5 3 points 5 hours ago

You ignore inflation. Sure it's 26k now but it's also 26k 15 years from now. Both of the fixed methods are just that. Fixed. Once you open Pandora's box on that you can not stop without facing serious early withdrawal penalties. Most importantly you can't withdraw more until you hit 59.5.
The required minimum distribution is a better method since it's recalculated every year based on balance plus age but allows a smaller initial withdrawal. RMD is the only reasonable option for a 40 something if they plan on using 72t.
To the OP. You will need to look seriously into roth conversions to come close to withdrawing the typical 3.5% if all of your 800k is in 401ks as you claim. You will need taxable space money to bridge this gap.
If you are happy with the rmd method and how much it will provide in withdrawals then I wouldn't bother with Roth conversions.

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[–]bernoulli33 2 points 5 hours ago

Good points, thanks.

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[–]oklaho 3 points 5 hours ago

I personally try not to add housing into retirement calculations because it is as non-liquid as an asset can get. Unless you plan on selling it right at retirement.

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[–]saywhatsmelly 1 point 6 hours ago

Good questions. I'm in same boat you are in. Same age. About 1.1 mil in 401k/IRA/SEP between me and my wife. About 200k in regular tax brokerage and roth iras.
I usually just include as a single net portfolio when running FI scenarios.

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[–]herbertmoore 1 point 26 minutes ago

I think that logically it is better to go with the 1.1M approach. Here is also something I have been thinking about: paying down your mortgage is essentialy a risk free way to earn FI returns - ie, if you are paying down a 6% interest loan, you are guaranteeing yourself that return because you will not have to pay it in the future. Therefore before buying any long term FI investment, I would consider whether it will be better than taking the guaranteed return on paying down debt.

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The shape of 401k's to come / Your employer likely will make changes to your retirement account. Make sure you know what those changes are, and what they mean to your nest egg.

Mark Miller, Reuters writes:  What will your 401k look like in five years? Not the account balance -- that will be determined mainly by the size of your contributions and market performance -- but the plan itself. There's a good chance your employer will make some important changes over the next few years, as the industry ushers in changes aimed at getting you to save more - and do more planning for retirement.

That's the key finding of a survey released last fall reflecting the views of 55 401k experts who were asked to predict the ways workplace plans will evolve over the next five years. The study, sponsored by plan provider Transamerica Retirement Solutions, queried industry insiders at organizations ranging from research, consulting and trade organizations to universities and financial services companies.

The biggest change will be a new emphasis on retirement readiness, rather than simply getting workers to join a plan and contribute. The idea is to focus on actual retirement outcomes, and it reflects apprehension about the large number of Americans who are approaching retirement unprepared. If that's something you're worried about, it turns out your boss shares your concern.

The 2013 Retirement Confidence Survey by the Employee Benefits Research Institute (EBRI) found that just 13 percent of workers are very confident they will have enough money to live comfortably in retirement.

And a 401k benchmarking survey released last year found that just 12 percent of employers believe that most of their employees will be financially prepared to retire, down from 15 percent in 2011. That survey is conducted annually by Deloitte, the International Foundation of Employee Benefit Plans and the International Society of Certified Employee Benefit Specialists.

It would be nice to think employers are motivated by altruistic concern about the retirement security of their workers. No doubt, some are - but there's also a human resources issue here straight out of Adam Smith. Companies are worried that older workers will overstay their welcome. Transamerica even came up with a name for it: Aging Worker Syndrome.

The federal Age Discrimination in Employment Act (ADEA) of 1967 made it illegal to have a mandatory retirement age younger than 65, and the law was amended in 1986 to rule out any mandatory age for most occupations. And in the wake of the last recession, rising numbers of older workers are staying on the job longer - either for the money and the benefits or because they like working. That EBRI report found that 36 percent of workers expect to stay on the job past age 65, up from 11 percent in 1991. Meanwhile, 25 percent of workers expect to retire before age 65 - half as many as in 1991.

Clearly, working longer is one of the best ways to boost long-range retirement security. Every year of additional work can help you delay filing for Social Security (thereby increasing annual benefits when you do file) while allowing you to contribute to your retirement accounts longer and spend fewer years drawing those accounts down for living expenses.

But for employers it raises the prospect of workers staying on the job past the point where they are productive, not to mention higher health care costs. "We don't want people to have to work longer if they don't want to," says Grace Basile, assistant director of market research at Transamerica.

The new focus on retirement readiness also reflects the continuing erosion of defined-benefit pensions and recognition that defined-contribution plans will be the key source of retirement income for many workers, aside from Social Security. That's leading more plan sponsors to encourage workers to set specific goals for their 401k's. The study forecasts that far more plan participants will be getting retirement-readiness assessment reports that tell them whether they're on track to achieve a successful retirement, and how much they need to be saving.

The study also forecasts the acceleration of several other 401k plan trends:

• More professional advisers. The number of plans offering workers in-house advisory services has been growing quickly in recent years, and the study forecasts further growth. Plans also will encourage participants to consolidate retirement assets - such as 401k's from former employers - making it easier for advisers to provide workers with an accurate picture of readiness.
• Further automation. The rising trend of automatic enrollment of new employees in plans has boosted participation rates sharply in recent years. Plan experts expect that trend to continue. They also think more plans will boost default employee enrollment contribution rates to 6 percent from the current average of 3 percent.
• Greater engagement through mobile platforms. Plan sponsors will reach out to participants with retirement planning apps that mimic online games, retirement readiness alert messages and calls to action. Says Basile: "It's going to be about getting their attention, and getting them to take action."

Finally, the experts are anticipating a helping hand from the market. They forecast that the current strong equity market will continue for a while - 70 percent agreed or strongly agreed with a forecast that the Dow Jones industrial average will have reached 17,500 by yearend 2017, and a majority agreed that total U.S. retirement plan assets will soar nearly 40 percent to $26.6 trillion.

Tax Software Vs. An Accountant: Which Is Right For You?

Jason Steele for Forbes/ Investopedia writes: With every important job comes the question of whether or not individuals should do it themselves or hire a professional. While the ever improving selection of tax preparation software certainly makes it easier to do your own taxes, it has hardly put Certified Public Accountants (CPAs) and other personal tax preparers out of business.

The Advantages of Using Tax Software

Price
There is no way around the fact that you will pay less for a software package than you will to hire a CPA or another qualified tax professional. The price of tax preparation software ranges from the $10 to $120 range to websites that offer the service for free. On the other hand, the least expensive tax preparers will cost at least $100 and a CPA is likely to charge at least twice that amount. The upfront savings of using tax software over an accountant is one of the most attractive benefits of filing your own taxes.

Speed
Once you have all the necessary documents in front of you, it is possible to complete your own taxes in less than an hour. In contrast, the best accountants will usually take from several days to a few weeks to process your paperwork and file your forms.

Simplicity
Good tax preparation software walks you through the process very quickly and easily. For those who have only a few deductions, sources of income, or investments, there is little need to sit down with an accountant to sort it all out.

The Benefits of Hiring a Professional Accountant
  Better Software
According to Denver CPA Carl Wehner, accountants pay around $1,000 to $6,000 for their software, which is far more sophisticated than the products sold to consumers. These more advanced programs have the ability to quickly scan your information and organize line items and forms correctly. By automating much of the data entry and organization, there’s less chance for human error to hurt your tax return.

Human Touch
Like a good family doctor that knows your medical history, you can develop a relationship with an accountant so that he or she understands your family’s financial situation and future goals. According to Wehner, who has been preparing taxes for 45 years, “A tax professional is often able to make valuable tax savings suggestions that a software program just can’t anticipate.” The value of this advice can easily exceed the additional cost of consulting with a professional. For example, a tax accountant can provide you advice on tax-friendly ways to save for your children’s education, or how to reduce taxes on your capital gains.

Accountants Can Answer Your Questions Year Round
As a trusted professional, a good accountant will be able to answer important questions that arise not just during your annual consultation, but at other times during the year.

A CPA Saves You Time When Handling Complicated Issues
Taxpayers who find themselves at the center of complicated business and investment matters may even have the skill to sort through their taxes on their own, but is it worth their time? A professional tax preparer is so familiar with the system, he or she can quickly and easily accomplish tasks that might take even skilled taxpayers hours of research. For busy non-tax professionals, their time can generally be better spent earning money in their area of expertise. Even if your tax situation is straightforward, hiring a professional will save you the time and stress of doing your taxes.

The Bottom Line
Ultimately, there is no universally correct answer to the question of hiring a tax professional or doing your taxes yourself with software. Your comfort and familiarity with IRS rules will be part of your decision, but the complexity of your finances should be the key deciding factor. Those with a single employer and few investments may save hundreds of dollars by preparing their own taxes, while those with business income or rental properties will find the expense of hiring an accountant to be worth their peace of mind and potential tax savings.

A Taste Test for Three Flavors of Tax Software / TurboTax / H&R Block / TaxAct

Tim Gray for the NY Times writes:   My choice of tax preparation software brands me an old coot, or at least out of sync with the modern moment. My wife, Mary Ellen, says my taste in music does, too — my apologies, Mr. Jagger. 

I prefer the downloadable desktop versions of the leading tax preparation programs. But the makers of all three — TurboTax, H&R Block and TaxAct — say that most of their customers, and nearly all of the new ones, choose their online offerings instead. This year, I made peace with modernity, forsook the desktop and went online, trying out each program there.

I learned that each online offering has strengths and weaknesses that recall those of its desktop forebear. TurboTax makes doing taxes about as easy as it can be, short of hiring a preparer. Block’s help is best — when I had a tax question, I got an answer from a Block staff member within five minutes. And TaxAct is a bargain. At $17.99, its Ultimate Bundle, which includes a state return, was far cheaper than TurboTax Home & Business, at $74.99, and Block Premium, at $49.99. Filing a state return costs an additional $36.99 with TurboTax and Block. (Prices can change throughout the tax season.) 

Based on the 2013 return for my wife and me, any of the three will work fine for a straightforward filing — consisting of, say, wages, interest and dividends, and common deductions like those for mortgage interest and charitable contributions. I also have to file the Internal Revenue Service’s Schedule C, because of freelance income, and all three handled that without problems. 

If you’re filing just one return, the online programs are cheaper than their desktop counterparts. In some ways, they’re also simpler. You don’t have to download software. You open up a browser, create an account and start plugging in numbers. It’s nearly as easy as making a purchase on Amazon. As with the desktop versions, each program uses an interview to elicit information. You provide the pertinent details from your records, and the software fills out the welter of I.R.S. forms. 

A shortcoming of the online versions is that you can’t easily jump back and forth between the interviews and the underlying forms. Those forms scare me, and I would prefer not to see them. But my wife, a C.P.A., likes to check where and how the software is using the information provided. To my chagrin, she sometimes manages to catch me putting figures in the wrong place. How might this happen? Once, when using a desktop program a few years back, I entered our mortgage interest on both Schedule C and the main return. I sensed that our tax number was wrong but couldn’t ascertain why. The program didn’t catch the error.

Another potential shortcoming of online filing is security. The tax software companies would seem tempting targets for hackers; each holds a trove of financial data. Representatives of all three companies said they invested heavily in data protection. The comments of Bob J. Meighan, vice president for TurboTax at Intuit, the software’s maker, were typical. “We use SSL data encryption — the same protocol used by the military,” he said. “All of our communications with the I.R.S. are on secure lines. And we have independent audits of our security.”

Here’s a summary of my triumphs and travails with each program. 

TurboTax

If you want ease and speed — always a relative judgment when struggling with taxes — TurboTax is the choice. It imported the most information — W-2s, investment reports and all of the nonnumeric entries from our 2012 return — and did so with just a few clicks. Mr. Meighan said the program could import information from more than 400,000 outside sources.

With that convenience comes a measure of annoyance: Embedded in TurboTax are copious come-ons for other services and products, including Mint.com, a personal finance website, and I.R.A.’s sold by well-known financial companies. The program even asks if you want to post to Facebook or tweet on Twitter about how it’s saving you money. 

For years, TurboTax has nagged me to upgrade to the Home & Business edition, from the Premier edition, because of my self-employment income. The program hinted that if I did so, it would find even more deductions. Home & Business did ask me more questions than I recall from years past. But my wife and I ended up with the same deductions and credits as before and in roughly equal amounts. That outcome was probably right, given our situation, but it also suggests that I didn’t have to spend $25 more to find out. TurboTax didn’t ask me to tweet about that. 

Some of Intuit’s add-ons can make tax preparation easier. The company makes Quicken, a personal finance program, which tracks spending, savings and investments. You can click Quicken information directly into TurboTax. And Intuit provides a website called ItsDeductible for logging charitable contributions. I recommend using the site: It will store smartphone pictures of items given to charity and help you value them — and your charitable gifts can be imported, too.

Intuit also continues to upgrade TurboTax’s help options. A few years back, just finding some of the help links on the TurboTax website was work. Now the program alerts you to help options soon after you sign on. 

I tested that help by asking a question about a weeklong trip to China. For my wife, it was mostly work; for me, mostly sightseeing, interspersed with a couple of business meetings. I wanted to know whether we could deduct part of my airfare. I opted for online chat, waited about 10 minutes and then exchanged messages for another 10 or so with a representative. I never received a definitive answer. Instead, the rep directed me to TurboTax online guidance about business-related travel. 

H&R Block

I encountered problems when using Block this year, though none seemed to affect the accuracy of our return. They just made the task more onerous. Part of the problem was probably me; I’m as deft with computers as a chimp with a tuba. 

The Block website wouldn’t work with my browser, Safari — some of the buttons did not respond to my clicks — so I switched to Firefox. Then I signed in and tried to import a PDF of last year’s return. Little of the information transferred. Pulling in income data stymied me, too. The program said that our W-2s and Vanguard account reports were not yet available, though those had flowed into TurboTax. Once I accepted that I was going to have to type more, Block worked fine. 

On the plus side, Block’s help was the best. I posed the same China question via online chat. Within about a minute, I found myself in touch with a representative, who soon told me that I could deduct none of the airfare. She said the trip did not meet the I.R.S. eligibility requirements for business-related travel abroad: I’d spent too little time on work.

TaxAct

Importing data into TaxAct presented the same problem I had with Block. I couldn’t make the PDF transfer work and had to accept the toil of typing. TaxAct also did not pull in as much data from outside companies. It does not, for example, link to Vanguard or Fidelity. And though the program said it could fetch our W-2s, I failed there, too. TaxAct asked for PINs, which I didn’t have and the other programs hadn’t needed. (My wife, the ever-cautious C.P.A., rates this extra measure of security as a virtue.)

TaxAct’s help was the slowest. I had to call; online chat wasn’t available. When I did, the operator insisted that I prepay for my return. (The other companies let you pay when you file, even if you seek help.) Once I paid, I was transferred to the help line, where I spoke with a representative about the China trip. We talked for about 15 minutes. She wasn’t sure of the answer; she told me she would research the question and email me within 24 hours. Her response arrived within 30 minutes. She sidestepped the original question, telling me where to put the information on the return if I decided to deduct. 

My favorite feature of TaxAct was one that was unnecessary. Near the end, the program provided a chart breaking down the federal budget by percentage and showing how much of the taxes paid by my wife and I would go to each category. Thus I learned that more than 50 percent of federal spending is designated for defense and for Social Security, Medicare and other retirement programs. 

On our return, 50 percent of our tax bill equated to enough money to buy an electric car — a dream of mine. And we may do that this year: All three tax programs said that we could receive a big tax credit if we did.