Filing Recommendations for 2011

Best ways to file your returns

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The best way to file your tax return depends on your situation. A majority now use professional preparers, but many could get the job done just as well, and faster, using a free online service. Whether you use a professional or not, here are our thoughts on the best way to proceed.

Disclosure: Fairmark.com receives compensation for recommending some of the solutions mentioned here.

Summary of recommendations

• For online preparation: TaxACT offers free, high quality service
• For active traders: TradeLog is the best solution to preparing Schedule D
• For software to install on your computer: TaxACT again (free), if you're running Windows
• For hiring a professional preparer: big names don't mean high quality

Preparing your return online

It's scandalous that the IRS doesn't offer even a basic tax return preparation and filing service on their website. Fortunately, TaxACT has stepped in with a solution. Once again in 2011 they are offering their excellent online preparation and filing service free of charge to all who want to use it, without regard to age, income level or complexity of the return. TaxACT isn't quite as well known as Intuit's TurboTax or H&R Block's TaxCut, but for many years it has been a high quality product, essentially equivalent to the offerings of the other companies, but without the restrictions the others impose on free filing.

I've used this software myself, to prepare and file my daughter's tax return. It did a great job, and even caught an error I was making that would have reduced her refund.

What's the catch? If you want them to do your state or local income tax return, you'll pay a reasonable fee. Ditto if you want an enhanced version of their software that offers added features. If you choose these items, the experience won't be free, but it will still be the best bargain around. We highly recommend TaxACT.

Alternatives? Some of the other software providers offer free service, but subject to arbitrary restrictions. You may spend a lot of time getting your return set up in their system, only to learn that you need a form that isn't included in their free service. I don't know why anyone would use these other services when TaxACT offers such a fine service entirely free of charge.

Worst of all is the Free File service available through the IRS. They make it as complicated as possible to find a quality service you can use free of charge, imposing arbitrary restrictions on income levels and age. (How they get away with this blatant age discrimination at a government agency is beyond me.) They don't check the quality of the offerings, and a study found that many of them were, in a word, lousy, making mistakes that made people underpay or overpay their taxes. Free File is really designed to discourage free online filing, and that's the only thing it does well.

Active traders

If you buy and sell stocks many times per year, reporting all those sales on Schedule D can be a laborious chore. For many people the key problem is the sheer volume of data to be entered; others are stymied by the complexities of the wash sale rule. Ordinary tax return preparation software won't solve these issues, but TradeLog does the trick. It's specifically designed to make it easy to download transaction data from your broker, automatically identify wash sales and make necessary adjustments, classify transactions as short-term or long-term, and produce the forms you need for your tax return. We believe TradeLog is the best available solution for active traders, and recommend it highly.