Get the most from your tax software

By Sally Herigstad

When you use tax software to prepare your income tax return, you have good reason to feel confident about the results. After all, the software asks you a series of questions and guides you every step of the way. All the calculations are automatic. And today's software is sophisticated enough to handle almost any tax situation.

Unfortunately, using tax software does not guarantee that your return is free of mistakes -- mistakes that are more likely to be in the Internal Revenue Service's favor than in yours.

The most common problem is that the software didn't allow you a deduction or a credit because you failed to check a box or you didn't understand a question. You could, say, faithfully log your business mileage all year and enter the total in the program. If you miss one question in the vehicle expense section, you don't get the mileage deduction -- and unless you look for it on your return, you may not even notice.

Professional tax preparers use a number of procedures -- tricks of the trade -- to stay organized and make sure the returns they prepare are correct. By taking these tips from the pros, you can get the most out of your tax software and increase the accuracy of your return.

First, get organized

Sort your financial documents before you start. This is advice MSN Money columnist Jeff Schnepper repeats again and again, and he's right. You can read more about his envelope system in his article "It will pay to prepare for your tax preparer."

For example, put all your W-2 forms together. Then do the same with all your dividend and interest statements. It's easier to go through the interview sequence without missing anything if you avoid skipping around too much. If you organize your information before you start, you may need to go through each section only once.

If you use personal-finance software, make sure your file is up to date and all transactions are properly categorized before you start to work on your return.

You may want to start a worksheet with relevant information, notes about how you determined amounts and so on. This not only helps you prepare your return, but it can be invaluable when you need to remember what you did.

Before you start, make sure the program has the latest updates. This is very important. Late in 2007, Congress enacted a number of provisions, the most important of which extended breaks for families affected by the alternative minimum tax.

Decide whether to use the interviews or the forms

The most popular tax programs, including TurboTax and H&R Block's TaxCut, let you go through a question-and-answer sequence or go straight to the worksheets and IRS forms. Unless you are confident working with tax forms and have kept current on the latest tax changes, go through the complete interview sequence.

Yes, the interview asks a lot of questions about things that have nothing to do with you, such as whether you received oil and gas income. But it also brings up things you might not have thought of or that you didn't know might apply to you, such as the sales tax deduction or the foreign tax credit. Using the interview takes full advantage of tax software.

If you fill out the forms and worksheets directly, you're basically using the program as a tax calculator. This is how most tax professionals use software. They don't have time to go through an interview sequence for every client's return. They know what they are looking for. They, and others who know what they are doing, find it much faster to enter information on worksheets or forms. It's also easier to skip from section to section that way if, for instance, all the information isn't available at once.

Enter your information one section at a time

As you enter your information, try to deal with each document only one time. After you enter each item, mark the original document or worksheet. If a piece of paper has several amounts on it, put a mark by each amount as you go.

Continued: When you should estimate

Keep a piece of paper or notepad handy to write down any questions you have. No matter how prepared you are, it seems you always need more information. Don't get stalled because you need your child-care provider's Social Security number. Add it to your list of questions and move on.

If you can't find a number you need, such as your property tax amount, enter last year's amount or an estimate. Today's tax software will allow you to mark your entry as an estimate and will remind you to recheck it before you file.

In fact, you can't file until you mark it as a final amount. Estimating substantial amounts rather than leaving fields blank helps you see how you're doing on your tax liability as you go along. And, marking them as estimates guarantees that you'll come back to them later.

After you've found answers to your questions and entered all your information, you are finally at the review section of the interviews. Most tax software has an additional section you must go through regardless of whether you used the interviews. The review section alerts you to things you should check again and tells you if you are missing required information. Certain information must be entered before you finish your return, while other information is required if you want to file electronically. You must also confirm that each estimate has been verified or corrected.

Double-check your work like the pros

Your tax return looks good, and you may even be happy with your refund or a small amount owed. Before you print and sign your return, however, there are a couple of ways you can help ensure the accuracy of your return.

Tax professionals often use a simple method to double-check their work. Here's how it works:

• Take the documents you used to prepare your return and, using adding machine tape or a spreadsheet program, add up all the income and subtract all the expenses.
• Make adjustments as necessary; for example, add back any portion of a deduction that is not allowed and subtract other deductions such as depreciation.
• Subtract your exemptions.

The result should equal your taxable income on your return. Nothing guarantees a perfect return, but matching the taxable income you expect to the taxable income on your return helps ensure that your return contains the information you intended it to.

If your total does not equal the taxable income on your return, take the documents you used to prepare your return and see if they show on your return as you expected. You'd be surprised how often something you entered doesn't end up on the return. Sometimes it's justified; for example, medical expenses must be quite substantial before you can deduct them. In fact, you can deduct only the expenses that exceed 7.5% of your adjusted gross income. If your adjusted gross income is $80,000, only the part of your out-of-pocket expenses that exceeds $6,000 is deductible.

In other cases, however, you may be entitled to a deduction that for one reason or another you aren't getting. Car mileage isn't the only expense for which you must answer myriad questions correctly to get the deduction. If your business has a loss, you must indicate that all your investment is "at risk" -- meaning you could lose your investment (assuming that is true) -- to deduct your loss. If you have a loss from residential rental real estate, the correct box must be checked, or you won't be able to use it to offset other income, such as your wages.

Tax software can make preparing your return relatively easy -- at least compared with the old pencil-and-paper method. The printed result looks a lot neater, too. But the official-looking result can hide missed deductions and other errors. Examine it carefully when you are done. Like the pros, take the time to make sure your finished tax return gives you all the breaks you are entitled to.

Updated Jan. 28, 2008