Before you buy tax-preparation software, check to see if you qualify for the government's IRS Free File program. For the 70 percent of Americans who make less than $56,000, the program allows you to prepare and file your return using established software for free. If your income exceeds that threshold, or if your return includes more complicated items like capital gains or losses, life-event changes (marriage, a spouse's death, selling your home, or moving for a job), real estate rental income or a small business, experts say you should invest in more robust software that's designed to guide you through those more complex topics.

Buying or downloading software is advantageous in that you can work on your taxes offline. You can also prepare more than one tax return -- for example, for your children or parents -- without additional cost. Lastly, if you need to amend a return down the road, you'll be able to go back to the software. If you file online, you may not be able to file an amended return as easily.

The other option is to do your taxes online, a good option if you don't qualify for the Free File program. Most vendors' online packages are similar to what you'd get with paid software, but of course, you don't have to download anything. Keep in mind that you can only prepare and file one return using online software.

Here's are some important factors to consider before you invest in tax-preparation software.

  • Check to see if you quality for the IRS Free File program. Generally, if your household income is less than $56,000, you can prepare and file your federal taxes online for free through the IRS website.
  • Decide whether you have a simple or a complicated return. If your tax documents amount to a couple of W-2's along with some interest income, a couple of kids and no big life changes, you can likely get by using free online versions of TurboTax, TaxCut or TaxACT. If you have self-employment income, capital gains (buying and selling stocks, mutual funds or a house), business-related expenses or income from rental property, considering paying more for the premium or home/business versions of tax software.
  • Data import compatibility. TurboTax and TaxCut both can import data from Quicken and Microsoft Money. Both will import data from 2007 returns prepared in either program. TurboTax will also import from the 2007 version of TaxACT. TaxACT does not import data from financial programs; it's best for simple returns. TurboTax can also import W-2 and 1099 data from participating companies, banks and brokerages, which can save you some time. TaxCut can't do this. TaxACT has limited ability to import W-2 information.
  • A thorough help function for complicated returns. TurboTax and TaxCut both offer scads of in-depth tax information for those who use schedules. TaxACT, as mentioned above, offers only the most basic assistance, but if you're comfortable filling out forms and schedules with minimal assistance, TaxACT is just as accurate as the others for basic tax returns.
  • State software, if you need it. The cheapest versions of all programs don't include state software. Step-up versions include the software or a free download of software for one state. Be sure to check before you buy. Be aware that each additional state return will cost extra.
  • Do you need in-person help? One area where TaxCut beats TurboTax is in-person advice. TaxCut's Premium and higher versions one free consultation with a professional. TurboTax charges at least $30 for this same service.
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