Should you write your own tax software?

Lazy Man and Money posted a reader's question over in the MBN Forums asking for help:

Do you have an Excel spreadsheet somewhere in these archives I can't find one so I could try doing IRS tax prep on the computer? Usually (for 20+ years) I've hand-tallied, every little receipt on yellow line paper & used hand calculator, over & over. I found TaxCut on line but of course those are just the final compilation forms. I'm hoping to find an already designed spreadsheet with headers Medical, Charitable Giving etc and try typing in with the computer tallying as I go merrily along. (well tediously) is the more accurate adverb 🙂

Part of this is pretty easy to do, and I'll show how in this post, but first a related question:

Do you actually want to be writing your own software to do your taxes?

For almost all cases, the answer is no, and I'll tell you why I think so.

One guy at work wrote a Matlab script last year to calculate the amounts to put in his 1040.  (No, I'm not making this up.)  He's a smart guy, but even smart guys make mistakes, and he ended up paying penalties and interest because he got something wrong with the calculations on his Schedule D.

There is a free 1040 Excel workbook, that appears to work in OpenOffice as well, that has been under development for over a decade.  It appears to do an admirable job of automating the calculations.  (The creator also accepts donations.  My Dollar Plan posted this link on the forum.)  I was impressed; it was quite a product that could be used for free.

I want to make it clear that the author has my full respect for undertaking this daunting task basically single-handed.  I was surprised that anyone tried taking it on.  It's a very difficult problem to take into account all of the tax code faithfully and package it in a form that is accessible by users of MS Office or OpenOffice.  What's more, the tax law changes, which makes updating this workbook a constant and necessary task.  As good as it is, though, this workbook should be employed only as a check of one's own calculations; I know that the workbook's creator emphasizes this.  Its users have helped to improve the program by catching several calculation errors that were subsequently fixed by the creator, to his credit.  This underscores the need for checking everything that comes out of the sheet.

For my money, though, I want more than just my own understanding of the tax laws, or one person's understanding plus the help of volunteers, to get the calculations right.  The scope of the task necessitates a team of tax specialists and programmers that have to get it right for fear of losing a lot of business.

TaxCut by H&R Block is the tax preparation program I've used for the past couple of years.  I really like it.  I bought the Home and Business edition this year so that I could do my partnership returns on the computer as well.  When I fired the software up today, the first thing it did was check for updates.  Some of them probably are bug fixes, but others are probably just H&R Block catching up with all of the changes in the tax code.  This reassures me that they're on top of things.  Paying $80 for the collective experience and knowledge of programmers and experts in the tax business year round is a good investment by my standards.

Before you trying hacking out your own tax software, I strongly recommend checking out Glenn Reeves' workbook for the real do-it-yourselfer or TaxCut for the slightly less militant do-it-yourselfer.  Odds are very, very good (though not certain) that they'll have done a better job than you could do.

Now back to Lazy Man's reader's question:

Here's a quick and dirty way to enter one's tax-related expenditures in a spreadsheet and calculate the totals for entering in the appropriate worksheets or lines on the 1040.

1)  Open a new Excel workbook or OpenDocument Spreadsheet (*.ods) file.
2)  In cells A1, B1, C1, and D1, enter Date, Description, Amount, and Total, respectively.
3)  In cell E1, enter =SUM(C2:C16383) and hit ENTER.  The number zero should appear in that cell.  (If you have more than 16,382 items to track, you'll need to change this number, but congratulations are in order.)
4)  Go to the worksheet tab at the bottom, and rename the tab to whatever type of expenditure you want to track (Charity, Medical, etc.).
5)  As you incur these expenses, record the date, describe it, and enter the amount, and the total in cell E1 should be current.
6)  If you want to create another sheet with a different kind of expenditure, highlight cells A1 through E1, type CTRL-C to copy, navigate to a blank sheet, click on cell A1 in that sheet, type CTRL-V to paste, and change the name of that worksheet to the appropriate type of expenditure.  (This works in OpenOffice; you may have to re-type the formula in Excel.  I don't recall how CTRL-C/CTRL-V works in that.)

DISCLAIMER:  All this does is add up the figures in column C.  Let me repeat:  All this does is add up the figures in column C!  Just because this spreadsheet spits out a total does not imply that you can enter it in any place on your 1040!  This sheet is just a simple adding machine.  You have to know what limits, what floors, what ceilings, what exceptions, what restrictions, and what conditions apply to the figures you calculate — indeed, whether they're meaningful for your taxes at all!  For example, qualifying medical expenses are deductible only to the extent that they exceed 7.5% of your adjusted gross income.  Charitable donations may have a ceiling.  Only half of your business's qualifying dining expenses are deductible.  The list goes on.

Again, for my money, I'm using TaxCut rather than rolling my own.  Have fun!