Which Is Better: TurboTax or TaxCut?

This year, the nation's two major tax software developers have gone almost totally paperless. Buy a copy of Quicken's TurboTax or H&R Block's TaxCut and you can download your portfolio, bank account and other data from the Web, then sit back while the programs ask you questions on every detail of your financial life. All the while the programs fill out your tax forms automatically. It's like getting a shot at the doctor's office. You never have to watch.

When it's all over, this year for the first time you can file your return completely electronically, directly from your PC. If the IRS owes you money, you can get an automatic loan in advance of payment. Or if you owe money, you can charge it to your credit card. Finally, both programs incorporate financial planning tools aimed at helping you come out better next year.

No doubt, Quicken and H&R Block see tax preparation as a killer Web app. After all, everyone has to do it. And everyone wants it to be as painless as possible. So both companies have put some major bucks into developing their respective products, with the result that TurboTax and TaxCut are pretty comparable, overall.

And they're both everywhere. If you don't feel like going to your local Wal-Mart for a copy, you can opt to use online versions of TurboTax and TaxCut. With the online versions, you simply set up an account, same as you would set up an online stock portfolio. Save your work after each session and return to it later. The whole ordeal is free until you decide whether to file your return electronically from the Web or print out the forms and mail them. A word of caution: The online versions don't contain as many of the help features as the programs you buy.

Whether you go with the online or boxed versions, it pays to have a look-around before deciding. Price is one factor: The entry-level version of TurboTax starts at about $30; TaxCut starts at $10. That can add up if you buy the updates each year. And you'll want to because these programs save key information from your returns -- like the amount of your state tax refund -- and automatically apply it to the following year's return. Obviously, that saves you from scrounging through your shoebox file.

Of course, if you do want to switch, TurboTax and TaxCut let you siphon data from each other. But that's an added step. Most people will likely want to stay with the same program year after year. Also, both programs are scaled. You can start with the basic version, then seamlessly move up to, let's say, a small-business edition if your busted dot-com employer forces you to become a solo entrepreneur. Which program should you choose? Here's a closer look to help you decide.

TurboTax

TurboTax handily wins the "Most Bells and Whistles" award. You can download W-2s and 1099 forms from participating financial service providers. It's been designed to work seamlessly with parent company Intuit's financial portal site, Quicken.com. TurboTax also lets you try out the program free. However, you have to ante up $30 before you can print or file the return.

When the program loads, it's as if you're entering the video game Quest (or perhaps Doom). Links on the gateway screen take you to copies of popular IRS tax booklets. Sit back and watch short videos in which Fortune Magazine Editor-at-Large Marshall Leob and former IRS Group Audit Manager Mary Sprouse speak on the tax implications of mutual fund sales, moving expenses and the like.

If you're stumped at any point while filling out your taxes, TurboTax lets you seamlessly jump online and chat live with an expert. They're listed by specialty -- everything from home-office deductions to the tax consequences of a divorce. Suggested fees are around $35 per question. But you're free to negotiate.

TaxCut

TaxCut is hands down the best value, though. The $20 deluxe version includes state tax forms you'd have to pay extra for if you went with TurboTax. H&R Block also sells versions of the program from previous years. A potential godsend if you're thinking of redoing, say, your '98 return.

Despite these advantages, TaxCut normally finishes second to TurboTax in annual reviews on CNet and ZDNet because of its smaller feature set. But parent company H&R Block is working hard to change that. This year it partnered with Microsoft (MSFT Quote - Cramer on MSFT - Stock Picks) after Mister Softee abandoned plans to develop its own tax program. The partnership is in addition to TaxCut's long-time affiliation with financial publisher Kiplinger's. Thanks to the Microsoft deal, if you buy a copy of TaxCut you receive Microsoft's financial-management program, Money, as a bonus. The two programs have been tweaked to work together and integrate tightly with Microsoft's financial portal MoneyCentral.com.

H&R Block also hopes to leverage its expertise in manual tax preparation. If you don't want to prepare the return yourself, you can simply answer some key questions and a live preparer will do the grunt work for $100. Alternately, you can send your return for a live preparer to review before actually filing.

Cyborg Accountants vs. the Real Thing

Working my way through both programs left me wondering if all their features really make tax preparation easier. Could I have simply entered the figures from my 1099 faster than it took to download them off the Web? Do I want to pay a stranger $35 to answer a single question via live chat, or pay my accountant -- whom I've known for years -- $300 to scrutinize my entire return?

Most folks will likely find that TurboTax and TaxCut do a better job of preparing taxes than they might do on their own. I'm talking about people with a regular job, a deductible mortgage and relatively few investments outside their 401(k).

But suppose you made 5,000 daytrades last year, or you own a dozen rental properties along with some fallow farmland? In that case, the programs can still help you rough out your return before you head to your accountant; just don't trust the programs alone. CNet did an experiment where it deliberately entered massive travel and entertainment deductions on a Schedule C, using TurboTax. The software reportedly didn't red flag the amount, even though it's supposed to scan the return for entries that might lead to an IRS audit. The printed out Schedule C was shown to a flesh-and-blood CPA, who quickly questioned the deduction.

The Socratic Method

To my mind, the main reason to go with either of these programs is their Q&A interface. If you're like me and tax time means having piles of papers atop the dining room table, than it certainly helps to have the detached presence of a software program guiding you step by step.

But the Q&A approach has its drawbacks, too. It isolates you -- intentionally, I think -- from those cold, gray IRS forms you must eventually send off. True enough, TurboTax and TaxCut allow you to see the actual forms as you're filling them out, if you choose. But still, the process stifles your thinking somewhat. For example, when I fill out a Schedule C, I'm forever locating new deductible receipts. What I really want is a series of linked IRS forms that act like a spreadsheet. That way, if I find that $9 cafe latte receipt from my last trip to San Francisco I can just plug it in as a travel expense on my Schedule C and instantly all the numbers on all the other forms will automatically adjust.

In fact, something close to this ideal exists on the Web. And it's free. Go to TaxACT 2000, the nation's distant-third tax-software provider. TaxACT also uses a Q&A interface. But the screen display lets you easily jump to whatever form you want and let you fill it out yourself.

Sadly, my big gripe with TaxACT is all the nag screens the program throws up -- all of them urging you to upgrade to the $9.95 version, which includes state tax forms, lets you file one return electronically and automatically inputs data from last year's TaxACT program. When it's 10 p.m. on April 16, though, and I suspect the IRS will shortly come for my furniture, the absolutely last thing I want are banner ads popping up on my screen.