Tax software: What you should know

TAX LAW CHANGES TO SAVE MONEY The 1997 Tax Act means filers will save an estimated $150 billion. Keep in mind: This year Home sales. Single people who sold their primary residence on or after May 7, 1997, will be able to take up to $250,000 in capital gains tax free as long as they've lived in the house at least two of the previous five years; married filers can tax a tax free gain of up to $500,000. Long Term Care Insurance. You can deduct up to $2,500 per person for such policies. Next year Roth IRAs. Contribute up to $2,000 a year per person ($4,000 a year per couple) of after-tax income to a Roth IRA. Withdrawals are tax-free at retirement (after age 5912). You also may withdraw up to $10,000 to buy your first house, or a sum equal to your contribution at any time and for any reason, tax-free. Education IRAs. You can sock $500 a year into a college-designated account for children under 18. The contribution isn't deductible, but earnings are tax-free as long as they're used for higher education. If you earn more than $150,000 per year (per couple) this perk isn't supposed to be available. But someone else, such as your grandparents, can open the account and make the contribution for you. Child Credit. There's a new $400 per child credit for children under 17. The amount jumps to $500 in 1999. Who gets it: Single parents with an adjusted gross income of $75,000 and couples with an adjusted gross income of $110,00 or less. Education Credit. Families who earn $100,000 or less a year can get a credit of $1,500 per year for a child's first two years of college and a 20 percent credit on the first $5,000 in costs per year thereafter.

ATIONWIDE, people are trading in No. 2 pencils for a high-tech alternative: tax software. And with good reason: Tax software can save you a minimum of four to six hours, more if you've got supporting schedules to fill out. On top of that, consider the fact there were 821 changes to the tax code last year, and the instructions for the supposedly simple 1040-EZ now have 31 pages of fine print. Consumers need more help than ever, and software is the cheapest way to get it.

Though prices vary, you can pick up a tax program for less than a large pizza. At Staples, the basic version of TaxCut is $14.99 -- before the $10 mail-in rebate. No accountant will hold your hand for that kind of money.

These are just a few of the reasons tax software programs are flying off of shelves. More than 3.2 million copies of tax preparation programs were sold in retail stores last year, a 47 percent jump compared with the 1995 tax year. Sales are expected to rise another 20 percent this year.

The two most dominant programs

Intuit's TurboTax (for PCs) or MacInTax (for Macs); and Kiplinger's TaxCut -- both start with simple, direct interviews. The software asks questions about marital status, employment, earnings and expenses, then uses the answers to fill in the blanks on the tax forms, all of which are built into the programs along with just about every IRS publication imaginable.

Despite the overwhelming amounts of data crammed into these programs, the process seems fairly personal. Questions are designed to make sure you don't miss out on potential savings. If you indicate you're self-employed, for example, but don't have a Keogh or SEP (Simplified Employee Pension) retirement account, the instructions will suggest you set one up. Mention you've got a home office, and you'll be warned this may invite an audit.

The programs aren't above making a snide comment now and then. "Congratulations: You have a refund coming," begins one message some TaxCut users receive. Then: "By the way, this is a lot like loaning the U.S. government your money interest free. For the next year, you may want to adjust your withholding."

The programs work well for most users. But be warned: If you're uncomfortable with computers or have an extremely complicated tax situation, tax software probably isn't for you.

Making the IRS' job easier

Even the IRS is all for computerized returns. The error rate on manually prepared returns is 21 percent; the error rate on returns prepared using software is less than 2 percent. Plus: Refunds for returns filed electronically come back faster, usually in two to three weeks vs. double or triple that if you file by hand.

Vickie Herndon, a medical transcriber, filed her taxes electronically using TaxCut on Feb. 3. Just 28 hours later, she received confirmation from the IRS. Ten days later, her refund was in her bank account. "I couldn't believe it," Herndon says. "Who would ever put their taxes in the mail again?"