An Overview of How TurboTax Software Works

Quick answer

• TurboTax guides you through tax preparation with a question-and-answer format.
• It helps identify potential deductions and credits based on your input.
• The software can import financial data from many institutions.
• It offers different versions for various tax situations, from simple to complex.
• TurboTax can file your federal and state taxes electronically.
• It provides support options if you need help.

What to check first (before you file or change withholding)

Before diving into tax preparation with TurboTax or any tax software, it’s wise to gather key information and understand your tax situation. This proactive approach can save time and prevent errors.

• Filing Status: Determine your correct filing status. This includes Single, Married Filing Jointly, Married Filing Separately, Head of Household, or Qualifying Widow(er). Your filing status impacts your tax brackets, standard deduction, and eligibility for certain credits.

• Income Sources: Compile all documents related to your income. This includes W-2s from employers, 1099 forms for freelance work, interest statements (1099-INT), dividend statements (1099-DIV), and any other income you received. The more complete your income documentation, the more accurately you can report it.

• Withholding or Estimated Payments: Review your pay stubs or previous tax filings to understand how much tax has already been withheld from your paychecks (for W-2 income) or how much you’ve paid in estimated taxes (for self-employment or investment income). This helps you see if you’re on track to owe money or receive a refund.

• Deductions and Credits: Familiarize yourself with common tax deductions and credits you might be eligible for. This could include deductions for student loan interest, IRA contributions, or self-employment expenses. Credits, like the Child Tax Credit or education credits, directly reduce your tax liability. TurboTax is designed to help you find these, but having a general idea beforehand is beneficial.

• Deadlines and Extensions: Be aware of the general tax filing deadline. For most individuals, this is April 15th. If you need more time, you can file for an extension, but remember that an extension to file is not an extension to pay any taxes owed.

Step-by-step (how TurboTax works)

TurboTax simplifies the tax filing process by breaking it down into manageable steps. Here’s a general workflow:

1. Choose Your TurboTax Product:

• What to do: Select the TurboTax version that best suits your tax situation (e.g., Free Edition, Deluxe, Premier, Self-Employed).
• What “good” looks like: You’ve chosen a product that aligns with your income sources and tax complexity.
• Common mistake: Choosing a basic version when you have investments or self-employment income, leading to needing an upgrade later. Avoid this by reviewing the features of each version before purchasing.

2. Gather Your Information:

• What to do: Collect all necessary tax documents, including W-2s, 1099s, receipts for potential deductions, and information about life changes (marriage, children, home purchase).
• What “good” looks like: You have all your income statements, deduction-related documents, and other relevant information readily available.
• Common mistake: Missing a crucial document, like a 1099-NEC for freelance income, which can lead to amended returns. Avoid this by making a checklist of expected documents and cross-referencing what you have.

3. Import or Enter Personal Information:

• What to do: Enter your basic personal details, including your Social Security number, name, address, and your chosen filing status.
• What “good” looks like: All personal information is entered accurately and matches your official documents.
• Common mistake: Typos in your Social Security number or name, which can cause your return to be rejected. Double-check every character.

4. Import or Enter Income Details:

• What to do: Import income documents electronically from employers and financial institutions, or manually enter the information from your W-2s and 1099s.
• What “good” looks like: All income sources are reported accurately, matching the amounts on your official tax forms.
• Common mistake: Forgetting to report all income sources, especially smaller ones like interest from a savings account or payments for odd jobs. Ensure you account for every form you receive.

5. Review and Enter Deductions and Credits:

• What to do: TurboTax will ask a series of questions to identify eligible deductions and credits. You’ll enter information about education expenses, medical costs, charitable donations, retirement contributions, and more.
• What “good” looks like: You’ve answered all relevant questions and provided documentation for all deductions and credits you claim.
• Common mistake: Overlooking common deductions or credits, like the student loan interest deduction or the earned income tax credit, because you didn’t think you qualified. TurboTax’s Q&A helps, but be thorough in your answers.

6. Enter Investment Income (if applicable):

• What to do: If you have investments, you’ll enter information from documents like Form 1099-B (for stock sales) and 1099-DIV (for dividends).
• What “good” looks like: All investment transactions and income are reported accurately, including cost basis for sold assets.
• Common mistake: Incorrectly reporting the cost basis of sold assets, which can lead to overpaying taxes. Ensure you have accurate purchase information.

7. Enter Self-Employment Income and Expenses (if applicable):

• What to do: Report income earned from freelance work, side hustles, or small businesses. You’ll also enter deductible business expenses.
• What “good” looks like: All income is reported, and you’ve captured all eligible business expenses to reduce your taxable income.
• Common mistake: Not tracking or claiming all legitimate business expenses, like home office deductions or supplies. Keep detailed records.

8. Review Your Tax Return:

• What to do: TurboTax provides a summary and review process to catch potential errors, inconsistencies, or missed opportunities.
• What “good” looks like: You’ve reviewed the summary carefully and addressed any issues flagged by the software.
• Common mistake: Skipping the review step and submitting a return with easily avoidable errors. Take the time to read through the summary.

9. File Your Taxes:

• What to do: Choose to e-file your federal and state returns directly through TurboTax. You’ll need to authorize the electronic filing.
• What “good” looks like: Your return is submitted electronically and accepted by the IRS and your state tax agency.
• Common mistake: Filing too close to the deadline, risking technical issues or delays. File a few days early if possible.

10. Pay or Receive Your Refund:

• What to do: If you owe taxes, you can pay electronically through TurboTax. If you’re due a refund, you can opt for direct deposit or a check.
• What “good” looks like: Your tax payment is made on time, or your refund is processed efficiently.
• Common mistake: Not understanding the payment options or deadlines, leading to late payment penalties. Be clear on how and when to pay.

Common mistakes (and what happens if you ignore them)

Mistake	What it causes	Fix
<strong>Incorrect Filing Status</strong>	Paying more tax than necessary; missing out on benefits.	Review the IRS definitions for each status and choose the one that applies to your situation. TurboTax will guide you.
<strong>Forgetting to Report All Income</strong>	Underpayment penalties, interest, and potential audits.	Carefully review all W-2s and 1099s. Double-check bank and brokerage statements for any unrecorded income.
<strong>Not Claiming Eligible Deductions</strong>	Paying more tax than required.	Thoroughly answer all questions in TurboTax about expenses, contributions, and life events. Keep records to support your claims.
<strong>Missing Tax Credits</strong>	Paying more tax than required, especially for lower-income taxpayers.	Pay close attention to questions about dependents, education, and other qualifying factors. TurboTax is designed to find these for you.
<strong>Errors in Social Security Numbers/Names</strong>	Return rejection, delays in processing, and potential identity theft concerns.	Meticulously verify all names and Social Security numbers against official documents for yourself, your spouse, and dependents.
<strong>Incorrectly Reporting Investment Basis</strong>	Overpaying taxes or underreporting gains/losses.	Keep detailed records of purchase dates and prices for all investments. Use Form 8949 and Schedule D accurately.
<strong>Failing to Track Business Expenses</strong>	Overpaying taxes on self-employment or business income.	Maintain organized records of all business-related expenses, including receipts, invoices, and mileage logs. Consult IRS publications for deductible expenses.
<strong>Not Filing an Extension on Time</strong>	Penalties and interest on unpaid taxes, even if you can’t file the return.	If you know you can’t meet the deadline, file for an extension well before April 15th. Remember, this extends the filing deadline, not the payment deadline.
<strong>Incorrect Bank Account for Direct Deposit</strong>	Delayed refunds or refunds sent to the wrong account.	Carefully enter your routing and account numbers. Double-check them before submitting.
<strong>Ignoring Software Warnings/Review</strong>	Submitting a return with errors that could lead to rejection or audits.	Take the time to read and address all flags and warnings generated by TurboTax during the review process.

Decision rules (simple if/then)

• If you received a W-2 from an employer, then you will need to enter that information into TurboTax because it details your wages and taxes withheld.
• If you had freelance income, then you will likely use a version of TurboTax that handles self-employment income (like TurboTax Self-Employed) because it requires Schedule C and potentially Schedule SE.
• If you made significant medical expenses that exceed a certain percentage of your Adjusted Gross Income (AGI), then you may be able to deduct them because TurboTax will help you calculate this threshold.
• If you contributed to a Traditional IRA, then you may be able to deduct those contributions because TurboTax will ask about retirement contributions.
• If you are married and both spouses have income, then you should consider filing jointly because it often results in a lower tax liability than filing separately.
• If you have dependents (like children), then you will likely qualify for tax credits like the Child Tax Credit, which TurboTax will help you claim.
• If you sold stocks or other investments, then you must report the capital gains or losses because TurboTax will guide you through calculating them.
• If you received unemployment benefits, then you must report this income because it is taxable at the federal level, and TurboTax will prompt you for this information.
• If you are unsure about a deduction or credit, then answer TurboTax’s questions honestly because the software is designed to identify eligibility based on your responses.
• If you owe taxes and want to avoid penalties, then ensure you either pay by the deadline or file for an extension and estimate your payment accurately.

FAQ

Q: Do I need to have all my tax documents before starting with TurboTax?

A: While you can start entering some information, it’s best to have most of your income documents (W-2s, 1099s) and records of potential deductions and credits before you begin to ensure accuracy.

Q: Can TurboTax import my tax information automatically?

A: Yes, TurboTax can import W-2s, 1099s from many financial institutions, and even prior year tax returns. This significantly speeds up data entry.

Q: What is the difference between TurboTax Free Edition and paid versions?

A: TurboTax Free Edition is for simple tax returns (e.g., only W-2 income, no itemized deductions or credits). Paid versions offer more features for investments, self-employment, and complex tax situations.

Q: How does TurboTax help me find deductions and credits?

A: TurboTax uses a question-and-answer format. It asks about your income, expenses, life events, and investments, and based on your answers, it identifies and helps you claim eligible tax benefits.

Q: Is my financial data safe with TurboTax?

A: TurboTax uses security measures to protect your personal and financial information. However, it’s always good practice to use strong, unique passwords and enable multi-factor authentication.

Q: Can TurboTax file my state taxes too?

A: Yes, most TurboTax products allow you to prepare and file both federal and state tax returns for an additional fee or as part of a bundled package.

Q: What if I make a mistake after filing with TurboTax?

A: If you discover an error after filing, you can typically file an amended return (Form 1040-X) to correct it. TurboTax can assist with preparing amended returns.

Q: Does TurboTax offer support if I get stuck?

A: Yes, TurboTax offers various support options, including online help articles, community forums, and paid options for live assistance from tax professionals.

What this page does NOT cover (and where to go next)

• Specific Tax Law Interpretation: This overview does not delve into the intricate details or current interpretations of specific tax laws. For complex legal or tax advice, consult a qualified tax professional.
• Detailed Investment Tax Strategies: While TurboTax helps report investment income, it does not provide advanced investment planning or tax-loss harvesting strategies. Explore resources on investment management and tax planning.
• Business Accounting Best Practices: This guide focuses on tax preparation. For comprehensive business accounting, bookkeeping, and financial management, seek advice from an accountant or business advisor.
• International Tax Implications: This information is for U.S. taxpayers. If you have international income or assets, consult a tax professional specializing in international tax law.