Tax Software: Online vs. Installed

Should you purchase and install tax software or use software online?

When doing your taxes with software such as TurboTax, you have two options for how you can use the software: You can install the full software on your desktop or laptop computer, or you can use the software through the tax software manufacturer's website without installing the software on your computer (it does, however, require an internet connection). 

Which method should you use: the online version or the version installed on your computer? Here are six differences to consider when choosing tax software.

Whether you use desktop or online tax software, always keep a copy of your tax return in a safe place.

Installing Tax Software: Online Is Easier

Working at home with wireless technology and laptop.
Getty Images/Tempura

Online Method

Online tax software like TurboTax doesn't require a software installation and does not change anything on your computer because it runs through an internet browser like Chrome, Internet Explorer, Microsoft Edge or Firefox.

Many online tax software options will also allow you to start your taxes for free. TurboTax, for example, allows you to do this, charging you only when you are ready to submit your completed tax return.

Desktop/Laptop Install Method

You can install the tax software on your computer from a purchased software CD or from a downloaded file if you purchased it online. With this method, the software runs completely on your computer and does not require an internet connection while using it.

When choosing this method, make sure the tax software is compatible with the operating system you're using. For example, you don't want to purchase the Mac version of the tax software if your computer is a Windows system.

There is also a small chance the version of your operating system (OS) is incompatible with the tax software. Though the chance of this happening is small, troubleshooting tax software installation problems can be a challenge because everyone's system is different. Find your computer's operating system version number (on Windows or on Mac) and check it against the tax software manufacturer's compatibilities.

Convenient Tax Prep: Online Advantages

With online tax software, you can work on your income tax return on any computer wherever there is an internet connection.

If you use tax software installed on your computer hard drive, you can only work on your taxes when using the computer on which the software is installed. This isn't an issue if you plan to only work on your taxes on your desktop computer, or if you install your tax software on your laptop. 

Online tax software is convenient if you need the ability to work on your tax return from different locations.

An important note: Online tax software users should avoid public computers, such as those found in libraries, internet cafes or coffee shops. If you must use a public computer to complete your tax return, be sure to log out of your tax software account and close the browser window before leaving the computer so people who use the computer after you won't have access to your financial data.

Tax Software Updates: Online Interferes Less

Desktop tax software either automatically checks for updates or prompts you to check regularly—often doing so every time you open the software application—especially if tax laws are being negotiated late in the year. Updates are necessary because income tax software is available each year before the IRS has ironed out all new income tax codes. Releasing the software early lets you get started on your return early. While tax software updates generally go smoothly, there is a chance that an update will conflict with something installed on your computer, prompting a call to tech support.

Online tax software, on the other hand, is updated automatically on the software maker's servers, so when you open the software in your browser, updates are already installed, and there's no extra effort necessary on your part.

Tax Data Security: Desktop Vs. Online Tax Software

Desktop tax software provides ultimate control over your income tax data because your data is stored locally on your personal computer. However, if you don't use good quality antivirus and firewall software and keep it updated, there is still a risk that your computer, along with your tax data, can be hacked.

Online tax software is very secure, with the trusted popular titles having the same security used by financial institutions to protect and encrypt tax data files. Check the privacy and security policies of online tax software to be sure it provides the best online data security.

Tax Data Storage: Desktop Tax Software

Tax software installed on your computer saves a data file locally until it is deleted. If you use the same brand of tax software for next year's taxes, some data from the previous year's file can be imported into the new tax year's software, saving you time by filling in some information (such as name, address, etc.). Hold onto past years' software versions if you want to do what-if scenarios or otherwise access your past returns.

Online tax software typically saves a tax return for three years. Online tax software lets you save a return as a PDF document, but the raw data is not stored on your computer. If you want to keep copies for more than three years, save the PDF onto your computer hard drive, in an online storage or cloud service like Dropbox or on removable media such as a USB drive.

Backing Up Tax Data: Online Tax Software Is Easier

Online tax software saves data while you work in the software and when you log out. It maintains secure, encrypted copies of tax data in at least two separate physical locations to ensure that your data is not destroyed due to a disaster.

If you use tax software on your computer, it is incumbent upon you to protect your data from disasters. You can set the software to backup data automatically and frequently while it is in use, as well as when the software closes. Beyond this, you will need to backup tax software data to a location other than your computer hard drive. Do not use your hard drive as the only place tax data files are backed up. If the drive fails, you'll have to start your return from scratch. 

Alternative locations for saving your tax software data file include a USB drive, a network attached server (NAS) or to an online backup service. Cloud storage services such as Google Drive, Apple's iCloud or Microsoft's OneDrive offer enough free space to save these files outside of your physical location.