How Does TurboTax Make Money?

TurboTax is a tax preparation software package for income tax returns, developed in 1984 by Michael A. Chipman and was later acquired by Intuit in 1993 for approximately $225 million. TurboTax offers a free version of its software for users under a certain income level who are lodging a relatively simple tax return. However, those who need to manage more complex tax returns will be prompted to get a premium version.

Software SalesTurboTax offers a range of tax preparation software packages that cater to different levels of complexity, from basic tax returns to more complex filings. Customers purchase these software packages to prepare and file their federal and state income tax returns. The software packages are sold both online and through retail outlets. Revenue is generated through the sale of these software products.
Online Filing FeesTurboTax offers an online filing service, allowing users to prepare and electronically file their tax returns directly through the TurboTax platform. Users pay fees for this service, which vary depending on the complexity of their tax situation. Fees may include charges for federal and state filing, e-filing, and access to certain forms and features. Online filing fees contribute significantly to TurboTax’s revenue.
TurboTax LiveTurboTax Live is a subscription-based service that provides users with real-time access to certified tax experts and CPAs who can offer guidance and review their tax returns. Users pay a subscription fee for this service, often on top of their software or online filing fees. TurboTax Live subscriptions provide a recurring source of revenue.
Tax Refund AdvancesTurboTax may offer refund advance products that allow users to receive a portion of their expected tax refund early, often in the form of a prepaid debit card. While these advances are interest-free, there may be fees associated with the service, such as a processing fee or an application fee. TurboTax earns revenue from these fees.
Additional ServicesTurboTax offers a variety of additional services and add-ons, such as audit defense services, identity theft protection, and MAX, which includes both. Users pay fees for these services to enhance their tax filing experience and receive added security and support. Additional services contribute to TurboTax’s revenue.
Challenges and CompetitionTurboTax operates in a competitive market with other tax preparation software providers and tax professionals. Staying competitive, ensuring data security, and complying with tax regulations are ongoing challenges. Providing reliable customer support is crucial during the tax filing season.
Future Growth StrategiesTurboTax’s future growth strategies may involve: – Product Innovation: Continuously improving and expanding its tax preparation software and services. – User Acquisition: Attracting new users and retaining existing ones. – Data Monetization: Leveraging user data for targeted financial services. – International Expansion: Exploring opportunities in new markets. – Partnerships: Collaborating with financial institutions and tax authorities.



Origin Story

TurboTax is a tax preparation software package for income tax returns.

The software was developed in 1984 by Michael A. Chipman and was later acquired by Intuit in 1993 for approximately $225 million.

During this period, Intuit was the leading developer of personal finance software products in the United States. Consumers in the 1990s were also very much unaccustomed to filing their taxes online.

When TurboTax Online debuted in 1999, the company effectively had a six-year head start in product development over competitors such as Microsoft.

Approximately 4.2 million copies of TurboTax were sold the year it was launched. Soon after, the company embarked on an aggressive sales campaign to ensure that its market dominance was maintained.

It also offered a freemium version for consumers on low incomes without removing functionality. In fact, the free version was so popular that TurboTax gained a 60% market share in the early 2000s.

The company grew rapidly in the ensuing years as it targeted taxpayers still reliant on paper returns. A thorough understanding of its target audience was then complemented with improvements in user design.

TurboTax experienced an 11% increase in revenue growth across its products for 2020, thanks largely to the COVID-19 pandemic.

TurboTax revenue generation

As noted earlier, TurboTax offers a free version of its software for users under a certain income level who are lodging a relatively simple tax return. To some extent, the free version is also offered to entice users to upgrade at some future point.

Any such upgrade means purchasing premium software. The company also charges consumers if they want a dedicated agent to prepare a tax return on their behalf.

Let’s start by taking a look at the premium editions on offer:

  • Deluxe ($60) – for those who want to maximize deductions and credits.
  • Premier ($90) – for individuals with rental or investment properties.
  • Self-employed ($120) – for sole proprietors who need to lodge personal or business income and expense reports.

For all three premium offerings, TurboTax can also be used to lodge state taxes for an additional fee of $50.

It’s also important to note that the above fees are for one year only. Consumers who wish to file again with TurboTax will need to purchase a license each tax time.

Premium plans include features such as:

  • Deductions for property income, donations, bonds, stocks, and cryptocurrencies.
  • Unlimited guidance and assistance while filing via a live chat.
  • Dedicated experts who can prepare tax returns for consumers. Individuals submit their documents to the system and are then matched with an expert that is best suited to their needs. TurboTax claim that their tax experts and certified practicing accountants (CPAs) have an average of 12 years of experience in the industry.

Key takeaways:

  • TurboTax is a software product that helps individuals and businesses lodge tax returns. It was developed in 1984 by Michael A. Chipman and then acquired by Intuit in 1993. Intuit was the first mover in the industry as the online lodgement of tax returns became more common at the turn of the millennium.
  • TurboTax offers a free version of its software for lower-income users with a relatively straightforward lodgement. It also offers three premium versions: Deluxe, Premier, and Self-Employed.
  • TurboTax also offers guidance for those who require help completing their tax return. All premium software users can also have a certified accountant complete the entire tax return on their behalf.

Key Highlights

  • Origin and Acquisition: TurboTax is a tax preparation software developed in 1984 by Michael A. Chipman. In 1993, it was acquired by Intuit for around $225 million.
  • Pioneering Online Tax Filing: TurboTax was ahead of its competitors when it launched TurboTax Online in 1999, giving it a significant head start in the online tax filing market.
  • Market Dominance and Freeware: TurboTax’s free version for simple tax returns helped it gain a 60% market share in the early 2000s. This freemium approach attracted a large user base.
  • Revenue Growth and COVID-19: In 2020, TurboTax experienced an 11% increase in revenue growth, largely attributed to the effects of the COVID-19 pandemic.
  • Product Offerings: TurboTax offers a range of premium editions:
    • Deluxe ($60): Maximizes deductions and credits.
    • Premier ($90): Suited for individuals with rental or investment properties.
    • Self-employed ($120): For sole proprietors requiring personal and business income and expense reports.
  • State Taxes and Licensing: TurboTax charges an additional $50 to file state taxes. Users need to purchase a license each tax time if they want to file with TurboTax again.
  • Features of Premium Plans: Premium plans include features like deductions for property income, donations, bonds, stocks, and cryptocurrencies. Users also get unlimited guidance via live chat and the option to have dedicated experts prepare their tax returns.
  • Expert Assistance: TurboTax offers assistance and guidance for users who need help completing their tax returns. Premium users can also opt for a certified accountant to handle their tax return entirely.
  • User Base Expansion: TurboTax grew rapidly by targeting taxpayers who were still accustomed to paper returns and continuously improving user design.
  • Range of Users: TurboTax serves both individuals and businesses, offering solutions for a variety of tax scenarios.
  • Revenue Generation: While the freemium model attracts users, TurboTax generates revenue from the sales of premium versions and additional services like expert assistance.
  • Premium Editions: TurboTax’s premium editions cater to different tax situations, providing tailored solutions for various tax needs.
  • Longevity and Innovation: TurboTax’s history spans decades, showcasing its adaptation to changing tax filing trends and its pioneering role in online tax preparation.

Read Also: Freemium Business Model, How Does Mint Make Money.

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