The power of free is somehow escaping people when it comes to filing their tax returns. Over 50% of all taxpayers can do it for free but they still choose to pay hundreds of dollars every year to get it done.
I read Are You Paying Too Much for Your Tax Prep? on Bloomberg. It says last year 57% of all people used a brick-and-mortar tax business to file their taxes. These brick-and-mortar tax businesses charge on average $176 for a federal return with just the standard deduction plus a state return. If you add itemized deductions, the average fee jumps to $273.
It defies logic when there are so many ways to get it done for free or nearly free. Yes some people have complex returns. Yes some people are wealthy enough that they don’t want to bother with the chore. That’s what, at most 17% out of the 57%? Far too many people are simply throwing their money away, year after year.
IRS Free File
IRS Free File is a partnership between the IRS and a number of tax software companies. It offers free access to tax software from those companies to people with income under $66,000. Other than the income limit, there is no limit on the complexity of the return. We are not talking about the you-must-know-the-rules Free File Fillable Forms here. The software offered is the same user-friendly Q&A software for which those companies otherwise would charge money if you didn’t go through the link from the IRS.
Supposedly 70% of all taxpayers qualify for the IRS Free File program but as we see far less than 70% use it, because most people still use brick-and-mortar. According to an article on New York Times, only 3% of those eligible actually use it. Quite possibly most people don’t know because only the IRS publicizes it. The IRS sure doesn’t have a large marketing budget.
Some companies in the IRS Free File program offer both free federal returns and free state returns; some offer only free federal returns. The IRS has a handy lookup tool to help you sort it out based on your age, income, state of residency and so on. Some states also offer separate free filing programs.
FreeTaxUSA
FreeTaxUSA attempts to leverage the power of free. It offers free federal tax returns with no income limit and no limit on the complexity of the return. The catch is, similar to IRS Free File, if you also need a state return, they charge you $13. You can also upgrade to a deluxe edition for $7 more. At a maximum of $20 for federal plus state, I think it’s quite reasonable.
TaxACT Free
TaxACT offers a free edition that’s free for both federal and state returns, but it’s limited to simpler returns using 1040EZ and 1040A forms. It doesn’t cover itemized deductions, capital gains, rental income, or self-employment. It still covers a lot of people because 40% of all returns the IRS received used 1040EZ or 1040A forms. As in other freemium models, they offer it free in the hope that when you have those complexities in the future you will continue using them and pay.
TurboTax Free Edition
Industry leader TurboTax also offers free access to its software for both federal and state returns. They call it TurboTax Free Edition. It’s also limited to simpler returns, excluding itemized deductions, capital gains, rental income, or self-employment.
It’s the same freemium model: free this year, hope you like it enough to be willing to pay in the future when you need more features. I think that’s fair. Those who pay average $176 to brick-and-mortar for simple returns can do it all free with TurboTax Free Edition. Free federal, free state, free e-files.
If your taxes are more complex than the free offer covers, you can buy TurboTax Deluxe + State from retailers like Amazon or Costco. It covers federal return, federal e-file, and a state return. State e-file costs extra but you can easily print the state return and just mail. The going price is about $40. $40 isn’t free but it’s a heck lower than $176 or $273.
H&R Block Free Online
TurboTax competitor H&R Block also offers a free edition for both federal and state returns. H&R Block Free Online also covers simpler returns without itemized deductions, capital gains, self-employment income or rental income.
If your taxes are yet more complex with capital gains, rental income, or self-employment, you can buy H&R Block Deluxe + State from retailers like Amazon or Costco. It covers federal return, federal e-file, and a state return. State e-file costs extra but you can easily print the state return and just mail. The going price is about $30. Sometimes you can find it close to $20. Again, $20-$30 isn’t free but it’s a heck lower than $176 or $273.
IRS VITA
Not everyone has a computer or a tablet or is comfortable working with one. For those who prefer to do it with someone face-to-face, the IRS operates a Volunteer Income Tax Assistance (VITA) program. IRS-certified volunteers prepare tax returns for those with income of $54,000 or less.
AARP Tax-Aide
If your income doesn’t qualify you for the IRS VITA program, AARP Tax-Aide has IRS-certified volunteers to help you. You don’t have to be a member of AARP. You don’t have to be over 50. You just have to make an appointment and show up. What’s excuse unless you really want to spend $176 or $273 every year?
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With so many ways to do the tax returns for free or nearly free, it’s really hard to understand why so many people choose to spend hundreds of dollars on them each and every year. I get it that people are concerned they won’t be able to do it accurately when they have never done it before. The thing is everything has a first time. Simpler returns really don’t have much to them. You just put your numbers in and the software will take it from there. I’ve used tax software for 20 years. Even as my tax returns grew more complex, I haven’t met any situation that the software couldn’t handle or did it wrong.
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Denis says
Harry, there is a new one that you missed – I got an email from Credit Karma saying they just introduced FREE tax prep and filing. It seems it’s totally free for any level of income and no restrictions.
https://www.creditkarma.com/tax
Denis
dn says
I’ve been paying someone for years, but have always had what I thought were complexities to deal with. This year, I decided to pay my preparer, but also buy TurboTax (was on sale for $10 off at Costco) and try it myself and see if TT can produce the same results. If so, then its TT for me going forward.
always_gone says
I have a wealthy buddy who has fairly complicated taxes, with lease agreements, rental properties, etc. He had a pro doing his taxes, but when he decided to “check the work” with TT, he found errors made by the pro. He has since quit paying for the pro and just uses TT. Good luck.
FinancialDave says
Harry,
Appropriate article for this time of year. I have been volunteering for AARP Tax-Aide for over 5 years and along with the VITA Tax-Aide these two groups cover every state in the US and most major cities and small ones too.
Stephen says
I agree with dn’s plan to try to get the same result yourself; but I wouldn’t pay for a tax program to accomplish that…I recommend just using the on-line version of any popular tax program–just don’t efile it after you have made the comparison. Completely free to use the software if you don’t file. I do it in reverse: I use the on-line programs every year (programs are generally released in mid-October) so I can do some “what-if” tax planning before Dec 31. Then I take my unfiled results and my 1099s and other supporting documents to the Volunteer Income Tax Assistance people at my local library who then do it all over again and efile it AND give me back everything condensed in a nice binder. I not only get no-cost filing…I also get no-cost quality control from professionals plus I’m aware of my tax situation in a way that I never was before when I was simply paying for it.
Mrs. Picky Pincher says
With the advent of popular services like Turbotax, I’m honestly shocked that 57% of people went to a brick and mortar business to do their taxes. I think that comes from the fear that you’ll mess up your taxes and IRS will come down on you. At least if you go to a physical store, you feel more secure about a professional taking a look at your finances.
I used TurboTax Absolute Zero my first time filing and it went swimmingly. I’m sure all the other services are fine, but TurboTax already has my info saved from previous years, so that’s a bonus.
myshkin says
Tax software makes sense for a lot of people, I guess, but there are a couple things it doesn’t get you: (1) a CPA who’s prepared to represent you before the IRS if you’re audited (yes, I know the odds of being audited these days are small); (2) a CPA who’s worked at the IRS or has plenty of experience with complex returns and can offer advice when how to report something is tricky or in a grey area; (3) a CPA who knows how to obtain a letter ruling if needed.
linda says
I have to use Self-employed version (highest in TurboTax). Is it possible to find a equivalence elsewhere?
TurboTax is getting greed every year since then…
Sara says
I don’t even use tax prep software, I just prepare it myself by hand and then either type it up and send it electronically (or sometimes snail mail it). Didn’t realize it was that weird. I just read the instructions carefully and make sure I fill out all the appropriate forms. More people should try it!
Stephen says
When tax software was first made available to the public it allowed you to switch views back and forth from the “interview-type” screen to the “Forms” screen. If you were comfortable simply filling out the Form, then great; but if you wanted to understand a bit more about what was behind the line item, you could quickly toggle screens to get to that help. It was very helpful and taught me a lot about both the laws and the filing requirements. None of today’s popular tax software programs seem to have that specific easy back-and-forth feature.
Harry Sit says
I doubt that many people care about forms these days, especially those who get them done at brick-and-mortar. The software is optimized for ease of use. TaxACT used to closely follow the forms, which actually made it the least intuitive. I haven’t looked at its latest edition.
milen says
Hi Harry,
Why did you omit these?
California offers free filing for residents:
https://www.ftb.ca.gov/online/calfile/
Federal free filing – even for incomes over 64k:
https://www.irs.gov/uac/free-file-do-your-federal-taxes-for-free
I have not tried either yet (have been using TaxAct but am tired of getting nickel-and-dimed each year for a few more bucks) so I intend to go with free, “government-run” filing this year.
Anyone have any experience with either of these?
Harry Sit says
“Some states offer separate free filing programs.” California falls into that category.
Income over $64k through Free File Fillable Forms requires that you know all the rules. If someone had been going to brick-and-mortar, I don’t think Free File Fillable Forms is a good choice for them.
Ken says
I’d like a free option for my mom, who is retired. She gets about $11,000 from social security, and another $10,000 or so from her retirement portfolio. Her taxes are “simple” but because she is living off mutual fund assets, there is always a Schedule D, and that bumps her out of everyone’s free filing category. I usually just pay the TaxAct filing fee myself, and tell her it didn’t cost anything.
Harry Sit says
If the $10,000 or so from her retirement portfolio is from tax advantaged accounts or just dividends, it doesn’t require a Schedule D. Even if there’s always one for selling mutual fund shares in a taxable account, FreeTaxUSA is still free. $13 for state isn’t too bad. She’s also a good candidate for AARP TaxAide. Finally if you buy installed software you can do multiple returns at no extra charge.
FinancialDave says
An AARP Tax-Aide site can easily do this kind of return for free.
Lynda says
Ask at a local Senior Center if VITA or TaxAide is available in her community. Or better call Vita locator at 800-906-9887 or TaxAide locator at 888-227-7669. Some sites operate via appointment and others walk-in. I’d recommend the appointment sites (less waiting time). In less than an hour and for FREE her tax will be done and efiled. Bring Social Security card, photo ID, last years return and her SS tax statement 1099-R if pension and 1099-B from brokerage house if she sold stocks or made RMD. Bam.
KD says
Even after Schedule A and D, I find that taxes are fairly easy – in essence it is just addition and subtraction of numbers. What instills fear in most people is the tax jargon and schedule jargon. For all the money that US spends in tracking burden hours with government forms, why don’t the voters demand easier lingo?
Governments like India have introduced pre-filling of forms – based on your id number which you will need to hand out if you truly need a deduction for tax purposes. I am usually done in 30 mins including the e-file.
What I notice is that entrenched government systems are hard to modernize especially if the threshold for making any change is always that all people need to be able to do it. So nothing changes, and rent seekers profit from it.
I do not know what the solution ought to be. A special tax credit for those who file themselves? That is never going to happen! Removal of special interest and distortion inducing tax deductions? Good luck separating the special interest groups and their affinity to influence government for their own benefit.
Ultimately, the state of affairs is complete sum of all the incentives and disincentives from the government. Just like the tax return! 🙂
Scott R says
I’m thinking about doing my own taxes this year and would like some recommendations. Our income is pretty high, so we won’t qualify for some of the free options, and I actually don’t mind spending money on a good program since I’ve been paying about $400/year for the last few years. I need something that will work with several “non-basic” forms, so please don’t suggest options which can only do basic tax forms. I would like something that lets me drill into the details and override if necessary, since my last accountant used software which somehow/supposedly prevented her from properly filling out my backdoor Roth info and we had to manually file.
Over the last several years I’ve gotten to the point where I have a pretty sophisticated “tax form” spreadsheet with formulas, etc. that I fill out and use to cross-check my accountant’s work. I usually find errors in their work, but my last accountant (other than being confused by the backdoor Roth) was actually very accurate. But this year she decided to stop doing taxes on the side, and since I’ve been sort of doing them myself anyway, I’m thinking I’ll give it a go this year.
So, my idea software would be very easy to use but also allow me to drill into the details, see the actual forms (so I can cross-check), and allow me to override, but also still let me e-file. FWIW, in addition to needing to fill out the Federal forms, I also will need to fill out the CT tax forms.
Harry Sit says
When you care about looking at forms, buy installed software instead of using it online. Either TurboTax or H&R Block will work.
VeeBee says
I second VITA https://www.irs.gov/individuals/free-tax-return-preparation-for-you-by-volunteers for any one under $54K. Also, it is a great place to volunteer as well. They offer volunteer training in Tax prep for 1-2 days and then you can volunteer and help file taxes for low income folks. Dont worry, you have oversight by a site coordinator.
ESI Money says
I’m in the 17% with complicated taxes (businesses and rental properties) and strong income.
Paying someone to do my taxes not only SAVES me money (she catches complicated things I wouldn’t) but also saves me time (I’m guessing 40 hours+ — and those are very frustrating 40 hours).
Worth every penny.
YMMV, of course.
Mike says
taxhawk.com is the same company as FreeTaxUSA and they have free federal/state filing for first time (defined as not using them since 1/1/13) filers. I am using them due to the taxact price increase.
Steve says
Do the (free) online outfits permit downloading of data from mutual funds and other financial services firms? Used to do taxes by hand, but after adding in things like ESPP, RSUs and personal investment transactions, complexity got overwhelming. Ambiguous and contradictory forms instructions didn’t help. Not to mention state returns that don’t always conform to fed rules. Wish I had switched to software sooner!
Harry Sit says
If your income qualifies, try TurboTax through IRS Free File. TurboTax offers the best functionality in downloading from mutual funds and brokerage firms.
Stephanie says
I wanted to also echo the recommendation for volunteering with a VITA site. This year is my fifth season, and it is the most fulfilling volunteer experience I have ever had. You get to provide something of significant value while also utilizing a skill set that not everyone has. It is wonderful work!
myshkin says
Linda, I just looked at the website for Credit Karma (recommended by Denis in the first comment), and it covers many forms, including self-employed, for free. It’s at https://www.creditkarma.com/tax. I haven’t tried it. Caveats: (1) They apparently make money by showing you ads; (2) you’d have to trust their security and privacy policies. They claim to use 128-bit or higher encryption, but I didn’t see anything about privacy policies. Maybe elsewhere on the site.
Frank Kirstein says
I’m disappointed in the HR Block Deluxe help facilities. Can’t find the CHAT function or other ways to ask about taxes and HSA accounts.
Dd says
I think one of the reasons that free tax software is not used more often is the difficulty in answering the EIC questions. One incorrect answer and no EIC. I also volunteer at a VITA site.
Harry Sit says
When you use software, you don’t just have one shot. If your incorrect answer is not producing the expected result, you can revisit the answer and eventually get it right. Hmm, maybe I should do some EIC tutorials using different software for people to find them via Google.
Harry Sit says
To those who volunteer at VITA or TaxAide sites, are you booked solid doing one return after another? In other words if more people come to you, do you have the capacity to handle it? Or do most people still don’t know the wonderful free help exists and they just go to their tax person for lack of awareness?
Dd says
Harry, in response to your comment that one can “revisit the answer and eventually get it right,” this is true for you, me, and VITA volunteers, but usually not for the VITA clients we see. Clients often don’t know how to use a computer, let alone navigate a tax program and have no idea if they have a correct result.
VeeBee says
Its is relatively busy for the capacity I have seen on my location. But it could be done at a bigger scale but for lack of more volunteers, marketing for this service, and better predatory marketing by H&R block (brick and mortar). Most returns I filed were rather straightforward. My site was located where there was significant need. United Way organizes this in the Seattle area.
Al-BEEE says
I’ve always done my own tax “stuff”. It P’s me that after you earn the money, you have to spend hours and hours to try to keep some . I don’t want to do E-file; but, would like to have a program that would guide me through the forms without reading publications which go round and round, finally referring to ANOTHER publication.
Are there any free downloads (which cover the 1040 including gains ,health care, etc.to use WITHOUT being online, figure and fill the forms, and manually copy them onto paper forms to be mailed?
Harry Sit says
TaxACT still offers a free download but the free edition has limited functionality. Newegg.com sells H&R Block Deluxe + State download for $30. With a promo code USAVE30 it comes to $21. It’s not free but I think it’s quite reasonable to do both federal and state returns. You don’t have to e-file if you don’t want to. It will generate printable forms which you can mail.
FinanceIdiot says
Thanks, Harry! I wouldn’t have thought I would qualify via Free File, but I do. You saved me $100 and switched me to H&R block. I’ve always used TurboTax but now I frankly can’t tell the difference.
PennySaved says
I have been using an excel spreadsheet for form 1040 for a few years now. Input the data and it does the calculations. Has most of the commonly used schedules and forms, including worksheets. Free download and you can print out the forms with data that look just like the tax forms.
https://sites.google.com/site/excel1040/
KD says
https://www.propublica.org/article/filing-taxes-could-be-free-simple-hr-block-intuit-lobbying-against-it
Propublica says less than 2 percent of individual tax returns last year were filed through a free online federal income tax filing service offered to lower- and middle-income families by 13 private tax prep groups. About 70 percent of taxpayers are eligible for the free service.
Harry Sit says
They blame it on tax prep software companies when most people don’t even use the free software they are eligible for. Even if every user pays for the extras not covered by free file, it’s still a lot less than what they are paying now to their human preparer. If the IRS offers free online filing directly I’m afraid most people still won’t use it. Many states offer free online filing. I’m curious what percentage of people use it.
Harry Sit says
From State of California as of May 28, 2016:
“Annually, over 6 million taxpayers qualify to use CalFile. So far this year, more than 157,000 CalFile returns have been received compared to almost 246,000 CalFile returns last year.”
About 3-4% of people used direct filing offered by the state.