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 $64,000. 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 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 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 Absolute Zero
Industry leader TurboTax also offers free access to its software for both federal and state returns. They call it TurboTax Absolute Zero. It’s also limited to simpler returns using 1040EZ and 1040A forms, 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 Absolute Zero. Free federal, free state, free e-files.
If your taxes are more complex than the free offer covers, you can buy TurboTax Deluxe Federal & 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 More Zero
TurboTax competitor H&R Block takes it one step further. Its free edition for both federal and state returns, H&R Block More Zero, not only covers simpler 1040EZ and 1040A forms but also covers the full 1040 form with itemized deductions such a mortgage interest and state income tax and property tax. 70% of all returns the IRS received used only the standard deduction. People pay average $273 at brick-and-mortar for returns with itemized deductions when they can do it all free with H&R Block More Zero. Shocking. I know.
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.
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.
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?
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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