Last year 112 million taxpayers filed federal taxes online, marking a 13.6% increase from 2010, when 98.7 million people submitted electronic returns. And with the big deadline for state and federal tax returns less than two weeks away, the IRS predicts that more folks will file electronically this year than ever before.
It's therefore no wonder that tax software products become popular purchases around this time every year. From TurboTax to TaxAct to H&R Block, you'll find software and services advertised for free or significantly discounted, but does that actually mean there aren't any additional fees? Or are there hidden costs? Of course, we can't promise you a hefty refund, but we can offer details on the tax prep tools you need to get one.
TurboTax software, in general, gets high marks from finance industry professionals. Rich Arzaga, CEO of Cornerstone Wealth Management in San Ramon, California, praises its processes as "intuitive" especially for a program that handles the parts of adult life that nobody likes: taxes and finances. Arzaga says, "If you have basic logic skills and ... good data, you can do a great job with TurboTax." We've found that TurboTax offers filing software for everyone's needs. From TurboTax Free Edition, to TurboTax Deluxe ($26.45, a low by $6), pictured, and TurboTax Business ($90.31 with free shipping, a low by $10), there's a version that's right for your filing.
Keep in mind, however, that submitting a state tax return, no matter the TurboTax software, costs an additional fee. This additional charge brings up an unmistakable point: When a tax filing software purports to be free, it's quite rare that it will cover all of your tax retun costs (unless it's for 1040EZ filing wherein you have no dependents, don't own a home, etc.).
Unsurprisingly, with the rise of tablets and smartphones, many taxpayers will take to their mobile devices to file their 2011 taxes. If this appeals to you, then you might also consider TurboTax SnapTax for iPhone or Android. Last week we saw this app and its services completely free of charge for Android tablet users, but it now comes with a $24.99 filing fee. However, that includes both federal and state services. Note that this app can only be used by people who can file a 1040EZ.
TaxACT: "Free for Everyone"
While the catchphrase "Free for Everyone" is TaxACT's calling card, the fine print actually says "Free federal tax returns for Everyone." Here's how it works: If you use TaxACT to file your federal tax returns, you can indeed file electronically for free, though you'll need Adobe Acrobat Reader and Flash Player 9 or higher to view the instructional videos. Filing your state tax forms from this free version costs extra, and will set you back $17.95.
The TaxACT Deluxe version on the other hand, offers more in-depth tax help — like assigning a deduction value to your charitable donations, for example — and will set you back $9.95. Then, to file state taxes from the Deluxe version, it's just an additional $8, amounting to $17.95 total, which is the same cost as using the free software and then paying the additional charge for a state filing. If you plan to file both state and federal through TaxACT then, it probably makes sense to go with the Deluxe edition plus state filing, to make use of the extra features.
H&R Block Software
Although we saw it for just $18.99 three weeks ago, you can still score a physical copy of H&R Block at Home Deluxe Federal & State Software for Windows or Mac at a discount ($36 with $2.97 s&h or free Site-to-Store, a low by $5). However, if you prefer to not to wait for the disc, download it for Windows or Mac, and you'll pay even less ($23.98, a low by $6). H&R Block is a trusted name in taxes, dating back to the time when Henry Block promoted the "17 Reasons" TV commercials on behalf of his number-crunching operation. Note that as with the other options listed above, e-filing state returns will cost you (in this case $19.95). But as one helpful Amazon reviewer points out, you can always print out and mail your returns in, which would cost you just the postage and the envelope. With this software, you also receive the support of an H&R Block enrolled agent to represent you in the event of an audit.
Is Tax Software the Right Choice for You?
While there's nothing quite like getting a CPA to help you prepare and submit your tax returns, filing yourself — whether online or with software — offers greater convenience and savings. Finding affordable tax prep software is easier than ever before, but DIY filing is still best suited for those with easy tax situations. So a single person who rents a home and has one source of income like a full-time job, might benefit more from online tax prep than a married couple who owns a home and vacation property, side businesses (filed as a Schedule C), and receives both W-2s and 1099s. That's not to say at-home tax software can't handle that, but research shows that those filing Schedule Cs are three times more likely to be audited than someone with an LLC or who works for a full-time employer who provides a W-2 and which makes systematic deductions from paychecks.
Of course, that doesn't mean anyone who files a Schedule C and uses online or at-home software is asking for an audit. But as with any DIY situation — from home improvement to catering a family picnic — one must determine if the project is better off in the hands of a professional. Sure, cost is a factor, but so is savings; and personally, I've lost track of how much money my accountant has saved me over the years through smart deductions I would've missed on my own.
In the end, and no matter which software you choose, both federal and state tax returns should be accurate and honest. Otherwise, you may be asking for a fate worse than death: back taxes and penalties, and that's just for starters. For more information about Tax Day — from tax freebies and software deals, to ideas for how to spend your refund — keep an eye on the Tax Day page.