Why You Should Take Advantage of the IRS’s Free File Program

More than 101 million Americans with moderate to low income overlooked the chance to file their tax returns for free last year. With accountants charging, on average, $137 in Illinois, $174 in Colorado and $190 in California to prepare a basic federal return (before additional fees for advice or a state return), you could instead put that money toward credit card bills, your house down payment.

The IRS’s Free File program allows eligible taxpayers to electronically prepare and submit their federal returns using consumer-friendly software from 10 tax-preparation companies. This list includes household names such as TurboTax and H&R Block, as well as lesser-known companies like ezTaxReturn and FreeTaxUSA. Some tax-prep companies in the IRS-developed program, known as the Free File Alliance, also let you do your state returns for free.

There are two places you can start: either on the Free File Alliance website, or the IRS’s Free File page. Pay attention: Ultimately, you must file directly through the IRS’s Free File page. (The Free File Alliance site takes you to a green “Click Here” link on its homepage.) Once you use the IRS page to select which company’s software you want to use, it directs you to a special company link set up for the program.

It can get confusing, and tax-prep companies are to blame. For example, Intuit has a link titled “File for $0 with TurboTax” (an Intuit brand), but it doesn’t take you into the Free File ecosystem. It does flag various fee-based products, though, like live help from an accountant.

The Treasury Inspector General for Tax Administration (the IRS watchdog agency) has complained that the program, around since 2003, is complex, confusing and under-publicized, and that of 104 million eligible taxpayers, only 2.4% used it last year. It also faulted tax-prep websites for charging fees to an estimated 43% of eligible filers who, instead of filing through Free File, used their commercial websites.

Actually, the Free-File system is not hard to use. Here’s how it works. Taxpayers with adjusted gross income (AGI) of $69,000 or less can click through step-by-step instructions for filling out each line on a 1040 federal return. AGI is all of your taxable income, including wages, salaries, tips, capital gains or losses, unemployment compensation, Social Security benefits, distributions from your individual retirement account and the like, minus certain deductions. You can subtract things like alimony and contributions to a retirement account, but not the standard or itemized deduction.

So should you use Free File?

Pros:

—You’re much less likely to make a mistake filing electronically vs. on paper, a digital error rate less than 0.5% vs. 21% for the coffee-stained 1040 that you stuffed into a mailbox, according to a tax trivia quiz.

—You’ll know immediately if your return was accepted or — ugh — rejected, perhaps because your ex-spouse mistakenly claimed your child as his or her dependent this year. And because the IRS processes electronically filed returns faster — typically within three weeks vs. six or more for paper ones — you’ll get your refund sooner.

—Free File will flag juicy deductions, exemptions and credits, including the earned income tax credit. The EITC, a $63 billion annual program, has difficult requirements but is worth up to $6,557 for 2019 returns filed this year. Exemptions and deductions reduce the income on which you owe tax. Credits are more lucrative, because they reduce your final tax bill dollar-for-dollar. You should find out if you can get the credits.

—If you can’t get it together by April 15, you can use Free File to file for a six-month extension.

—The IRS promises that your data, including your Social Security number, are secure.

—It’s free! Who doesn’t like that?

Cons:

—Not everybody is comfortable with the idea of a DIY federal income tax return. Isn’t corralling all the documents exhausting enough?

—You may have a complex situation that requires a paper return or is easier to handle through an accountant. For example, if you need to file an amended return for a prior year, you need to snail-mail it in. If you’re married and filing separately and live in a community property state — Wisconsin, Washington, Texas, New Mexico, Nevada, Louisiana, Idaho, California and Arizona, and Alaska, if you opt to have community status — things can get complicated. You’ll have to list half of your spouse’s income, half of your community income and all of your individual income.

—You have to carefully choose which of the 10 tax-prep companies.

—Unless you live in a no-tax state (Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming), you also have to file a state return. While some Free File Alliance companies offer a free state return, others limit it to certain states, and some, like EZTaxReturn and 1040Now, don’t offer it at all.

(SOURCE: TNS)

(Article written by Lynnley Browning)