National Taxpayer Advocate Nina Olsen says that Americans spend the equivalent of 6.1 billion hours attempting to comply with an overly complicated federal tax code. Ostensibly, she's talking about tax preparation itself, preparing for the preparer, dealing with correspondence from the IRS, and numerous other odius activities that waste a whole lot of time.
I can't argue that point with Olson. Just the thought of having to put together all my documents in the next few weeks is enough to bring on hives. But it doesn't have to cost much money to actually prepare and file your return. For filers who don't itemize—about two-thirds of Americans, according to the IRS—free online tax-prep software packages are readily available and, from our experience, not hard to use. Four popular brands—CompleteTax, H&R Block At Home, TaxACT and TurboTax—currently all have online versions that lets anyone, regardless of income, complete and file a federal return for free. (Expect to pay extra to file state forms.)
The other three free federal products—H&R Block At Home Free Edition, TaxACT, and TurboTax Online Free Edition—all support the forms that most taxpayers use. Of those, TaxACT appears to be most comprehensive for businesspeople. For instance, if you need an obscure business document such as Form 8906, the Distilled Spirits Credit, TaxACT is for you. (I'd like to know what that credit is about!)
Block also is offering free preparation of federal 1040-EZ forms in its participating storefront offices. Some 40 percent of taxpayers file the simple, 1040-EZ or 1040-A forms. (It remains to be seen how much tax preparers there will be encouraged to try to upsell profit-making products or services to those "free" clients.)
And then there's FreeFile
As in past years, the IRS is featuring FreeFile. It opened for business last week. Anyone can use FreeFile's fillable electronic tax forms to prepare and file their federal forms electronically for free. In a past test, one of our staffers found this method relatively easy to use, though we'd recommend this approach only to folks who feel fairly confident about what they're doing.
For many others, guided tax-prep software also is available through FreeFile. To prepare and file your federal form for free, you must go through the IRS FreeFile portal and meet certain demographic and/or income criteria, generally adjusted gross income in 2010 of $58,000 or less. This year, 16 companies, including the four mentioned above, are participating.
Why bother going through FreeFile? The most compelling reason is to take advantage of free prep and filing of your state return, which otherwise could cost more than $30 per return. A number of states are participating this year in FreeFile, but in order to take advantage of their programs, you first may have to file your federal return through FreeFile. Again, expect income or other restrictions.—Tobie Stanger