Free tax filing isn’t always free: Extra costs add up for many self-filers

When Free-Filing Starts to Cost Money
Let’s start with two specific words left out of the partnership between the IRS and those companies: “state taxes.” The IRS program is designed for preparation and filing of federal individual income taxes, not for state income taxes.

That’s where most of the do-it-yourself tax preparation systems start to ask for money. A taxpayer can still use the federal part for free, then prepare their state return on paper, but most seem to opt for the additional cost of continuing within the program to complete this filing electronically.

In the past month, several advertisements for the big tax preparation companies have promoted the “free” federal filing aspects of their services.

Here’s what TurboTax, H&R Block, TaxAct and TaxSlayer charge for state returns prepared and e-filed in conjunction with the “free” federal version, if the taxpayer qualifies for the free version.

Once again, each of these programs varies in exactly how much you can do with the free version. But for those who qualify, these are the extra costs that most will be encouraged to add on. )The information below is based on their websites' product information and disclaimer pages on Feb. 5, 2013.)

• TurboTax Online Free Edition
  State preparation fee: $27.99 per state, includes e-filing.
  Tech support and tax support from CPAs, EAs, tax lawyers via email and chat only.
• H&R Block at Home Free Online Version
  State preparation fee: $27.95 per state, includes e-filing.
  Email tech support; one-time email or chat tax support session.
• TaxAct Online Free Edition
  State preparation fee: $14.95 for any number of states, w/e-filing.
  Tax and tech support by email only.
• TaxSlayer Free Tax Edition
  State preparation fee: $17.95 per state, $9.95 for additional states.
  Tech email support only, no tax support.

* Note that not all filers qualify for the free version of all of these products.

For filers who manage to stay in the qualification zone for free filing, this can seem still a pretty inexpensive solution. They need to remember, however, that doing your own taxes is like representing yourself in court. It may be okay for small claims, but when the issues start to get even slightly more complex, it’s better to rely on an experienced tax professional.

The Other Costs Add Up
Many taxpayers end up upgrading to a higher (non-free) version of the software, which can cost from $40 to $90 more in addition to often higher ($10 or so) state filing costs. This puts them in the range of $80 to $130.

Then, the tax programs often recommend users have their preparation fees deducted from their tax software. This costs about $30 for many of the programs. Taxpayers can also use a credit card to pay immediately at no extra cost, but there seems to be an encouragement.

Then Come the Bank Products, aka Refund Loans or Advances
Promoted as a faster way for a taxpayer to receive their refunds, these are actually loans offered though the tax software that are issued against the anticipated refund amount.

As loans, they have a cost, because the bank backing the “anticipated” refund has a risk: What if the taxpayer has debts that intercept their refunds or if the taxpayer files false information. As of 2011, the IRS stopped warning preparers and financial institutions if there was such a debt, so the risk increased. With an assortment of various fees and high short-term interest rates, bank loan products can easily add another $60 to $170 to the total cost of a taxpayer’s return.

Without one of the refund advance loans, a taxpayer who e-files their return to the IRS and asks for direct deposit, can get their refund in as little as 10 days, and often faster from their state. That shouldn’t be worth the cost to most taxpayers.

The Cost Now:
Free + State + Upgrade + Deduct Fees + Loan = $$$ ?

So the previously somewhat simple return that was upgraded from a free version of a software program could now be costing the taxpayer $140 to $300.

Real Tax Professionals Are Cost Competitive
Many taxpayers feel that a CPA or EA would be cost prohibitive, but depending on the region of the country, many professionals would be happy to assist with returns in the $150 to $300 range, and most won’t steer their clients toward high-cost loans that don’t really provide more than a couple of days of earlier refund.