Free IRS E-filing launches today

January 18, 2012

If you’re looking for a cheap way to do your taxes, you can’t do better than free!

Thanks to partnerships between the IRS and numerous tax software companies, many taxpayers are able to electronically file their federal tax returns with (relatively!) easy to use tax software. In addition, over 20 different states can be e-filed through the Free File program as well.

TurboTax, the maker of far and away the most popular tax software, is one of the companies participating in Free File. You can use the “Freedom Edition” of TurboTax if you meet certain income guidelines, which gives you nearly all the features of TurboTax for absolutely free. The nice thing about using TurboTax’s Freedom Edition is if you get stuck, or find out you’re not actually eligible after you start, you can download your tax data and take it to a tax preparer who uses ProSeries to import your work. (You’ll have to call around in your area to find a pro, but since ProSeries is one of the more popular professional tax software programs, it shouldn’t be too hard to find somebody. Don’t bother with the tax chain stores, though, as they use their own proprietary systems.) That way you didn’t do all that work for nothing.

Of course, any time you do your own taxes, it’s always a good idea to have an experienced professional review your work. I’ve always found that at least half the self-prepared returns I review contain some sort of error. But you can do this after you file…or save up two or three years and have them reviewed all at once…and that way you pay very little if you did them right. And if the professional finds additional savings, then it’s just a bonus.

Do Your Federal Taxes for Free with IRS Free File

WASHINGTON — IRS Free File, which has been making taxes a little less taxing for a decade, opens today, Jan. 17. More than 33 million returns have been filed through Free File since its debut.

Everyone can use Free File, either the brand-name software offered by IRS’ commercial partners or the online fillable forms. Individuals or families with 2011 adjusted gross incomes of $57,000 or less can use Free File software. Free File Fillable Forms, the electronic version of IRS paper forms, has no income restrictions.

“Free File can save you time and money. You can prepare and e-file your tax return at no charge. And, the software helps you find the tax breaks you are due,” said Diane Fox, director, Free File program. “Free File helps make taxes less taxing.”

Free File software is a product of a public-private partnership between the IRS and the Free File Alliance, LLC. The Alliance is a consortium of approximately 20 tax software providers who make versions of their free-file products available exclusively at http://www.irs.gov/freefile.

All Free File members must meet certain security requirements and use the latest in encryption technology to protect taxpayers’ information. Seventy percent of taxpayers – 100 million people – are eligible for Free File software. It’s perfect for first-time filers, families looking to save money or older Americans adept at using the Internet.

People with an adjusted gross income of $57,000 or less are eligible for at least one software product if not more. Each of the Free File software providers sets their own eligibility requirements, usually based on qualifiers such as income, state residency, age or military status.

The easiest way to locate a software provider is to use the online “get help” tool at http://www.irs.gov/freefile that, with a little of a taxpayer’s information such as income, age and state residency, can identify matching free-file products. Or, taxpayers can review all providers and their offers. Some software providers also offer state income tax preparation for free or for a fee.

Also, the IRS is working with select volunteer tax sites such as Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly. There are 200 locations nationwide that have set up Free File kiosks where taxpayers can use computers to prepare their own returns with Free File.

For taxpayers whose incomes are more than $57,000, there’s Free File Fillable Forms, available only at the IRS website. This program is best for taxpayers experienced in preparing their own federal tax returns. For people who prefer doing their taxes the old fashioned way – by paper – this is an electronic alternative.

Free File Fillable Forms performs some math calculations and provides links to some IRS publications. It does not use the familiar question-and-answer format used by software. Taxpayers can e-file the forms for free. It also does not support state income tax returns.

Taxpayers must access the free-file products through IRS.gov or authorized kiosks to avoid any charges for preparing or e-filing a federal tax return.

Once taxpayers have selected a Free File software product, they will be directed away from IRS.gov to the partner’s site to prepare and e-file their returns. The IRS does not retain any personal information from the taxpayers.

The IRS also encourages businesses, state and local governments, charities and churches to inform their employees, clients and customers about Free File.


The most misunderstood question on the tax return

January 8, 2012

The IRS Form 1040 has a lot of confusing and misunderstood questions; this should come as no surprise to anybody. But what I frequently find surprising is how poorly people understand this question:

Ask yourself two questions: Do you like the influence that private, large campaign donors have over the Presidential election? Do you like how Congress is spending your tax dollars?

My guess is most Americans would answer No to both questions. And so logically, you would think that most Americans, or at least a very large number of them, would support measures that take money out of the control of Congress and put it into a fund for candidates who DON’T take money from large donors that might want “special favors” from the candidate once in office.

Interestingly, that’s exactly what the Presidential Election Campaign fund does. By checking this box on your tax return (or in your software for the majority of people who never even see a paper Form 1040 anymore), you’re taking $3 out of the “general fund” that can be spent however Congress wants to, and it puts it into a fund for Presidential candidates who agree to abide by certain campaign funding rules.

Surprisingly, only a little over 10% of taxpayers check this box.

I think there are numerous reasons for this. Many people assume the $3 is being added on to their tax bill (like when grocery stores ask you for a $1 at check-out for a special cause)…and most people aren’t feeling particularly giving when they’re already contemplating their tax bill. Most people simply don’t know what the fund is. And for people who use tax professionals, it’s just one more question the professional has to cover, so frequently it’s just ignored.

So it’s just something to keep in mind. You do, in a very, very small way, have a little bit of control over where your tax dollars are going. So now you know, and can make your decision.


Boost your tax refund while increasing your savings

January 4, 2012

The recent IRS Tip below covers one of my favorite tax credits. The Saver’s Credit provides a nice tax credit for people with low- and moderate-incomes who contribute to qualifying retirement accounts.

I don’t think this credit gets the attention it deserves because there’s a common sentiment that, as one preparer I know put it, “If your income is low enough to qualify for this credit you can’t afford to save for retirement!” I don’t buy that. Median household income is currently about $50,000 a year, and you can qualify for this credit with an AGI of $56,500 (if you’re filing a joint return), which means around half of US taxpayers could qualify for this credit.

In particular, I think this credit is great for young people just starting out in their careers…they likely have income low enough to qualify for the credit but without a lot of major expenses. Also, even though the accounts are officially dubbed “retirement” accounts, they can actually be used for a variety of purposes. If you decide to go back to school (or you have kids that you’ll be putting through college one day), if you face major medical expenses, or encounter several other situations, you can access these “retirement” funds without penalty as long as you follow certain rules.

The main thing to realize about this credit is that you can qualify for it retro-actively. If you find while you’re doing your tax return that your income was in the qualifying range, or close to the qualifying range, you can contribute to an IRA up until the April tax filing deadline. The contribution will be counted for the previous tax year. This reduces your income for the previous year — which helps you reach the qualifying income level — and allows you to receive the credit even though your contribution was made after year end.

Issue Number:    IR-2011-121

Inside This Issue


Plan Now to Get Full Benefit of Saver’s Credit; Tax Credit Helps Low- and Moderate-Income Workers Save for Retirement

WASHINGTON — Low- and moderate-income workers can take steps now to save for retirement and earn a special tax credit in 2011 and the years ahead, according to the Internal Revenue Service.

The saver’s credit helps offset part of the first $2,000 workers voluntarily contribute to IRAs and to 401(k) plans and similar workplace retirement programs. Also known as the retirement savings contributions credit, the saver’s credit is available in addition to any other tax savings that apply.

Eligible workers still have time to make qualifying retirement contributions and get the saver’s credit on their 2011 tax return. People have until April 17, 2012, to set up a new individual retirement arrangement or add money to an existing IRA and still get credit for 2011. However, elective deferrals must be made by the end of the year to a 401(k) plan or similar workplace program, such as a 403(b) plan for employees of public schools and certain tax-exempt organizations, a governmental 457 plan for state or local government employees, and the Thrift Savings Plan for federal employees. Employees who are unable to set aside money for this year may want to schedule their 2012 contributions soon so their employer can begin withholding them in January.

The saver’s credit can be claimed by:

  • Married couples filing jointly with incomes up to $56,500 in 2011 or $57,500 in 2012;
  • Heads of Household with incomes up to $42,375 in 2011 or $43,125 in 2012; and
  • Married individuals filing separately and singles with incomes up to $28,250 in 2011 or $28,750 in 2012.

Like other tax credits, the saver’s credit can increase a taxpayer’s refund or reduce the tax owed. Though the maximum saver’s credit is $1,000, $2,000 for married couples, the IRS cautioned that it is often much less and, due in part to the impact of other deductions and credits, may, in fact, be zero for some taxpayers.

A taxpayer’s credit amount is based on his or her filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs.Form 8880 is used to claim the saver’s credit, and its instructions have details on figuring the credit correctly.

In tax-year 2009, the most recent year for which complete figures are available, saver’s credits totaling just over $1 billion were claimed on just over 6.25 million individual income tax returns. Saver’s credits claimed on these returns averaged $202 for joint filers, $159 for heads of household and $121 for single filers.

The saver’s credit supplements other tax benefits available to people who set money aside for retirement. For example, most workers may deduct their contributions to a traditional IRA. Though Roth IRA contributions are not deductible, qualifying withdrawals, usually after retirement, are tax-free. Normally, contributions to 401(k) and similar workplace plans are not taxed until withdrawn.

Other special rules that apply to the saver’s credit include the following:

  • Eligible taxpayers must be at least 18 years of age.
  • Anyone claimed as a dependent on someone else’s return cannot take the credit.
  • A student cannot take the credit. A person enrolled as a full-time student during any part of 5 calendar months during the year is considered a student.
  • Certain retirement plan distributions reduce the contribution amount used to figure the credit. For 2011, this rule applies to distributions received after 2008 and before the due date, including extensions, of the 2011 return. Form 8880 and its instructions have details on making this computation.
  • Begun in 2002 as a temporary provision, the saver’s credit was made a permanent part of the tax code in legislation enacted in 2006. To help preserve the value of the credit, income limits are now adjusted annually to keep pace with inflation. More information about the credit is on IRS.gov.