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NerdWallet’s Guide to Filing Taxes Online

May 19, 2016
Income Taxes, Personal Taxes, Taxes
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Filing a tax return online is the norm these days — only about 9% are filed on paper, according to the IRS. But the prospect of filing taxes online can seem daunting if you’ve recently decided to do your own taxes, have just entered the taxpaying world, or are finally just giving up on paper.

Don’t worry — it’s simpler than it looks. Here are the basics.

Why file online?

The short answer is that filing online is easier and faster.

Filing online means using software, rather than pencil and paper, to fill out your state and federal tax returns and calculate what you owe or whether you’re due a refund. It also includes transmitting those finished tax returns to your state and the IRS.

Until just a few years ago, it was common for people to fill out paper tax forms manually and shove them in an envelope with all the supporting documents. Then they would take it to the post office — sometimes waiting in line for hours — to ensure that it was postmarked by the deadline. But software that walks you through the preparation, in an interview-style format, makes filing online much less of a hassle for most people.

Online filing also gives you more control over your time. For example, thanks to e-filing, which is part of most online tax-prep programs, you can digitally transmit your tax returns through IRS-approved electronic channels. You can even wait to submit your returns at the last minute if you want. If you’ve got a refund coming, you’ll also get your money faster than if you submit a paper return.

What’s out there?

The market for tax-prep software is huge, and there are many options. But generally, you can get what you need in two ways: through the IRS’s Free File program, or through a commercial provider such as TurboTax, H&R Block, TaxAct or others.

You can check out our handy guides here to learn more about the pros and cons of some of those commercial software providers. But before you start shopping, ask yourself two questions: How complicated is my tax situation? And do I want the desktop or the cloud version?

Typically, the cloud versions are more convenient because there’s nothing to install on your computer. The software and your return live in the cloud, which lets you access your return from multiple devices such as a tablet or phone. With desktop versions, you download the software directly from the provider or seller to your computer. The software, and your return, reside only on that machine.

Which method is more secure? It’s hard to say — both the software providers and the IRS have been hacked. To learn more about how to keep your tax information safe, check out this article.

What will it cost to file my taxes online?

If you go the commercial route, you’ll usually pay some combination of fees to prepare your federal return, prepare your state return, and e-file those returns. Expect to spend at least $40 to $50 when it’s all said and done. If you’ve got a more complicated return and need a more sophisticated version of the software that can handle business or rental income, numerous investment transactions, or deductions for a home office, for example, the tab can easily run over $100.

Your choice of cloud-based or desktop software makes a difference in the price tag, too, so be sure to look at both options. If you choose cloud-based software, you typically don’t have to pay for the software until you decide to print or e-file your return, for example. But you’ll probably have to pay additional fees to have the software prepare your state return.

Desktop software, on the other hand, typically requires an upfront payment to download it. You probably won’t have to pay extra to prepare your state return, though you’ll probably have to pay extra to e-file it.

Prices for both cloud-based and desktop software tend to go up around 30 days before the April filing deadline, so completing your returns in January or February could save you some money.

Filing online for free

If you meet a few criteria, you might be able to file your taxes online for little or no cost.

Here’s the deal: Virtually all of the large commercial software providers offer free versions of their software, but they’re usually only for people filing Form 1040EZ or a 1040A. So, if you have a simple, straightforward tax situation, the free versions might save you a bundle. Be sure to check the providers’ websites for details on what their free versions do and don’t cover. At least one provider offers the 1040 in its free version.

In general, if you itemize, have a lot of investment income, are a freelancer or landlord, or have other more advanced tax situations, you’ll probably have to pay for the software you need.

Another route is the IRS’s Free File program, which lets you prepare and e-file your return for free using basic tax-prep software from a consortium of about a dozen companies. Just answer a few questions on the site, and the IRS will match you with online tax-prep software.

There’s a catch here too, though: an income requirement to get the free software. For example, you had to earn less than $62,000 in 2015. If your earnings are above the annually adjusted threshold, you can still use the Free File site, but you’ll get access only to fillable electronic versions of the IRS forms and not much guidance.

Now that you know the lay of the land, check out our side-by-side comparisons of free and paid tax-prep software.

Tina Orem is a staff writer at NerdWallet, a personal finance website. Email: [email protected].