How To Do Your Taxes On The Cheap

It's that time of year again. Tax filing season. This year the feds are cutting you a small break: Due to a District of Columbia holiday followed by a weekend, personal tax returns are due three days later on April 18. (On the other hand, due to Congress' December tax changes, those who itemize their deductions can't begin to file until Feb. 14.)
But you can also do something yourself to make this filing season a little less painful. An array of computer-based programs can help you do your tax returns accurately--cheaply or even for free. Some 60% of individual taxpayers use a paid human preparer. As a result, according to an IRS study, the median income taxpayer shelled out $258 for tax prep in 2007.
But the majority of taxpayers, provided they've got the time, patience and computer savvy, can do tax prep themselves. Know that when it comes to taxes, do-it-yourself is not for everyone and can't be done the old-fashioned way--with blank copies of the actual forms and instructions, a pencil, a good eraser and maybe a calculator. Despite all the talk over the years of tax simplification, the truth is that pretty much the opposite has happened .(One reason not to do any but the simplest return by hand is that many of the numbers to be entered on your 1040 and its schedules depend on other numbers whose values can change as you complete the return. At a minimum you'll need some computer firepower to do all these cascading calculations and recalculations. (Paid preparers couldn't cope without software, either.) Form 6251, for calculating the dreaded alternative minimum tax, has 54 steps. Schedule D for capital gains and losses has 22 steps.
No wonder that according to the IRS' own studies, just 8% of taxpayers did their returns without benefit of a pro or software in 2008, down from 28% in 2000.
If do-it-yourself software is not for you and you're broke, one option--used by 3% of taxpayers in 2008--is to take advantage of the free human-based tax help out there. The IRS oversees two such initiatives, the Volunteer Income Tax Assistance Program and the Tax Counseling for the Elderly Program. The AARP foundation runs AARP Tax-Aide, with volunteers at 6,500 locations across the country.
In addition, many law schools and legal services organizations offer tax-help clinics; ask around. If you don't have a computer, use one at your local library and Google "free tax help" and your city. And don't forget to check with the librarians; it's possible tax help will be available in the same facility.
The three top sources for software tax prep are Intuit's TurboTax, H&R Block At Home (which used to be called TaxCut) and TaxACT. You can buy them as stand-alone disks, downloadable software, or as a Web-based program used with an Internet connection. There are more than a dozen other tax prep products with names like OnlinetaxPros.com, TaxSlayer, 1040NOW.NET and TaxSimple. Most of them require an Internet hook-up.
Pricing by a single vendor can vary, so it pays to look around. A stand-alone disk of TurboTax Deluxe, which allows you to activate the program for one state, and to electronically file one federal return, lists for $59.99. Does anybody pay that? When we checked, it was selling for $49.99 at Costco or Staples. Some vendors on Amazon.com charge just $41 (and usually with no sales tax or shipping charge). The online version from TurboTax with a state return is $36.95.
But if you have a brokerage or mutual fund account, check with your provider. At Vanguard, downloadable TurboTax Deluxe with a state return is free to Flagship Services and Asset Management Services Clients. Fidelity and TD Ameritrade also offer discounts to customers.
The Internal Revenue Service, which saves money every time a taxpayer files electronically rather than on hard paper, promotes a program called Free File Alliance that offers free tax prep computing from 19 providers. The main requirement is that the taxpayer has an adjusted gross income of $58,000 or less. Good candidates for free prep and filing include anyone who is able to file using the IRS Form 1040EZ.
Besides the income limitation, there are a number of other caveats. Many of the free tax prep vendors have age restrictions. Not every one operates in every state. If you need a particularly obscure form, you may be out of luck. Many, but not all, of the Free File Alliance participants will charge you to do a state tax return. Read the fine print.
Whatever your choice, keep good records of whatever you shell out for tax prep. Such costs are deductible--but with two catches. One, you can only benefit if you itemize and your unreimbursed employee expenses and certain other miscellaneous items (including the tax help) top 2% of your adjusted gross income. Two, you can't take the deduction for this year's costs until next year.