First, it's important to recognize that all major tax preparation software is now available online, which greatly simplifies the process. You don't need to purchase CDs or even download software. All you have to do is visit the tax preparation website and enter information into your browser using easy, step-by-step instructions. You can even fill out tax forms using your smartphone or tablet.
One of the best reasons to use tax preparation software is to save money. The IRS partners with 14 tax preparation websites to offer free online federal tax return preparation and free e-filing for taxpayers with income below $60,000. Visit the IRS Free File website to learn more.
Other commercial tax preparation websites also advertise free federal tax returns, but be sure to read the fine print. Some services let you start your federal return for free, but charge a fee to print or e-file. Free federal returns are often limited to 1040EZ and 1040A returns, since those are simpler to prepare. If you want to itemize deductions or file a Schedule C for a small business, expect to pay between $13 and $75 for the federal return.
What about state income tax returns? In some cases, you will end up paying a small fee to prepare and file state tax returns online. However, in other states, you may qualify for a free state return if you make below certain income thresholds.
Next to price, the second-best reason to use tax preparation software is convenience and speed. As with online shopping, it's simply easier and faster to complete tax forms online. Tax software is designed for tax beginners. The programs will tell you what forms you need to assemble, or even transfer them straight from your employer. You don't need to know what percentage of health care expenses are deductible or the latest changes to the tax code. The online programs walk you through each step -- income, deductions, credits, -- and do all of the calculations for you.
Bottom line: If your tax situation is relatively simple -- you meet the criteria for filing a 1040EZ or a 1040A -- and you're comfortable online, it makes perfect sense to use a tax preparation website.
Now let's look at the costs and benefits of going with a professional tax preparer.