By Richard Barrington

Tax season will be here soon enough. For some folks, that means it’s time to pull out the reference books and devote a weekend to processing paperwork. For others, it means paying somebody else to crunch the numbers — preferably as cheaply as possible. Still others look for free options (such as Free File).

Over the past month, MoneyRates and Get Rich Slowly have run a joint poll asking how readers intend to prepare their next tax return. Of the more than 2200 respondents:

  • 62% plan to file the return themselves using software
  • 23% intend to pay somebody else to prepare the tax return
  • 10% will file their return themselves by hand
  • 5% have a friend or family member who will provide free help

If you’re considering a tax-preparation service, be prepared for a wide range of pricing — anywhere from free for a basic 1040EZ with no fancy pants features to $400-plus for a complex return with investments, business income, rental income, and so on.

Of course, there’s much more to picking a tax preparer than finding the lowest price. The more you know about what’s available, the more confident you’ll be about weighing the trade-off between cost and level of service. For many people, using the right tax prep service saves more money — sometimes a lot more — than the cost of the service!

Tax preparation: What’s at stake?

If you earn an average income, you’re likely to pay hundreds of thousands of dollars in income taxes over the course of your lifetime, whether you’re actively earning income, or withdrawing from your tax-deferred retirement fund. With numbers this big, getting your taxes right can make a huge difference to your finances.

To look at this another way, tax evasion is punishable by up to five years in prison and a $250,000 fine — and you’re responsible for your taxes, no matter who prepares them. In short, it’s very important to get the right tax-preparation help.

Tip: For quick reference, Five Cent Nickel has posted the 2010 federal income-tax brackets, 2011 federal income tax brackets, and 2012 federal income tax brackets.

How to choose a tax-preparation service

One of the basic choices you’ll face is whether to use an online service or visit a tax preparer for some in-person advice. In each case, costs vary greatly. But as you’ll see, online services are often a lot cheaper.

On the other hand, the personal touch can be valuable. A discussion of your situation, rather than simply filling in fields on a computer screen, can help you identify deductions you might not have thought of, or prompt you to make different tax-related decisions in future years.

An in-person tax preparer might be more helpful to you if the IRS comes calling with questions. Be advised, though, that only a lawyer, CPA, or Enrolled Agent (a tax advisor registered with the federal government) can represent you in front of the IRS on tax matters.

Before you start comparing prices, you should determine which level of service is right for your needs, so you can concentrate your search within that type of service.

When you start looking for tax-preparation help, you may be surprised by the variety of different firms out there, from nationally-known organizations to mom-and-pop outfits with names like “Bart’s Tax Service.” There’s nothing wrong with using Bart’s Tax Service, nor is a well-known name a guarantee of quality. In any case, check the service with the Better Business Bureau, and do some research online to see what comments other customers have made.

Free tax preparation services

Yes, it’s possible to get your taxes done for free — if you meet certain conditions:

  • Simple return. Several online options, and even a couple of in-person services, offer free tax preparation of federal returns. These free services typically limit you to Form 1040-EZ or Form 1040 with no itemized deductions, interest income, or other complications.
  • Income limits. Some free services require your adjusted gross income (AGI) to be below a certain level.
  • D.I.Y. Another free option is to do your taxes yourself. The IRS website offers the same fillable forms and step-by-step instructions used by most tax-prep services. If you file state income tax, you’ll need the appropriate state forms and instructions from your state treasury department or equivalent.

Getting a state return done in conjunction with a free federal return starts at $8 to $40 online, and around $40 in person.

Online tax preparation software

Online tax-preparation software assists you in completing and submitting the necessary forms. Intuit’s TurboTax, probably the best-known software package, starts at $29.95 for the basic federal return, plus $39.95 for the state return, plus an additional $19.95 to e-file that state return.

OnePriceTaxes also starts at $29.95 for the basic federal return, but includes an e-filed state return at no additional charge. And TaxACT, from 2nd Story Software, lets you file a simple 1040 for free, but charges $14.95 for the state return, plus $7.95 to e-file the state return.

Software Download – Lowest Advertised Cost
Product (Company Name) Version Federal 1040
Simple Price
At Home ™ (H&R Block ) Basic $19.95 $36.95 $19.95
OnePriceTaxes (AFJC Corp) Tax Software 2010 $29.95 - -
Tax Act (2nd Story Software) Free $0.00 $14.95 $7.95
TurboTax ® (Intuit) Basic $29.95 $39.95 $19.95
1. Prices shown are lowest online advertised price as of March 11, 2011.
2. Most “Free” services are limited to customers with a certain tax situation.
3. Information is provided for general guidance. Contact provider or visit official website for specific details.

Online tax preparation services

There are many online services that will collect your information to generate and file the necessary tax forms. Be certain to use a secure site to enter your information. (How can you tell if a site is secure? Look for a web address beginning with “https:” and a lock icon or similar in your task bar.)

Most online services that charge for the basic federal tax return charge less for the additional state tax return, and most offer e-filing for free or for a modest additional charge.

Here’s what you can expect to pay:

  • Basic online services. If your tax picture is extremely simple, the cost ranges from $8 to $30 to prepare and e-file a bare-bones federal return. Adding a state return costs $8 to $34.
  • Deluxe online services. If you’re in a more typical tax situation, you may itemize deductions and you may have interest and dividend income. Online deluxe services range from $10 to $40 for federal returns, plus $15 to $40 for state returns.
  • Premium online services. This level of service is for taxpayers with complex tax situations, such as business income, self-employment income, or income from rental property. Online premium services range from $20 to $70 for federal returns, plus anywhere from free to $40 for state returns. A few premium services, such as Premium ($49.95 federal, $29.95 state) will bundle a business tax return along with your personal tax return.

The extra cost of a state return drops as the complexity and cost of the federal return increases, because in general, as the federal return becomes more complex, less additional work is required for the state return.

Online Tax Preparation – Lowest Advertised Cost
Product (Company Name) Version Federal 1040 Simple Price State
e-File (HBS Financial Group Ltd) Simple $0.00 $29.95 $0.00
1040Now Free File $0.00 $17.95 -
123EasyTax Federal Tax Return $0.00 $14.95 $0.00
At Home ™ (H&R Block ) Free $0.00 $27.95 $0.00
CitizenTax (Smokey Software, Inc) - $18.88 $19.99 $0.00
CompleteTax (CCH) Basic $0.00 $29.99 $0.00 Free Federal $0.00 $19.95 $0.00 Free Federal Tax Return $0.00 $22.95 $0.00
eSmart Tax (Liberty Tax) Basic $0.00 $19.95 $0.00 Free $0.00 $29.95 - Basic Return Package $29.95 $20.00 $20.00 Free Federal
$0.00 - - Free Tax $0.00 $33.50 $0.00 Free federal tax return $0.00 $39.95 $0.00
FreeTaxUSA (Tax Hawk, Inc) Free Edition $0.00 $9.95 $0.00
I-CAN! FreeFile
(Legal Aid Society of Orange County)
Free File $0.00 $0.00 $0.00
Jackson Hewitt Basic $0.00 $29.95 -
OLT OnLine Taxes 1040EZ Simple $7.95 $7.95 $0.00
OnePriceTaxes (AFJC Corp) Federal and/or State Taxes $7.95 $7.95 $0.00
OnlineTaxPros Free File $0.00 $14.95 -
RapidTax (Rapid Filing Services LLC) Basic Package $9.99 $19.99 $0.00
Tax ACT (2nd Story Software) Free Edition $0.00 $14.95 $7.95
Taxbrain (Petz Enterprises, Inc) 1040EZ Tax Package $14.95 $29.95 -
TaxSlayer Free Edition $0.00 $14.90 -
TaxHawk Federal Tax Return $0.00 $0.00 $0.00
TaxSimple Basic $0.00 $24.95 -
TurboTax ® (Intuit) Free Edition $0.00 $27.95 $0.00
1. Prices shown are lowest online advertised price as of March 11, 2011.
2. Most “Free” services are limited to customers with a certain tax situation.
3. Information is provided for general guidance. Contact provider or visit official website for specific details.
Tip: Curious about income-tax rates in other states? Every year, the Tax Foundation publishes an Excel spreadsheet listing state income-tax rates.

In-person tax preparation services

Like online tax preparation services, the costs for in-person services vary depending on the complexity of your tax situation. Unlike online services, prices also vary widely with location. As of February 2011, base prices for in-person federal returns in the interior of the U.S. (Reno or Little Rock, for example) range from free to about $40, plus up to an additional $40 for a state return. But if you live in Los Angeles or Manhattan, expect to pay anywhere from $100 to $400+, plus up to another $40 for the state return.

Some H&R Block walk-in locations will prepare and file your federal 1040 form for free if you meet requirements and also file (and pay for) a state return.

Professional Tax Preparer – Range of Quoted Costs
Company Type Manhattan Little Rock Reno Los Angeles
H&R Block Federal
$0 – $39
$0 – $99
Jackson Hewitt Federal
$38 – $79
Liberty Tax Federal
$50 – $400+
Individual Tax Preparer Federal
$120 – $150
1. Prices shown were obtained through telephone interviews in February 2011.
2. Most “Free” services are limited to customers with a certain tax situation.
3. Information is provided for general guidance. Contact provider for specific details.
Tip: The IRS website is generally very useful, which may come as something of a surprise. For instance, here’s some advice containing tips for choosing a tax preparer.

State tax returns

If you live and work in Alaska, Florida, Nevada, South Dakota, Texas, Washington or Wyoming, congratulations — you don’t have to worry about state taxes.

Otherwise, you’ll probably have to file a state tax return. (And if you’re lucky enough to live in New York City or certain Ohio cities, you’ll also file a city personal income tax return with the applicable state.)

If you had income from multiple states, you may be required to file in more than one state, and this will likely cost you additional tax preparation fees for each state.

The takeaway

As a general rule, online tax preparation makes the most sense for relatively simple tax returns. You may benefit from in-person advice for more complex situations. However, that in-person advice is only as good as the qualifications of the person giving it. Here are some things to look for:

  • Professional designations. A CPA, tax attorney, or Enrolled Agent is a plus.
  • Full vs. part-time. Many tax preparers work seasonally, but people with complex tax situations often need advice throughout the year.
  • Audit experience. Some successful IRS audit experience can be a plus; multiple instances of audits that went against the taxpayer should be a red flag.

What’s the bottom line? Perhaps the most important decision in choosing tax-preparation help is fitting the service to your needs. Depending on your situation, free advice can be a tremendous bargain — or it could be the most costly mistake you’ve ever made. Know your tax situation, and get appropriate help if you need it.

OOPS! Due to an error in the data source, quotes for the “Individual Tax Preparer” row in the last table were inadvertently labeled “CPA”. These were, in fact, prices from individual tax preparers who were not necessarily CPAs.

Note: Taxes are a dull topic, no question. But they’re important. For more info on taxes, check out these past GRS articles: Red Flags That Lead to IRS Audits, How to Cheat on Your Taxes (Legally!), and How to Check the Status of Your Tax Refund. Also when it comes time to pay taxes, Index Credit Cards provides some guidance in the article You Can Pay Your Taxes by Credit Card; Here’s Why You Shouldn’t.

GRS is committed to helping our readers save and achieve their financial goals. Savings interest rates may be low, but that is all the more reason to shop for the best rate. Find the highest savings interest rates and CD rates from Synchrony Bank, Ally Bank, GE Capital Bank, and more.