Tax Prep Costs: How Much Will It Cost to Get Your Taxes Done?

This is a guest post from Richard Barrington, a freelance writer and novelist who spent over 20 years as an investment industry executive. Barrington is a regular contributor at MoneyRates. Previously at GRS, he shared how to find the right CD or money-market account and tips for sound saving and investing.

Note: See the 2012 Version of this article at 2012 Tax Prep Costs.

Tax season is in full swing income tax bracket. In fact, income tax returns are due in just over a month. (This year, the IRS has moved the tax deadline from April 15th to April 18th.) 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). And, of course, many people have already filed and received their tax refund!

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.

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.

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 eTax.com 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.

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.

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.

GRS is committed to helping our readers save and achieve your financial goals.Savings interest rates may be low, but that’s all the more reason to shop for the best rate.Find the highest savings interest rate from Ally Bank, Capital One 360, Everbank, and more.

This article is about Shopping, Taxes