Online Tax Preparation and Filing FAQ
Frequently Asked Questions about Online Tax Preparation and Filing
- What is e-filing?
- What is online tax preparation and how does it work?
- What is an audit, and do I need audit protection?
- What is the difference between a 1040 and a 1040EZ?
- Should I e-file state taxes as well as federal taxes?
- How quickly can I get my refund?
- Who can I count as a dependent?
- Can I import financial data from Quicken or similar software into the web based tax preparation tools?
- I'm self-employed. Will an online tax preparation service be adequate for my tax needs?
- How did NextAdvisor.com review these online tax preparation services?
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E-filing refers to filing your taxes online, rather than through the mail. In 1986, the IRS launched their e-file program in order to make the process of filing taxes cheaper and easier for consumers. Filing taxes electronically substantially reduces errors. E-filing is also less time consuming, and results in a faster refund. If you e-file and you owe the government money, you can either send a check in the mail, pay by debiting your checking or savings account, or pay with a credit card. When you send a return by mail, you must pay extra for certified mail with a return receipt if you wish to confirm that the IRS has received your return. When you e-file, the IRS notifies you by email within 48 hours to confirm that your return has been received. Preparing your taxes online is secure, easy and much cheaper than using an accountant. In most states, you can e-file your state return at the same time that you file your federal tax return online.
Online tax preparation services provide web based tax preparation tools that walk you through each step of the tax preparation process. Most will help you identify deductions for which you are eligible, which helps increase your tax return or decrease the size of your tax bill. Online tax preparation services also help you avoid costly errors, and some will reimburse you for any penalties and interest charges that are caused by inaccurate calculations. Some online tax preparation services also offer audit protection.
If the IRS finds inconsistencies between your tax filing and their records of your income, you may be audited. This means that the government will carefully examine your finances in order to determine whether you underpaid when you initially filed your taxes. If the IRS finds that you do owe additional money, you may potentially have to pay penalties and interest charges on top of the amount that you underpaid in the first place. A tax preparation service will help you avoid errors that could lead to an audit, and if you have audit protection, the tax preparation service will also help you prepare for and manage the entire audit experience. H&R Block, for example, can provide you with an H&R Block agent to represent you in the event of an audit. TurboTax tracks your audit risk, provides tips to reduce your chance of an audit, and give you step-by-step guidance on everything you need to know and do if the IRS contacts you.
The 1040EZ is the simplest tax form, and can only be used if your income is less than $100,000 per year and is entirely from wages, salary, tips, taxable grants or unemployment compensation, and your taxable interest is not over $1,500, and if you only take the standard deductions. You cannot use a 1040EZ if you plan to claim dependents. A 1040 allows you to itemize your deductions and declare dependents.
Most people are required to file a federal tax return. If your income is low enough, you may not need to file a federal tax return, but you might still want to, in order to be eligible for refunds or credits. If your financial situation is fairly straightforward, many online tax preparation services will help you e-file your federal return for free, and only charge for e-filing your state tax return. If you live in Alaska, Nevada, South Dakota, Texas, Washington, Wyoming or Florida, you are not subject to state income taxes. If you live in New Hampshire or Tennessee, you only need to pay a state tax on interest and dividend income. 37 states and Washington D.C. allow you to e-file your state return at the same time that you file your federal tax return. If you live in California, Maine, Massachusetts or Minnesota, you can still e-file your state taxes, but you must do it directly through your state's Department of Revenue website. If you have taxable income in New Hampshire or Tennessee, you may also e-file through your state's Department of Revenue website.
If you e-file and elect to receive your refund via direct deposit, you should have your refund within 2 weeks. If you e-file and choose to receive your refund through the mail, you should have it within 4 weeks. If you file your taxes through the mail, you should have your refund within 6 weeks from the date the IRS receives your return.
You can claim an exemption on your taxes for each of your dependents. Qualifying dependents can include your child, stepchild, foster child, sibling or step-sibling, or any of their children, such as your grandchild, for example. In order to qualify for an exemption, a dependent must be under 19 or be a full-time student under the age of 24. The dependent must live with you for at least 6 months a year, and must not provide more than half of his or her own support.
You can also count other relatives and full-time members of your household as dependents, if they are citizens or residents of the U.S. or residents of Canada or Mexico, if they did not file a joint income tax return with anyone else, if you provided over half of their support, and if they have less than $3,400 of income for the entire year. Relatives who can qualify as dependents without having lived in your home for the entire year include children, grandchildren, stepchildren, siblings, half siblings, step-siblings, parents, grandparents, great-grandparents, stepparents, aunts, uncles, nieces, nephews, fathers-in-law, mothers-in-law, sons-in-law, daughters-in-law, brothers-in-law or sisters-in-law.
Some online tax preparation services do allow you to import your financial data, while others require you to type or paste your financial information. TurboTax imports financial data from Quicken, QuickBooks and ItsDeductible Online 2008, as well as any program that creates .txf files. H&R Block will import data from Microsoft Money, Quicken and DeductionPro, as well as importing last year's tax return information from TaxCut or TurboTax. You can also import data from financial institutions, such as your bank, brokerage firm or payroll provider.
If your financial situation is very complex, you may benefit from the assistance of an accountant. But most online tax preparation services do provide additional tools to help the self-employed ensure that they are filing their taxes correctly, as well as providing information about allowable business deductions. H&R Block's Premium package provides tax guidance for the self-employed, and their Home & Business package is designed for consumers who need to prepare corporate, S-corporation, partnership, LLC and payroll returns. TurboTax recommends their Home & Business software for consumers who are self-employed, who earn income from a side job, or who earn income from a non-incorporated home business. For small business owners who are incorporated, or who run a partnership or multiple-member LLC, TurboTax recommends TurboTax Business as opposed to Home & Business. TaxSimple also provides additional tools for self-employed consumers and small business owners, but we do not recommend these services.
We thoroughly researched all the tax preparation services in the category. We looked at their state and federal filing offerings for automated deduction tools, online (real-time) support and audit protection availability. We even used one of the services (TaxAct) to file our own taxes. In addition, we researched each provider by reading pertinent news and third-party research reports.
After our initial tests, we continue to monitor the services and update our reviews as situations change. We also monitor the providers' sites for any service changes or specials.
We only include online tax preparation providers on our site that we believe offer a good value proposition. If there is a provider you know of that is not on our site, you can be fairly certain we did not rate that provider good enough to include in our comparison. If you think we are missing a quality online tax preparation provider or have any other suggestions or comments, please visit our contact us page.
Disclosure: NextAdvisor.com is a consumer information site that offers free, independent reviews and ratings of online services. We receive advertising revenue from most of the services we review. Our editors thoroughly research and whenever possible test each service we review and offer their honest opinions about each one. We are independently owned and operated and all opinions expressed on this site are our own.