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Tax Preparation Software Buying Guide

About 70 percent of taxpayers (about 100 million people) qualify for the federal program, according to the IRS. You can skirt the restrictions and often get more functions, such as the ability to import a prior yearís information, by accessing similar free tax software directly through the websites of big companies including H&R Block and TaxAct.

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There you'll be subject to continual upselling; however, an upgrade may prove necessary depending on your circumstances. The free editions accommodate only the simplest and most basic federal tax returns. Anything more than that requires a more expensive software package, and adding a state return to the mix adds another charge. That's one potential advantage of using the Free File software available through the IRS: Some companies offer free filing for participating states or charge lower fees for state returns. On the other hand, some companies donít allow residents of select states to use their Free File software or allow only filers within certain age or income ranges.

Among all the free tax software out there, we zeroed in on several recommended providers that can help you prepare and e-file relatively straightforward federal returns for free and state returns for less than $20. High on our list is TaxAct, which offers both a free version and a Free File edition available to taxpayers 18 to 57 with adjusted gross income up to $52,000. Either way, a state return costs $14.95. FreeTaxUSA stands out for including broad functionality even in its free software. The company charges $12.95 for state returns, regardless whether taxpayers use the Free File program or the commercial version, which hawks additional services. Along with TaxAct and FreeTaxUSA, eSmart Tax earns positive reviews online. Users of eSmart Tax who are 54 or younger and earn $58,000 or less can save on state returns by accessing the software through the IRS. Preparing and e-filing state tax returns with the Free File edition, or with the free Basic edition on the company's website, costs $19.95. Free tax software from TaxSlayer, on the other hand, carries a higher fee than the others for state returns ($23.90) and has more limited capabilities. For example, it supports only 1040EZ forms for free federal returns. The Free File edition is available only to users with adjusted gross income of $30,000 or less, but does come with a lower charge of $12.95 for state filing.

Market leaders H&R Block and TurboTax exceed our price range with high state fees for users of their federal free editions (starting at $27.99 and $29.99 respectively). However, both are members of the Free File Alliance and offer discounted or even free filing for states that participate in the State Free File program. That means qualifying consumers in many states can use one of the big players' products completely free. H&R Block Free File ($14.99 for states without Free File) is available to taxpayers 52 or younger with adjusted gross income of $58,000 or less. The TurboTax Freedom Edition ($14.99 for states that don't qualify) is available only to taxpayers with adjusted gross income of $30,000 or less, active military earning $58,000 or less, and those who are eligible for the Earned Income Tax Credit.

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Before deciding, consider the complexity of your tax situation and your comfort with the entire process. While free tax software meets the needs of many filers, companies make the bulk of their profits on upgrades (and you'll get lots of prompts to make that choice, especially if you don't use a Free File edition). Depending on the provider, if you are self-employed or own a small business, earn rental income, got married or had a child, gained or lost money trading stocks, bought or sold a home, or dealt with any number of other complicating factors last year, you may have no choice but to upgrade to more expensive tax preparation software (or turn to a tax professional). The upside is access to more features and guidance. Many companies simply deduct the cost of the software from your refund.

Most companies don't require any upfront payment for online tax preparation software, so you can try out a product or two before making any financial commitments. This will give you an idea what forms and schedules your tax situation demands and which version suits your needs. The flip side is that some frustrated taxpayers fill in all their information only to wind up with an unexpectedly high bill at the end and opt to redo all the work with cheaper tax preparation software.

Of course, the entire process will proceed more quickly if you've already assembled all the relevant information, including your W-2, any 1099s you may have received, and a copy of last year's tax return. By filing electronically, you should be able to save money, minimize errors, and receive your refund in a matter of days. If you insist on filing a hard copy of your return, the free tax software providers mentioned here let you print and mail at no charge, which can save you the cost of state e-filing. One repeat customer of FreeTaxUSA relies on the free printing option as a precaution against identity theft. Just make sure you read the website carefully, because not all companies provide this option.

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by Louis DeNicola (Google+ Profile)

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Filed in: Banking, Bills, Finance,
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