When major tax-preparation brands TurboTax, made by Intuit, and H&R Block say they’ll do income tax returns at no cost, that only applies to certain people.
Live a straightforward financial life with few complications or income sources? The two major players in mass-market tax prep say they will do your return for free. But if your tax return has just a few financial wrinkles, TurboTax and H&R Block will charge you money, according to the fine print.
For example, Intuit’s
INTU,
TurboTax and H&R Block
HRB,
say users have to pay for tax returns that will report sales of stock and cryptocurrency. The same is true if the taxpayer has income to report from gig work.
There can also be extra costs for certain tax-prep services. Want some AI-infused help from H&R Block? The price starts at $35 for a federal return and $37 per state return.
TurboTax says its own AI-powered tax help is available on all of its free products this tax filing season. And its “TurboTax Live Assisted Basic,” which lets taxpayers ask questions of tax pros in real time, is free through March 31, according to a spokeswoman. But only customers who have “limited credits” — meaning they have a simple tax return and they’re claiming the earned income tax credit or child tax credit, but no other tax credits — can take advantage of that offer.
Prices on tax software are a prickly topic this tax season. Last week, the Federal Trade Commission ruled that TurboTax used deceptive advertising for years when it promoted its free services without clearly explaining that many taxpayers weren’t eligible for its free option.
Intuit said it will appeal the FTC’s “deeply flawed decision” and insisted to regulators that its disclosures were sufficient. TurboTax now says around 37% of tax filers qualify for its free edition, and some of its current TV ads highlight this.
Meanwhile, Intuit sued H&R Block, alleging that H&R Block’s advertising misleads potential customers about TurboTax’s prices and how the rivals compare. H&R Block countered in court papers that Intuit is “aggressively seeking to avoid legitimate comparative price advertising.” Both companies declined to comment on the lawsuit.
Overall, it’s “incredibly challenging” for people to understand whether free tax-preparation offers really apply to them, said Nina Olson, the former IRS national taxpayer advocate.
The “up-sell problem” — where customers start a tax return thinking it’s going to be free, but then the tax-prep company ends up charging them — has been an issue for at least two decades, and it’s not limited to any one company, said Olson, who retired from the IRS to start the nonprofit Center for Taxpayer Rights.
Olson is fine with tax-prep companies only providing free tax prep for “plain vanilla” returns. Taxes are complicated, she noted. But “transparency is a wonderful thing, and that’s what we’ve got to get better at, so consumers are aware what they are signing up for,” Olson said.
Both TurboTax and H&R Block say they are upfront with consumers. Here’s a MarketWatch breakdown on who qualifies for the free editions of TurboTax and H&R Block, and tips on other ways to file your taxes for free, including IRS Direct File, IRS Free File and other free programs.
Who is eligible for TurboTax’s free edition?
The free version of TurboTax is available to people who use a Form 1040 (the most basic type of income-tax form) to file their taxes, and who only file “limited credits,” meaning the earned income tax credit and the child tax credit, but no others.
TurboTax says its free edition can handle wages paid by an employer and reported on a W2. It can also support income from interest and dividends reported on a 1099-INT or a 1099-DIV that is below $1,500. (Sums above that amount require a Schedule B and the free edition will not cover that.)
It can also handle the taxes connected to money coming from a retirement account, like a 401(K), or a pension, a spokeswoman said.
TurboTax’s free edition applies the standard deduction, which most taxpayers use instead of itemizing their deductions. It also applies the student-loan interest deduction.
But the free version will not support income from unemployment benefits, capital gains taxes, business income or self-employment taxes. It’s also not built for the taxes on money paid to an independent contractor, which generally comes on a 1099-NEC.
The free edition has no income maximum and it covers both federal and state returns, according to an Intuit spokeswoman. Credit Karma, which is also owned by Intuit, has a free offer for people who did not use TurboTax last year and it can handle more tax complexity, the spokeswoman noted.
More than 10 million people file their taxes for free with TurboTax each year, Intuit said in court papers and elsewhere.
Who is eligible for H&R Block’s free edition?
Similar to TurboTax, H&R Block’s free version is mostly limited to taxpayers with relatively simple returns filed on a 1040 — but it does have some more capabilities than TurboTax’s free product.
A federal and state return filed with H&R Block Online can be done for free, according to the company. The free return supports income from W2 wages, Social Security income, unemployment benefits and interest and dividends under $1,500. Normal retirement distributions pulled from accounts like a 401(k) may fit the free version, depending on a taxpayer’s circumstances.
It handles the child tax credit and the earned income tax credit. It also applies the standard deduction, student-loan interest deduction and education credits. It can also handle the American Opportunity Credit and Lifetime Learning Credit, which are linked to an eligible person’s educational pursuits.
There’s also no income limit on the H&R Block free offering, so long as the taxpayer sticks with the applicable credits and deductions.
How can I file my taxes for free with IRS Direct File?
The IRS Direct File platform, the government-run version of free tax-prep software, is intentionally starting small, IRS officials said. It will be available to residents in 12 states starting around mid-March. Similar to the TurboTax and H&R Block free versions, only certain taxpayers are eligible to use Direct File.
It can handle income reported on W-2 job wages, unemployment benefits and Social Security payments. It can also handle interest income up to $1,500. It applies the child tax credit, the earned income tax credit and deductions for student-loan interest and $300 out-of-pocket expenses for teachers.
But Direct File cannot process the tax credit for households with health insurance through the Affordable Care Act’s exchange. It also can’t handle provisions like the “saver’s credit” for retirement contributions, independent contractor money or capital gains.
The 12 states where Direct File will be available are: Arizona, California, Florida, Nevada, New Hampshire, New York, Massachusetts, South Dakota, Tennessee, Texas, Washington state and Wyoming.
Another option for free tax prep: IRS Free File
While taxpayers will have to wait for the IRS Direct File platform, there’s another free option that’s ready to use now: the IRS Free File program.
To qualify for IRS Free File this year, households can make up to $79,000, which is roughly 70% of households.
The Free File program is an IRS partnership with some tax software companies — but not TurboTax and H&R Block. The program has run for two decades yet few taxpayers take advantage of it. “It’s a good product. We just need more people to know about it,” said Tim Hugo, executive director of the Free File Alliance.
This year, the program has eight tax software providers and some offer free state returns in addition to free federal returns. One caveat: Some of the providers cap the income limits for their Free File offerings at levels under $79,000.
The eight providers are: 1040Now; 1040.com; ezTaxReturn.com; FileYourTaxes.com; On-Line Taxes; TaxAct; FreeTaxUSA; and TaxSlayer.
“Free File can provide a multitude of services,” Hugo said. “You can have very complicated returns,” he added. Free File providers offer the same customer service for their free customers and their paying customers, Hugo said.
The IRS has a list of the tax scenarios that Free File providers can handle. It includes capital gains and losses, self-employment taxes, and child and dependent care expenses — all of which aren’t included in the free versions of TurboTax and H&R Block, or IRS Direct File.
Through May 2023, the IRS took in 2.7 million Free File returns, a 10% decrease year over year, according to a Treasury Department watchdog.
Other ways to get free tax-prep help
There are other IRS-backed free tax-preparation programs. They include the Volunteer Income Tax Assistance program and the Tax Counseling for the Elderly program.
Income thresholds are generally around $64,000 for VITA. The TCE program is geared at taxpayers age 60 and above. Here’s a link where to find nearby organizations participating in the VITA and TCE programs.
The people doing these tax returns are IRS-certified volunteers. The hours and services might be limited, the IRS says. But these volunteers can do basic tax returns, along with IRA distributions, pension income, simple forms of capital gains, self-employment income and some itemized deductions.
This story originally appeared on Marketwatch
