Marcy Lyon of San Francisco has been filing her income taxes online since 1999, starting early and usually before her March 13 birthday. She says filing online is a breeze.
Lyon is not alone. In 2006, more than half of all taxpayers, or about 73.3 million people, filed their taxes electronically, either filing the forms themselves or using a professional tax preparer. And the number of online filers is increasing, rising 3 percent in 2006 from the previous year, according to the Internal Revenue Service.
If you haven’t jumped on the bandwagon already, this year might be a good time to start. Not only did late legislation bring about some tax law changes that aren’t reflected on the 2006 paper forms, which had already been printed, but also experts say online filing is easier, safer and less prone to error than paper filing.
There are four ways to file electronically: You can pay a tax professional to do it; you can buy the software, which costs around $20 or more, and file it yourself; you can file on a software company’s Internet site for a fee (typically a bit less than buying software); or, if you have adjusted gross income of $52,000 or less, you can file your return for free, courtesy of the IRS, using its Free File system. The system can now be accessed from the IRS home page, http://www.irs.gov/.
In 2005, slightly more than 61 percent of all individual tax returns were prepared by a tax professional, according to the IRS, and the remaining filers fended for themselves.
“For the average taxpayer, filing online is the easiest, fastest and most accurate way to do it,” said IRS spokesman Jesse Weller. When you file online, the software prompts you to enter the correct information as you go through the process and alerts you to potential deductions and other opportunities.
“It (the software) walks you through and asks you questions as you fill in the blanks,” said Lyon, who has used Mountain View-based Intuit’s TurboTax software for years. “It offers several levels of resources and information as you go.”
TurboTax (http://www.turbotax.com/) is one of the most popular online tax programs on the market, although several others are available, including H&R Block TaxCut Premium (http://www.taxcut.com/). The programs are loaded with the latest tax code information, as well as sample forms, and users need merely punch their information into the template. The programs are readily available at office supply stores or venues where software programs are sold.
TurboTax, for instance, will highlight items the IRS frequently audits, such as claiming deductions for a home office, and point them out to the user.
“It will also check for mistakes and things you left out,” Lyon said.
During the years, Lyon has evolved a ritual for her online filing. “It begins with my husband saying, ‘Have you started the income taxes yet?’ And I say, ‘I’m waiting for the W-2s.’ They come in by Jan. 31. TurboTax has already sent me two reminder e-mails about it. They send one at the end of the year so you can make charitable contributions to optimize your tax bracket.”
As the various forms and bits of tax information roll in, Lyon enters them immediately into the program.
“This way, you don’t have to worry where all those little pieces are,” she said. “They’re in the computer.”
Just like an Excel spreadsheet, every time a new bit of information is entered, the system adds or subtracts and adjusts the totals.
“I can’t imagine doing it by hand and sitting up there adding up the numbers,” Lyon said.
Because Lyon used TurboTax last year, she can import all the previous information into this year’s forms. This lessens the possibility of error.
Similarly, Lyon said, “you do your federal income tax first and it will read a lot of information into the state. It will point out the differences and ask you questions.”
Lyon said taxpayers can still talk with someone if they need help with the software, though it costs extra.
When you finish your state return, Lyon said, “(TurboTax) asks you if you want your refund as a direct deposit and gets your bank information if you do. Then it prompts you to see if you want to file your income tax online, and you pay TurboTax for its services using your credit card.”
Software programs help lessen the probability of human error, said Weller, the IRS spokesman.
“E-filing provides more than 99 percent accuracy for your return,” he said. “The paper accuracy rate is about 80 percent.”
Weller said many employers are now making W-2 earnings statements available online, allowing users to easily copy and paste the information into software programs.
This year, filing online has a special advantage.
Three tax breaks that became law Dec. 20 were passed after the paper forms had been printed, so the forms don’t include lines for the new deductions.
“People who file using paper returns … will have to write (these deductions) in on special lines,” Weller said. “People who file electronically will have these automatically. The software is updated to make sure you claim the proper amount on the proper lines.”
The three items are a deduction for college tuition and related fees that had expired in late 2005; an educator expense adjustment allowing teachers and administrators to deduct as much as $250 for out-of-pocket classroom expenses; and a third tax break that is unlikely to affect many Californians, who typically pay more in state income tax than in sales tax, Weller said.
Online filing is secure, Weller said.
“The IRS has never had a breach with online filings, and there have been millions filed over the years,” he said. “The latest encryption and security features are used by the electronic return originators, all the companies that provide the software.”
Another advantage to online filing is that paper returns can get lost in the mail. Every year, Weller said, a “large number of refunds” are either lost in the mail or returned to the IRS. Filers who expect a refund are encouraged to use the direct deposit option, and the money will be deposited electronically into the bank account they specify.
Lyon said there is one pitfall to electronic filing, however: “The important thing is to remember your user name and password, not just for the year but from year to year,” she said. Obviously, it’s important to remember your password so you don’t get locked out of your own income tax, and also so you can bring it forward from the previous year.
Although Lyon swears by TurboTax, that doesn’t mean it’s the right choice for everyone.
In choosing the right tax software for you, start by evaluating your needs. Are you a simple, 1040-EZ kind of person, or did you have seven jobs and a slew of child-support payments last year? Better look for a program that provides detailed explanations.
If you do your own taxes and are simply looking for someone to check your math, look for a package that lets you easily skip over sections.
Be sure the software has an option that allows you to file online; not all software programs do. Also, make sure the program is compatible with your operating system. Once you decide on what software to buy, shop around online to find the cheapest price.
Once you’re up and running, you may find that, like Lyon, you’ll never go back.
Lyon said she would never return to paper. “No way,” she said, before pausing.
“Well,” she added, “maybe if someone paid me to do it.”
Reach Janis Mara of the Oakland Tribune at jmara@angnewspapers.com.
Tax Tips
• It no longer takes months to get a refund from the IRS. If you file your federal tax return electronically, you could receive your refund in 10 days, and no later than three weeks. For tax returns filed through regular mail, the refund would take no more than six weeks.
• Households earning $52,000 or less can qualify for free IRS electronic filing. Just go to http://www.irs.gov/, click on the “e-file” icon, then click on the “free file” link.
• If you prefer to work with a tax preparer face to face, you can set up an appointment with an IRS volunteer at a network of free tax preparation sites around the state during tax season. They prepare returns for people whose household incomes are $39,000 or less. To find the nearest Volunteer Income Tax Assistance office, call 800-829-1040.
Source: McClatchy Newspapers Service