Electronic Tax Filing Makes $ense

If you've spent time and money preparing your tax return, it might feel unsatisfying to send off your work to the IRS with a click of a mouse rather than a postage stamp.

But The Early Show financial adviser Ray Martin says there are lots of good reasons to give e-filing a try.

If you are expecting a tax refund this year, then getting your refund faster and with the least hassle and lowest cost will be among your top priorities right about now.

A lot of other people have this in mind, too. According to IRS data on tax return filings, about 100 million people, or 74 percent of all tax filers, received refunds in 2005.

Tax filers in a hurry to get their refunds should prepare and file their tax returns electronically, over the Internet, and have their refunds directly deposited into their bank accounts. In fact, the average direct deposit refund received in 2005 was $2,544, which is not chump change.

Tax prep with software: Turbo Tax versus TaxCut
About half of all individuals choose to do-it-yourself when it comes to preparing and filing their taxes. Given the complexity of the tax forms and instructions and the ease of using tax prep software, it's a no-brainer to use tax preparation software to complete, review and file your tax return. While there are dozens of tax prep products available, the two most widely used, reviewed and recommended products are Intuit's TurboTax and H&R Block's TaxCut. Both are widely recommended — and if you have been using one of these programs, then stick with what you have; there is little reason to switch. But there are some differences between the two, so here is a quick excerpt from the many reviews and comparisons between the two:

Cost for federal, state and deduction tools:
TurboTax Deluxe: $39.95
TaxCut Premium: $29.95

e-filing cost for fed and one state return:
TurboTax Deluxe: $29.90
TaxCut Premium: $15.95

Mac computer version:
TurboTax Deluxe: Yes
TaxCut Premium: No

Import data from other sources:
TurboTax Deluxe: Better
TaxCut Premium: Good

Deduction help tools:
TurboTax Deluxe: Yes
TaxCut Premium: Yes

Live tax help:
TurboTax Deluxe: Yes
TaxCut Premium: Yes

Product upsell:
TurboTax Deluxe: A lot
TaxCut Premium: Not too much

For full disclosure, I have been a user of Turbo Tax for more than 15 years and I am enrolled to practice before the IRS, so I also have a lot of experience in preparing and filing tax returns with this program. Based on my personal experience with Turbo Tax, I would strongly recommend it, especially if you have many types of deductions, report income from a small business or investments, and you like to enter your information directly into the forms on the screen. Also, if you use a Macintosh computer, TurboTax is your only option — and if you want to import your data directly from a large list of payroll providers, this program provides a large list of options. Also available is the option to swap some of your refund for gift cards from over 50 retailers at 10 percent to 50 percent off the face value – but a $30 fee applies, so it's not worth it unless you buy a larger amount.

However, based on the feature comparisons above, TaxCut does have several advantages that may be important to many people. First, TaxCut costs less for preparing and e-filing a federal and state income tax return. Also, if you are new to the do-it-yourself tax prep scene, or you have some new tax issues to deal with, you can try out TaxCut, and if you find that you need the assistance of a pro, you can walk into one of the thousands of H&R Block tax prep centers, where they will review, prep and file your return for you, crediting what you paid for TaxCut against the tax prep fee, which last year averaged about $150.

Both TurboTax and TaxCut offer an online version of tax prep software for less money, but many people would rather just prepare and save their tax returns on their own computers, instead of storing them out in cyberspace.

e-Filing Your Tax Return
The benefits of e-filing your tax return are faster refunds, secure processing and acknowledgement from the IRS that your return has been received within 48 hours. If you use a tax-preparation computer program from a well-known provider, the preparation and filing process is straightforward and easy. The e-filing process allows individuals to electronically "sign" their returns using a five-digit self-selected PIN and information from their prior year's return. The most comforting element of this part of the process is that an electronic notice is generated, with includes an IRS Document Control Number, or DCN, which provides official proof that the return is filed and accepted by the IRS — no more rushing to the post office to mail the forms return receipt requested. In 2005, more than half of all individual tax returns, or 68 million tax returns, were e-filed.

Free File
The IRS' File program, which is in its fourth year, is a public-private industry initiative to provide electronic tax preparation and filing for average to lower income taxpayers. Eligibility requirements have changed and largely apply to taxpayers with adjusted gross income of $50,000 or less. This limit is set so that approximately 70 percent of individual tax filers should qualify for the Free File program. This means that over 92 million taxpayers may be eligible to prepare and file their returns over the Internet for free.

For the millions of people who do qualify to use Free File, most will not use it because many people just don't know about it. Free file also combines tax prep and computers, two things that a lot of people find intimidating. Other drawbacks include having to call the IRS for tax questions and using an email address for technical help questions, not a popular option for most people. Last year about 5.14 million taxpayers, about 4 percent of those who qualified for this program, used Free File. But this option is gaining popularity. The total number of individuals who used Free File surged 47 percent over 2004 levels. To find out about the Free File program and to learn if you qualify, log onto the IRS Web site and click on the Free File banner on the home page — you can't miss it.

What if you use a tax professional – should they e-file your tax return?
More than half of all tax returns are prepared and filed by professional tax preparers. Given the benefits of e-filing, it should follow that tax pros are also getting on board with this process. In fact, last year, more than 48 million tax returns, or 70 percent, were e-filed through a paid preparer. If your tax pro is old-fashioned and insists that you file a paper tax return, try to push for e-file, especially if you want the benefits of secure proof of filing and a faster refund.

Even if you don't expect a refund, you can still e-file now and schedule your tax payment to be automatically debited from your bank account or charged to a credit card on April 15. All taxpayers who e-file will receive an electronic confirmation of receipt of the tax return from the IRS. Most states also participate in the e-file program.

Where Is My Refund?
Log on to the official IRS Web site and click on the "Where's My Refund?" link. That takes you to the tool the IRS provides to get a refund status update. The information required on the Web site is your Social Security number, filing status (single, married filing jointly, etc.) and the expected refund amount. After providing this information, the Web site will state that the tax return is "being processed" and when the refund should be received.

Direct Deposit Your Refund
The IRS is also promoting direct deposit for tax refunds as a way to speed up getting your tax refund even more. That message is catching on because most tax refunds were directly deposited in 2005.

Skeptics who think the direct deposit program is some sinister IRS scheme to find its way into your bank account need to get over it. When you deposit a paper refund check, the IRS will receive a copy of the cancelled check with your bank's clearing information on it. So neither way allows you to "hide" from the IRS.

However, be aware that direct deposit can get tricky when you choose to direct the deposit into an individually owned bank account for a refund from a joint tax return. Some financial institutions will reject such a deposit, which will delay the time to get your refund. To avoid this, make sure you check with your bank to ensure it will accept the deposit of a refund from a joint tax return.

A Loan You Can Do Without
Some tax preparers will offer a check on the spot in the amount of your refund, less a fee. I have never been a fan of these "refund anticipation" loans. To make the point, I called a local office of a national tax preparer company and spoke to a representative. She kindly explained that they could prepare and e-file my tax return and have my refund deposited directly into my bank account, which I should receive in about two weeks. When I pressed her for a way to get the refund money immediately, she offered their instant refund loan with a cost of an additional $115 for a refund of about $2,500.

If your refund is in that range (the majority of tax refunds are), this fee represents a 4.6 percent interest rate for a two-week loan of $2,500. Annualized, this is an interest rate of about 120 percent!

If you can wait to get your refund in two weeks, you can do so using e-file and direct deposit with no added fees or interest charges.