2020 was a year we’re all happy to see in the rearview mirror. The global COVID-19 pandemic triggered business shutdowns last March and put millions out of work. The economic impact on taxpayers was significant enough that the IRS extended 2019’s filing deadline to July 15, 2020. Things are arguably no less grim this year, but you’ll need to file your taxes 2020 taxes (which what you’re filing in 2021) by the usual April 15 deadline, with e-filing opening on February 12. If you intend to wait as long as possible to file your taxes, check out our Tax Tips for Last-Minute E-Filers. But the tax filing services are open for business now, so you might as well get started!
There’s Never Been a Better Time to E-File Your Taxes
To their credit, tax preparation services are ready, despite the enormous challenges this year brought. In addition to having many employees suddenly switch to working from home, these companies have had to handle increased business from taxpayers who were used to walking into an office or retail location to get their 1040s completed and filed in person. Some will file manually using mailed-in paper forms they filled out themselves, but many are switching to paying their taxes with an online service such as those reviewed here. If you’ve never tried an online DIY tax solution, this is a good year to start, for three reasons.
First, many changes to US tax laws haven’t made the news because of more pressing topics. Second, preparing and filing online might even get you a bigger refund, since these sites are trained to dig deep for deductions. Finally, tax website developers continue to offer more ways to connect to tax professionals virtually so they can help you complete and file your return—or even take on the entire task for you.
The Best Tax Software Deals This Week*
*Deals are selected by our partner, TechBargains
We’ve all learned how to do things differently in 2020. So, if you’re still preparing your taxes manually, this might be a good year to move that operation online—especially if you’ve had to turn to self-employment or gig work to deal with a job loss. Every tax website company has at least one version that allows you to complete and file a complex Schedule C. In fact, the 2020 editions support all but the most obscure tax topics. So you can report on your 1099s in addition to W-2s, your unemployment, your new work expenses—practically any tax-related situation you faced this year.
If you’ve felt lost using a web-based tax solution in the past, consider giving it another try this year. Online personal tax preparation websites just keep getting better.
The Tax Code Has Changed Significantly
As we said earlier, tax law changes have gotten lost in the shuffle this year. But you should know about them since they may well affect you. Tax website developers have built all of these modifications into their online solutions.
For instance, standard deduction amounts are different for the 2020 tax year. They’ve actually been increased a bit. If you’re a married couple, the standard deduction is now $24,800. In addition, each spouse 65 or older gets a $1,300 deduction. If you’re single, you can claim a $12,400 standard deduction. You get an $18,650 deduction as head of household plus $1,650 at age 65 or older.
Income tax brackets themselves didn’t change for 2020, but the brackets include a broader range of income due to inflation.
Long-term capital gains rates stayed the same for 2020, but their income thresholds increased. For example, you now qualify for the 20% rate if you earned more than $441,550 as a single filer. For couples filing jointly, the income threshold is $496,600, and heads of household, $469,050. Most taxpayers will fall into the 0% or 15% range. Some high-income taxpayers will be hit with an additional 3.8% net investment income surtax for both short- and long-term gains.
If you don’t itemize deductions on a Schedule A, you can still deduct up to $300 in cash contributions to qualified organizations.
Some tax breaks that were slated to expire were extended late last year, including the mortgage insurance premium deduction (with some caveats) and energy-saving credits.
At we right this writing, it seems fairly certain that most Americans will be the recipients of another round of stimulus checks. But you still have to account for the payments received earlier in 2020 under the CARES Act. Tax website developers have built in the reporting required. You’ll be asked whether you received an Economic Impact Payment (EIP), which would have been based on your 2018 or 2019 tax return, and what the amount was. If you received less than you qualified for because of a change in your situation in 2020 (such as different filing status or an income increase or decrease), you will receive a Recovery Rebate Credit on your tax return. If you received more, you’re not expected to repay it.
There are many other changes, including modifications to the rules concerning retirement plans. Personal tax preparation websites have built these alterations to the tax code into their online products. And to varying degrees, they also explain how you can expect to be affected.
Filing Your Taxes Online Is Easier Than Ever
Considering the changes that have occurred, what will you find when you log into H&R Block, TaxAct, TurboTax, or any of the other websites whose developers have been planning for the end of January 2021 for many months?
If you’ve used a personal tax preparation website or desktop software before and you go back to that same product this year, you’re not going to notice tremendous differences. Still, every site we reviewed this year has made improvements, some more than others. But they’re the usual modifications—user interface tweaks and enhancements to support resources and changes to prices and product lineups.
For the most part, this year’s crop of contenders look and work much as they did for the 2019 tax year. What’s going on in the background as your tax data is calculated and rerouted to accommodate the new laws and forms, though, is different. The companies that make today’s leading tax sites worked hard in 2020—so that you don’t have to in 2021.
How Online Tax Software Works
When you prepare your income taxes using paper forms, you spend a lot of time shuttling back and forth between them. You come to a line on the 1040 that requires a supporting form or schedule, so you go there and complete it, and then transfer the number back to the 1040. Sometimes you need to fill out a worksheet or chase down a document you got in the mail or double-check your calculations because things just don’t look right. You may have to do this many times if your return has any complexity.
Tax websites work much differently. Once you create an account and comply with the site’s security requirements, you can stop worrying about which forms you need and whether your calculations are correct. You also won’t need to worry about how any tax code changes are going to affect your return. That’s all taken care of for you in the background.
When you use a digital tax preparation solution, you’re really just filling out a giant questionnaire. These sites work like giant wizards: They ask questions on every page and you respond by providing answers. You enter information in blank fields, select the correct option from a list, or click a button. When you’ve satisfied all the requirements of a screen, you move on to the next and complete that. You never have to see an actual IRS form or schedule (though in some cases, you can if you want to).
You’ll probably recognize the path you’re taking. It’s patterned after the order of the IRS Form 1040. You provide contact information first, including Social Security number(s) and birthdate(s), and then move on to your income, deductions, credits, health insurance status, and taxes paid. After you’ve exhausted all the topics that apply to you, these sites review your return and highlight errors or omissions you might have made.
When you’ve cleaned them all up, the software transfers your tax data to any state returns you must file (though these are not all available in the preview versions you’re seeing in late December and early January). Once you’ve answered miscellaneous questions there and checked your entire return, you’re asked to pay the service’s fees (if there are any). Finally, you can file your return electronically and print it out.
What’s It Like to Use an Online Tax Service?
Along the way, personal tax preparation websites provide a lot of support. After all, how helpful would they be if they just displayed replicas of the actual IRS forms and schedules on the screen and asked you to fill them in using the IRS instructions?
Instead, some of these solutions, such as H&R Block and TurboTax, provide state-of-the-art user experiences. They’re designed to make what is an unpleasant task more palatable. They use color, graphics, design, and layout to present screens that are lively and attractive, rather than dull and lifeless like the actual forms.
The step-by-step data entry path they provide generally works quite well—as long as you work your way through your whole return without a lot of backing up or lurching forward (where allowed). Jackson Hewitt, for example, asks whether you’d like to complete your 1040 by using its comprehensive interview; this option takes you through the entire process in one long Q&A session. It asks you about every tax topic that might apply to you.
The other alternative, one that every online service offers, involves selecting the topics that apply to you. You choose these from the lists they provide for income, deductions, credits, and taxes. When you select one, the sites walk you through mini-interviews to get the information they need. Then, they return you to the main list to choose another topic, and so on, until you’re finished.
Most of the sites we reviewed are a hybrid of these two approaches. The point is, all you have to do is read what’s on the screen and follow its instructions. You spend most of your time responding to questions and clicking links to advance to the next screen or using the site-wide navigation tool. These sites are good guides, most of the time.
Tax Software Speaks Your Language, Not IRS-ese
If you’ve ever filed a tax return, you know it can be a challenge to understand the IRS language on its forms and schedules. Turning to the written instructions sometimes doesn’t help much. They’re quite comprehensive—so comprehensive, in fact, that it’s often hard to find the answer to your exact question. When you do find it, the language, again, can be difficult to decipher.
From their earliest days, personal tax software developers have sought to interpret IRS-ese and make it more understandable to the non-accountant. They’ve written and rewritten their content so that the average taxpayer can understand what’s being requested. Services like TaxAct do more. For example, they provide hyperlinks to small help windows that further explain a term or phrase. They anticipate questions you might ask and post Q&As on especially complex topics. They try to ensure that you understand the question being asked so that you’ll provide the correct answer.
Everyone Needs More Help Doing Their Taxes
Sometimes a friendly, understandable user experience and clarification of the content displayed on screens isn’t enough. So, tax websites offer online assistance. Some, including H&R Block, provide context-sensitive explanations in panes attached to the main working area.
In some cases, this guidance isn’t available until you click a Help link. And sometimes when you do that, you have access to a giant database of questions and answers. You may be directed to IRS instructions and publications on a few sites, but usually, the technical content has been rewritten to make it understandable.
What do you do if your efforts to find help on the site itself fail? You might have one of several types of questions: The first goes something like, “Where do I enter the information that’s on this paper form I got?” Or “The site won’t let me advance to the next page. What did I do wrong?” Or, simply, “I’m stuck. I can’t find my way back to the screen where I enter mortgage interest information.”
All sites offer at least one of three ways to contact the company’s technical support representatives: by email, phone, or chat. TaxSlayer, for example, offers all three. Some, like H&R Block, offer online communities where you can see if your problem has already been addressed by someone else.
These technical support representatives cannot advise you on points of tax law, though. So some offer to connect you to an accounting professional, often just via chat or phone. Though you’ll pay extra fees, you’ll get the most innovative and comprehensive guidance if you use TurboTax Live. This service connects you with a CPA or EA (Enrolled Agent) via live video chat, not just during tax season, but year-round. H&R Block has added a similar service. Both companies have amplified these virtual resources for the 2020 tax year.
Are There Any Free Tax Filing Services?
Prices for this year’s tax websites range from free to over $100. It turns out that you can get a lot for free. According to our tax survey, 17% of you use free services, in fact. 20% of you use paid software. Every company whose website we reviewed offers a version that costs nothing to prepare and file your taxes. All support the Form 1040 and assume you’ll take the standard deduction. You can record—or import, in some cases—your W-2 data in all of them.
Each goes even further than that in some ways. H&R Block is very generous in its free offerings among the normally paid services. Block supports W-2, retirement plan, and Social Security income; childcare expenses and child tax credit; the Earned Income Credit (EIC); and student loan interest. TaxAct, too, allows retirement income, unemployment, and support for the EIC, in addition to the W-2, child tax credits, and college expenses. TurboTax lets you report W-2 income, the EIC, and child tax credits. Using TaxSlayer, you can enter your student loan interest and education expenses, in addition to the W-2. And Jackson Hewitt’s free edition will prepare and file the EIC (no children), unemployment and W-2 income, and up to $100,000 taxable income.
Two of the online tax services we reviewed are free (or nearly free): Credit Karma Tax and FreeTaxUSA. Both support all major IRS forms and schedules. FreeTaxUSA charges nothing unless you need to file a state return; that costs $12.95. You can also buy enhanced support for $6.99. Credit Karma Tax is the only personal tax preparation website that is totally free, for both federal and state returns.
Finally, note that you might even qualify to use paid software for free, if your income is below a certain threshold or if you’re in the military. The IRS Free File program allows you to submit your federal (and maybe your state) taxes for free, even if you’re using an app like TurboTax. To find out if you qualify, visit this page on the IRS website.
You Can Also Let the Tax Pros Take Over
The personal tax preparation services we review here are capable of producing very complex tax returns. You’ll pay more if you need more forms and schedules to complete (we reviewed the most popular versions, which in some cases were not the most robust), but the tools are there for advanced topics like self-employment, depreciation, rental income, and capital gains.
If you’re not comfortable in your ability to complete a complicated tax return, but still want to give it a shot, you can go with a site like H&R Block. The company offers DIY preparation and filing, of course. But if you get partway through and realize you’re not sure of some tax issues, you can have an H&R Block tax professional review your return, complete it, and sign it. You can even just upload your documents and the pro will take over. TurboTax offers a similar service this year.
Stay Safe, Protect Your Privacy This Tax Season
Whenever you’re going to be sending sensitive information over a network you don’t control, you should be concerned. Since taxes are nothing but sensitive data, you ought to be doubly concerned if you’re filing from a coffee shop, say, or the airport. About half of you get this, it seems, as a tax survey that we put in the field for last year’s filing shows that 47% of those who use online tax software are concerned about their data being compromised.
Fortunately, protecting your traffic is as simple as using a VPN. A VPN can create a secure tunnel that encrypts your data, ensuring that anyone who manages to intercept it sees only gibberish. In another survey on the security of using tax software, we found that only 37% of e-filers use a VPN.
No amount of security software can keep you safe if you fall for a telephone, email, or in-person tax scam, however. Scammers often rely on you to simply tell them what they want to know, instead of getting it out of your computer with malware. Instead, they simply pretend to be someone, say the IRS, who you’d likely believe might have a reason to be inquiring, and ask you for your secret information or for payments on imaginary fees you supposedly owe. Know that the IRS will never call you out of the blue and ask for private information. The agency prefers to communicate via written letters sent via US Mail. Here’s how to avoid tax scams this filing season.