With one month of 2018 already gone, Tax Season is officially in bloom. This year brings a heightened focus on tax returns thanks to the recently passed Tax Cuts and Jobs Act of 2017. Despite that added attention, the changes that law brought forth won’t actually affect the returns taxpayer’s file this April. Of course that doesn’t mean there isn’t plenty to consider when planning to file your 2017 returns.
From determining whether you should be itemizing your tax deductions to deciding what online tax preparation service is right for you, here’s a look at what you should be thinking about as April 17th draws near:
Standard Deduction vs. Itemized Deductions
One choice that might factor into your filing options is whether you plan to take the standard personal tax deduction or elect to itemize your deductions instead. Currently approximately 70% of taxpayers simply take the so-called Standard Deductions. However homeowners, charitable givers, and others may find that itemizing is more lucrative. Additionally (as you’ll see below) determining whether you’ll want to itemize your deduction or not may play a role in helping you decide which tax preparation and filing option is right for you.
With that in mind, here’s a brief overview of what you need to know about the standard deduction versus itemizing.
Understanding deductions in general
Before we get into the specifics of the standard deduction as well as itemized deductions, it’s important to understand what separates tax deductions from tax credits. Put simply, tax deductions are subtracted from your taxable income while tax credits are directly reflected in your tax bill. For example, if you grossed $40,000 in 2017 and took the standard deduction of $6,350, your taxable income would be $33,650. You would then be taxed on that figure instead of the full $40,000 — although, in this example, the deduction would move you from the 25% to 15% tax brackets, which obviously leads to additional savings.
Meanwhile credits serve as dollar for dollar reductions in your tax obligations. Take, for example, the Savers Credit that rewards lower wage earners for making contributions to their retirement accounts. On the surface, credits can be more lucrative than deductions but, as mentioned, deductions can be especially important when they bring you down to a lower tax level.
Personal deductions and business deductions
Another important note for freelancers and self-employed individuals is that business deductions are separate from personal ones. In fact it’s likely that you’ll not only take deductions for business expenses, mileage, ect. but will also be eligible for certain personal deductions. Because of this it’s important to keep your records organized and separate your business finances from your personal ones. This is where software and online solutions such as Quickbooks Self-Employed can come in handy and make managing your taxes a bit easier.
As mentioned, the majority of American taxpayers already utilize the standard deduction when filing their returns. However that figure is likely set to increase under the GOP-backed tax bill that passed in Congress at the end of last year. That’s because, for many, that standard deduction will nearly double, making it less likely that itemized deduction will exceed the standard. Here are the basics of how the law will change the standard deduction starting with the 2018 tax year:
|Status||2018 tax year||2017 tax year|
|Married filing separately||$12,000||$6,350|
|Head of household||$18,000||$9,350|
|Married filing jointly||$24,000||$12,700|
Although this won’t affect you this time around, it is certainly something to keep in mind going forward.
In order to incentivize house buying, the IRS allows homeowners to deduct the mortgage interest they pay in a year from their taxable income. As a result this perk alone may exceed the standard deduction. It’s worth noting that the recently-passed tax bill will also bring changes to this rule, with the mortgage interest deduction cap lowering from $1 million to $750,000.
Those who donate a sizeable portion of their income to charity might also find value in itemizing their deductions. Donations to qualifying nonprofits including churches and other organizations can be deducted from your taxable income provided that you itemize these deductions. To confirm that your favorite non-profit is eligible to receive tax-deductible donations, you can use the IRS’s Exempt Organizations Select Check tool.
While the current tax law penalizes individuals who don’t maintain health insurance, it does allow you to deduct some of your medical bills from your taxable income. However these expenses can only be deducted if they exceed 7.5% of your adjusted gross income and excludes any expenses you were reimbursed for (be it by an insurer, employer, etc.). Furthermore that figure will rise to 10% of your AGI starting in 2019.
Online Tax Preparation Service Options
When it comes to preparing and filing your taxes, there are now several online resources you can turn to. Add in the speed and simplicity of E-File and you can now complete your entire tax return without setting foot outside your house. Given this abundance of options, it’s worth taking a look at several different services and what separates them from the rest of the pack.
Keep in mind that many of these services allow you to start your return for free, only paying when you decide to file. Therefore, if you’re ultimately unsure which option is best, you may be able to get hands-on with a couple of options before making your final decision. With that out of the way, let’s dive into a few popular online tax preparation options.
Perhaps the most recognizable name on this list is H&R Block, which runs a number of brick-and-mortar tax preparation centers in addition to having online DIY products. The first of these products is their More Zero plan, offering $0 federal and state return filing. From there, H&R Block offers the Deluxe package for $34.99, Premium package for 54.99, and Self-Employed package for $74.99. Additionally, for each option aside from More Zero, an additional $36.99 fee is charged for each state filing.
The difference in each of these packages is the number of tax situations they support and the help they provide. For example, while More Zero offers technical support by chat, unlimited tax advice by chat doesn’t kick in until the Deluxe package. Meanwhile those using apps like Stride might need to upgrade to the Premium package, which supports expense imports. Finally, although freelancer workers with less than $5,000 in expenses to claim can find support on the Premium offering, other small business owners will need to invest in the Self-Employed option.
Another nice thing about H&R Block’s online offerings is that you do have the option to add a Pro Review to any filing. Of course this will cost you. Adding Pro Review to the More Zero package goes for $49.99, adding to the Deluxe package costs an additional $79.99, and adding to either the Premium or Self-Employed option will cost an extra $89.99 on your federal return.
While H&R Block has made a name for themselves in the storefront tax preparation business, TurboTax has been a go-to software option for several years. Naturally that reputation now extends to the Internet, with TurboTax offering several online services. Similar to H&R Block, these options start with a free AbsoluteZero package featuring $0 federal and state returns, a $39.99 deluxe package, $59.99 Premier package, $89.99 Self-Employed package, and finally TurboTax Live for $149.99. Note that all of the options excluding AbsoluteZero also charge $36.99 per state filing.
The downside of TurboTax’s AbsoluteZero option is that it only supports forms 1040EZ and 1040A. Notably this is less than H&R Block’s free option, which also supports Schedule A itemizations. Those itemized deductions come in the deluxe version of TurboTax online, which also searches 350 deductions and credits to help you maximize your refund. For support with Schedule D including rental properties and other investments, you may need to upgrade to the Premier edition. For small business owners who use Quickbook Self-Employed for their expense and record keeping, TurboTax does have one big advantage. With both services falling under the Intuit umbrella, you can easily import your mileage and expenses from Quickbook Self-Employed when you use the Self-Employed online tax preparation option.
Lastly, TurboTax live allows you to reach a CPA or EA live and on-demand as you complete your return. This option supports complex tax situations and allows you to have your questions answered along the way. Additionally users who sign up for this option will have their finished return reviewed by a professional to make sure everything looks good.
Credit Karma Tax
If you’re a savvy credit consumer, you’re likely familiar with Credit Karma and their free credit score services. In 2016 they expanded their offerings to include free tax preparation and filing support. Credit Karma Tax boasts free federal and state filing, 24/7 help along the way, and more — all wrapped in CK’s slick user interface. Furthermore the site promises no upselling and, in fact, has no paid options to upgrade to.
The downside to Credit Karma Tax according to a sampling of reviews is that it doesn’t yet offer support for Georgia or New Mexico state returns. Additionally some reviewers have noted bugs that are likely a symptom of the service’s infancy. That said it does stay true to its “free as free gets” promise and will hopefully improve with future tax seasons.
For those willing to take a chance on a site with less name recognition in order to save, TaxSlayer may be an option for you. Unfortunately, while several of their other offerings are priced a bit lower than H&R Block or TurboTax, TaxSlayer’s free option seems to be lacking. For one it only supports Form 1040 EZ. However TaxSlayer’s other options — Classic at $17, Premium at $35, and Self-Employed at $55, support all major forms. On top of those numbers, each state return filed will add $22 to the Class and Premium options while the Self-Employed option includes a state filing. Incidentally, this makes the top package slightly cheaper than the Premium option when a state return is added.
As far as differences between the various tiers go, the biggest difference comes between the Classic and Premium options. The Premium level is where support options such as Ask a Tax Pro, live chat, and Audit Assist come in. Overall, despite a free option that is comparatively lacking, TaxSlayer’s packages not only come in at much lower price-points than some of the big guys but their state returns are also cheaper to file. TaxSlayer also presents a strong case for self-employed individuals who aren’t concerned about importing from Quickbooks since its $55 package also includes state filing.
Like TaxSlayer, TaxAct also offers a number of competitively-priced options for individuals with a variety of tax needs. Starting with a free option with support for federal forms 1040EZ and 1040A as well as free state filing, TaxAct also has a $29.95 Plus plan, $44.95 Freelancer plan, and $59.95 Premium plan. State returns also add an extra $37 to each plan except for the free option.
Aside from having the highest per-state return cost on the list (beating TurboTax and H&R Block by a mere penny, mind you), TaxAct’s base packages do come in a bit cheaper than similar plans from those big players. Their Plus option supports a number of tax situations including itemizations and investments. Meanwhile the Freelancer plan seems to include many of the same features as Plus but is specifically designed to manage self-employed tax situations. Lastly the Premium option also includes Audit Defense. Although support isn’t explicitly mentioned under any of the packages, NerdWallet reports that’s paid users can speak with a CPA or EA for “tax support” (but not “tax advice”) via chat or phone if you need. With that, this could be a good middle-of-the-road option in terms of price and service.
Another alternative to the big guys is FreeTaxUSA. Despite its name, the site only offers support for preparing and filing federal returns without charge while state returns cost $12.95. That said, the free federal filing applies to several tax situations including self-employment and support for investments. Moreover, although there is no free state option like with some other services, FreeTaxUSA’s price per state filing is the cheapest of the options on our list.
For those seeking a little more than FreeTaxUSA’s no-frills, straightforward, DIY basic level, there is a Deluxe option for an additional $6.99. This add-on includes priority support, audit assist protection, and the ability to file amended returns at no cost. However, even with that support, reviews suggest this might not be the best option for those who are less confident in their tax filing abilities. So while FreeTaxUSA is certainly budget friendly, those willing to pay more for guidance and peace of mind may want to look elsewhere.
If online services just aren’t for you, there is another way. As you probably already know if you’ve ever spotted a sign-twirling Statue of Liberty in your area, there are still plenty of brick-and-mortar businesses that specialize in helping you file your tax return and maximize your refund. These range from big chains like the aforementioned H&R Block to independent CPAs that can give you one-on-one support with your taxes. Depending on the business, this option may be more expensive than the online services, at the end the day, it may be worth it to let someone else handle the whole tax mess for you.
With 2017 tax returns due in just a few short weeks, now is the time to start thinking seriously about your tax filing plan. The first step is to determine whether you’ll need to itemize your deductions or whether the standard deduction will suffice. Next, you can determine which (if any) online tax preparation services meet your needs or elect to hire a local tax professional to take over the job for you. Whatever you end up electing to do, just make sure that your return is postmarked by April 17th, 2018. Happy Tax Season!
Also published on Medium.