NEWS: The IRS Free Direct File pilot program has launched in 12 states, including New Hampshire.
WHAT THIS MEANS TO YOU: If you are a New Hampshire resident, and meet eligibility requirements,you can file your tax return online for free directly with the IRS.
The IRS on Tuesday launched its new free Direct File tax program in 12 states, including New Hampshire for taxpayers with simple returns who take the standard deduction. The IRS estimates that about one-third of all taxpayers in the pilot states are eligible for the program. The program, which has been up and running in a more limited form for a month, is available in both English and Spanish versions.
The IRS estimates that about one-third of taxpayers in the 12 participating states, or 19 million taxpayers, are eligible for the service.
You may have questions. Let’s take a look.
Question: Isn’t it already free to file taxes with the IRS?
Answer: Taxpayers have always been able to file their tax return directly with the IRS for free when filling out the paper forms. Remember those? 1040? 1040-EZ? But times have changed. The paper forms are not efficient for the IRS, and in today’s digital age, not for you, either. It’s a lot of math, and figuring things out, and people don’t want to use them.
The IRS has been encouraging taxpayers and people who prepare taxes to file electronically for years, and already has some free online options that have been around for a while.
The IRS, for the past decade, has had “free fillable forms,” and IRS Free File. More on these shortly.
There are also companies that offer free commercial tax preparation software for all tax filers, but “free” can be a loose term when it comes to these companies. More on this shortly, too.
Shouldn’t the IRS be the first go-to for filing digitally? Yes, it should be. But because it’s a government agency and political football, it’s taken a lot longer for it to get with the program than for-profit businesses. Because it’s been underfunded for years, the agency hasn’t had the resources to develop the software that for-profit businesses have been offering taxpayers for years.
The 12-state Direct File program is its big step toward closing that gap.
Q: So, how is IRS Direct File different from the other IRS free options?
A. Yes, it is confusing. But here’s the breakdown:
Paper forms or IRS Free Fillable Forms: You fill the forms out yourself and do the math, old-school. The online fillable forms are quicker than the paper forms, but don’t offer any more guidance, or help with the math. IRS Direct File software will ask you leading questions and also note errors. The IRS would like people to get away from doing their taxes using forms, because the agency doesn’t have the staff to deal with lengthy paper-form processing. If you still file this way, it could be weeks or even months before you get your return.
IRS Free File: Available to taxpayers below a certain adjusted gross income level (for 2023 taxes, the ones you are filing by April 15, 2024, it is $79,000). Adjusted gross income (AGI) is total income – wages, dividends, capital gains, business and retirement income, tips, etc. – minus adjustments (self-employment tax adjustment, retirement account contributions, student loan interest, etc.) It is calculated BEFORE the standardized deduction or itemized deductions, which aren’t included in AGI.
The IRS partners with several tax preparation software companies that provide guided tax preparation software. This is different from the Direct File program because it has an income cap and the taxpayer uses a private company that has agreed to participate. These companies may have some qualifications and requirements that go beyond the IRS’s income cap.
The upside is if you’re not in one of the 12 pilot program states, it’s a trusted way to file your tax return free of charge, as long as your AGI is below $79,000 and your tax return is not complicated. The IRS has a webpage that allows taxpayers to check out the “offers” from the software companies to find if one is a good fit. Some of them offer free state tax preparation as well, which for most New Hampshire residents isn’t an issue since there’s no state income tax. But if it is, keep that in mind.
IRS Direct File: There is no income limit, as there is with Free File, and the software belongs to the IRS, so you’re not choosing a private company to complete your taxes, the IRS is doing it.
MilTax: Eligible members of the military, veterans and surviving family members can file for free through MilTax, the Department of Defense’s free program. The site lists eligibility rules.
Q. Who qualifies for Direct File and how do I do it?
A. The IRS has an online eligibility checker so you can see if you qualify for Direct File. It also offers a step-by-step guide and other information. The IRS even has a YouTube video about it, in both English and Spanish.
You are eligible for IRS Direct File if you meet these requirements:
You live in (or lived and earned an income in 2023) Arizona, California, Florida, Massachusetts, Nevada, New Hampshire, New York, South Dakota, Tennessee, Texas, Washington state, Wyoming.
The income types you report on your 2023 federal tax return are W-2 wage, SSA-1099 Social Security, 1099-G unemployment compensation, or 1099- INT interest income of $1,500 or less.
Take the standard deduction, deduct student loan interest or educator expenses.
You are still eligible if you file for the Earned Income Tax Credit, Child Tax Credit, or Credit for Other Dependents.
You ARE NOT ELIGIBLE if:
You have other types of income than that listed above, including self-employment, contractor or gig income. Even if you also have a W-2 job. This is because you must pay a self-employment tax, which takes you out of the realm of simple tax return.
If you itemize deductions. Only standard-deduction filers can use Direct File. By the way, the standardized deduction for the 2023 tax year is $13,850 for single filers and married filing separately, $27,700 for married filing jointly, and $20,800 for heads of household. Because of the changes to what can be deducted in the 2017 Jobs and Tax Act, most people who qualify for Direct File because of income type likely don’t have itemized deductions that are higher than the standardized ones.
You claim credits other than the ones listed above, including Child and Dependent Care Credit, Saver’s Credit, or the Premium Tax Credit.
To use IRS Direct File, visit IRS.gov. If you already have an account, you’ll be able to sign in and start using it immediately. If not, you’ll have to create an account, which includes verifying your ID.
Q. How is this different from Turbo Tax, H&R Block, etc. Aren’t they all free?
A. One reason the IRS Direct File program was launched is because Turbo Tax, which had agreed to be part of the Free File program, was making it virtually impossible to find for people who qualified for the free program. Turbo Tax had to pay a $141 million settlement in 2022 for charging customers who would normally be eligible for the IRS Free File option. This included charging people who made less than the maximum income for free filing a fee for things like they didn’t have health insurance or they were self-employed. The Free File option is open to any taxpayer who meets the income threshold, despite complications in their tax return.
The Federal Trade Commission earlier this year said it has determined that the majority of people who file their taxes using Turbo Tax pay a fee.
Since the IRS launched Direct File, companies like Intuit, the parent company of Turbo Tax, have fired back with a lot of possibly confusing criticisms, including that filing taxes is “completely free” for Americans. Well, yes and no, as we’ve already discussed. It certainly is if you use paper or fillable forms with the IRS, which can be a hot mess the more complicated your taxes are.
Turbo Tax and H&R Block do offer free filing for very basic tax returns, similar to what Direct File offers, but if you’re going to use it, keep your eye out for upcharges. You aren’t charged until you agree to file at the end, so if you get to there and it’s telling you there’s a fee, let it go and check out Direct File.
If you qualify for a commercial company’s “free” tax return filing and live in one of the 12 IRS Direct File states, you will also qualify for IRS Direct File.
Turbo Tax has more bells and whistles, like the amount of your return showing in a window as you go through it. It’s up to you if you want to pay a fee for bells and whistles. The IRS says it will continue to upgrade Direct File, which by all accounts so far is simple and easy to use, though a little more work than Turbo Tax.
Q. Why New Hampshire (and those other 11 states)?
A. IRS Direct File has launched in a way that will catch bugs and assess how it works before going full-on USA. That means that, since it is only for federal tax returns, it has launched in states that don’t have a state income tax (if you haven’t noticed, that’s New Hampshire), as well as states that do but also have easy online state tax return software that Direct File can link to.
Q. What about people who don’t live in New Hampshire (or those other 11 states)?
A. If you don’t live in one of the 12 Direct File states, or if you do, but lived in another state during 2023 and have to pay a state income tax there, you still have options.
My sister, in Maine, checked out Direct File a few weeks ago. She didn’t qualify, but the IRS guided her to Free File, and she qualified because her AGI is below $79,000. She wasn’t even aware Free File existed, though her AGI has always been below the threshold. She’s used Turbo Tax for years, but the service never let her know she was eligible for Free File. The IRS did let her know, immediately when it determined she didn’t live in a Direct File state. She was also guided to where she could file her state taxes.
She got both of her returns, via direct deposit, in days.
The IRS plans to assess how Direct File goes this tax year and then set a timeline for the rest of the U.S.
Q. I’m confused about my taxes, will IRS Direct File help?
A. IRS Direct File is a way to file your federal tax return. It does not offer tax guidance or advice (nor do most free commercial tax prep services).
The IRS and other nonprofits do, however, offer help, much of it free, to people who need help filing taxes.
Volunteer Income Tax Assistance (VITA) provides free tax filing assistance to individuals with low-to-moderate income, persons with disabilities, and elderly and limited English-speaking taxpayers. It also offers access to free tax preparation software for those who are able to prepare their own tax returns. To find a VITA or Tax Counseling for the Elderly (TCE) site, check out the locator tool.
The IRS Taxpayer Advocate webpage has information on your rights as a taxpayer, low-income taxpayer clinics, and more.
If your taxes are complicated, you may want to hire a tax professional to do them for you. For instance, I am self-employed and have a variety of freelance jobs. I pay a tax professional a very reasonable fee (which is deducted from my next year’s taxes), and he does a great job finding all those things that I don’t know anything about and saving me money. The IRS has tips on how to choose the right tax professional.
Q. I don’t know. I just don’t trust the IRS.
A. Okay, that’s not really a question, but I’ll take a whack at it.
Who better to oversee the filing of your tax return than the agency that you owe the money to? The folks who collect tax money have always been the target of consumer ire, since biblical times, but they are also regulated and accountable. And don’t charge you for filing your taxes.
Why trust for-profit companies that want to make you pay for a service that should be free, some of which have had to pay big judgments for ripping people off?
Those companies are now investing the time and effort into discrediting IRS Direct File. Do you wonder why? In the end, it’s your money and it’s up to you to make an informed decision.
If you’re skeptical about IRS Direct File, do the research. IRS.gov has a lot of very clear and easy-to-understand information on how it works. The IRS Taxpayer Advocate site also has information on how to pay taxes, and resources for taxpayers who have questions or challenges.
If you can’t find enough information on commercial tax prep sites to compare, and choose a commercial tax prep site, if you’re being charged a fee at the end check to see if you qualify for Direct File instead of paying the fee. The short time it will take to retrace your steps will save you money, which is what you want, right?