Direct File Online – File Taxes for Free

by | Jan 26, 2024 | Podcasts

Direct File Online – File Taxes for Free

Key take-aways:

1. High tax payments may not be the fault of the accountant but could be due to insufficient withholding or estimated payments by the taxpayer.

2. Accountants are not infallible; consistent mistakes or IRS letters may indicate the need for a new accountant.

3. The average cost for tax preparation in the U.S. was $150 last year, which typically does not include consultation or advice.

4. Accountants can provide guidance such as recommending increased withholding or estimated payments, but they rely on the information provided by the taxpayer.

5. The IRS is introducing a “Direct File Online” system, but it’s in the early stages and not widely available.

6. There are free or low-cost tax filing options for low-income individuals, such as IRS Free File (for incomes up to $79,000) and VITA (for adjusted gross incomes up to $64,000).

7. Other free tax assistance programs include TCE for the elderly, and while the IRS can be contacted for help, responses may vary.

 

 

Direct File Online – File Taxes for Free – Links

Definition: Adjusted Gross Income from IRS
Direct File Online at the IRS
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Direct File Online – File Taxes for Free – Transcript

Welcome back to the podcast.  This is episode number 469.

One of the things we hear very frequently from folks that we’re talking to is they will say, “Hey I need a new accountant.”

And so we always want to probe a little further and we ask “gee what happened?”
“Did your accountant retire last year?”
“Are they changing their business structure?”
“Why do you need a new accountant?”

The response that we get – overwhelmingly – is “well I paid too much money – last year – in taxes. So I think I need somebody else to do my taxes for me.”

We’ll point out if you paid too much in taxes, that’s probably not the fault of your accountant.

It may be a situation where you didn’t have enough withheld from your paycheck, or you didn’t pay enough in your quarterly estimates, or there was something wrong.
Unfortunately it’s probably on your end – and not on your accountants end.

Now accountants aren’t perfect. If they make mistakes, if they consistently make mistakes, then you may want to think about moving on to somebody else.

If you’re consistently getting letters from the IRS to explain entries on previous tax returns, that may be a a caution flag to say I need a new accountant.

“Because I paid too much in taxes…” tells us you don’t really understand how taxes work.

One of the other things we’ve learned over over the years is the average cost a taxpayer pays in the United States (last year) to get their tax returns prepared is $150. That was the average cost last year.

For your $150 you pay to have your tax returns prepared, please understand what does, and does not, come along with that.

For $150, you’re not going to get a consultation, you’re not going to get advice.
You’re not going to get guidance on what to do.

Now if your accountant is good, you’ll get a a summary letter that comes with your return saying “hey you need to increase your tax withholding.” Or “you should think about making estimated payments and here’s a schedule for you.” Or “here are the the coupons to send in your quarterly estimated checks.”

Do what your accountant tells you! Because they’re giving you some good guidance!

Most people though tend to think “oh I need to talk to my accountant because I’m thinking about doing this thing.” That kind of business model doesn’t really exist that much anymore. And so finding an accountant who’s going to pick up the phone and chit-chat with you about some real estate limited partnership – doesn’t exist anymore.

So you’re not going to get guidance or advice. You’re not going to get representation before the IRS. That will probably result in some additional charges or costs that come with it.

But the other overriding point we want to make when you’re getting your taxes done is your accountant doesn’t know your situation.

If you give your accountant “bad information,” they’re going to take that “bad information” and they’re going to fill out a tax return for you.
And then you’re going to sign it.
You are going to sign it.

And then it’s going to get submitted to the IRS. So, “garbage in garbage out.” That’s an important fact to remember when you’re talking about tax returns.

So look if you’re “in between accountants,” if you’re still shopping around for someone…

We used to joke about certain accountants used to use a “very sharp pencil.” If you’re “in between accountants,” you should know the IRS is rolling out a free online method where you can file for free. But it’s just getting rolled out.

And if you’re in New Jersey, understand that “direct file online” that’s what they’re calling it, is not available here in New Jersey.

But if you – or someone you know – is a lower income tax filer, there are alternatives that are either low-cost or no cost.

1. The first thing I would suggest – and I don’t even know if they do this anymore – but I used to tell clients just go to the library. You can pick up the forms. They had paper forms there.

Now I’m dating myself because I know they did this twenty years ago. But it used to be you could go to your public library pick up all the tax forms you need, and fill it out yourself.

2. I can tell you at Chaminade High School, in math class of our junior year Mr Gioia, taught us – and tested us – on filling out tax forms.
That was in 1978! I was filling out tax forms, and we were doing case studies for people. This was part of our education.

I know they don’t do this anymore. But man-oh-man, this is a really good skill for young people to learn! Go through these tax forms and figure it out.

3. There are other alternatives. They have a program called “IRS Free File.” And the IRS has partnered with eight different companies around the United States.

If your income is between zero and $79,000, it is free. It’s free.

I know that $79,000 in gross income is not going to cover a lot of folks. But you may know someone who may be in a situation where “hey every dollar counts and we don’t have the income to go to some hotshot CPA. We need an alternative.”

4. Likewise, there is a program called VITA, which is the IRS Volunteer Income Tax Assistance.
This is very similar to “IRS Free File” – in the sense that if you’re a household with adjusted gross income up to $64,000, you can use this service called VITA, get your tax returns filed for free.

Understand that, “IRS Free File” works for folks who have income up to $79,000. That’s gross income.
VITA, pretty much covers the same group. It’s households with adjusted gross income up to $64,000.

If you don’t know the difference between gross income and adjusted gross income, we will put some links in the show notes so you can see the difference between the two.
These are vastly different numbers.

5. A fifth option if you are, again, “in-between accountants,” and you’re retired, there’s a program called TCE which is stands for “Tax Counseling for the Elderly.”
This is often run in conjunction with AARP. So it is not for your little leaguer, but maybe for someone who is retired and looking for some assistance in getting their taxes done.

6. The sixth option is you could always pick up the phone and call the IRS. You should get ready to be on hold for a very long period of time. But we’ve heard people say “if you don’t like the answer you hear from the IRS, just hang up. And then call right back and get somebody else. You will get a different answer”
We hear that a lot.

People call the IRS. They’ve called them two or three times and they have gotten two or three different answers for the very same question.
That’s not a good track record.

7. And then there’s this new program. The seventh option is this “Direct File Online,” which is just getting rolled out.

Now a lot of us probably remember how Obamacare got rolled out. Not well.

Things didn’t go very smoothly. And so the IRS is rolling out this new program called “Direct File Online,” and they’re going very very slowly.

In 2024, it is sent out by invitation only. And the invites are going to state and federal workers only.
They’re not just offering this across the board.

They want to study how smoothly this program works and whether the returns they submit contain errors, before they should decide to expand the program.
That’s smart, they’ve actually learned from the way Obamacare did not work: their website crashed frequently, there were a lot of problems, a lot of misinformation.

And so I’m happy to see they’re doing it this way.

But most taxpayers couldn’t use “Direct File Online,” the way it’s set up right now.

If you receive a form 1099, say you had a short term job, you had with they call a “gig.”
If you’re part of the gig economy, or, if you received a required minimum distribution or some kind of distribution from a retirement plan.
If you got interest from a bank account, if you had dividends, if you had capital gains,

All of these instances will will generate a form 1099, for the year. If you received a 1099, you wouldn’t be able to use “Direct File Online,” it’s just not going to work.

I don’t really understand the reason why the IRS is rolling out this program. As we mentioned earlier, there are some alternatives like “IRS Free File,” which tends to work pretty well.

But they seem to want to compete — or put H&R Block and TurboTax out of business. I just don’t understand the reason for that.

They also say that “Direct File Online,” will work on a smartphone.
Now I understand – not everybody has a desktop computer. But I would be really nervous about filing my taxes on a smartphone.

The other thing I think worth mentioning is “Direct File Online,” will be a direct upload to the IRS.

If you’re using “Direct File Online,” it’s not going to necessarily speed up your tax return (refund).

You can’t upload your W-2 as a PDF. So you may get it as a PDF, but you still have to actually manually type in the numbers.
And so the information isn’t really being shared – in the sense – you can’t just attach your W2 and have everything uploaded.
It’s a a little kooky and a little clunky.

Again, I’m happy to see they are rolling this out, on a small scale. Also, if you itemize your taxes, you wouldn’t be able to use “Direct File Online.”

If you have income from your job in excess of $200,000 again – you wouldn’t be able to use “Direct File Online.”
Also “Direct File Online” won’t work if you paid for childcare. Say you go to work and you want to claim the childcare the the dependent care tax credit.

Also if you want a tax credit for doing a home improvement – around the house. Say you put in new windows and doors. There’s normally a tax credit for energy efficiency. You wouldn’t be able to use “Direct File Online,” and still claim the credit.

So it really is in the infant stages. It IS completely free.
But we’re just not there yet.
But know that doesn’t necessarily mean that you can’t file your taxes for free.

You can always do this yourself. I learned it when I was in high school, back in the seventies.
And there are alternatives, for lower income folks to get their taxes filed for free.

So there there are things out there that do provide some alternatives. But you’ll hear more and more as we go through tax season about this “Direct File Online” portal. It’s just not quite there yet. Worth worth a look. At some point we hope they expand and improve it. But right now, don’t hold your breath.

That is the story for episode 469 “Direct File Online.”
Thanks, as always, for tuning in.

Tom Mullooly is an investment advisor representative with Mullooly Asset Management. All opinions expressed by Tom and his podcast guests are solely their own opinions and do not necessarily reflect the opinions of Mullooly Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Mullooly Asset Management may maintain positions in securities discussed in this podcast.

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