A Detailed Look Inside TurboTax’s Online Tax Preparation Platform – What is Free and What Must You Pay For?

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Tax season is in full flight here in the US. As I mentioned several days ago, if your taxes are very simple, please don’t pay someone $60 to help you fill out a 1040EZ federal tax return – fill it out yourself.

In my mind, an even better option for individuals without a business (if you own your own business, I honestly believe that you should have the help of CPA to make sure you don’t miss anything and to bounce ideas off of) over filling out the tax forms directly are to employ one of the many low-cost online tax preparation platforms available on the market. These platforms ask questions in normal language (read non-IRS talk), and then populate the numbers in to the tax forms for you. A pretty sweet deal in my book!

It’s pretty amazing to see how the online tax preparation business has grown over the past few years. In searching around the Internet, I found around 12 legitimate options currently available. Some of the newer/lesser known options are listed below:

• Free Tax USA
• eSmart Tax
• My Free Taxes
• eTax
• Free File (IRS)
• Tax Slayer
• eFile
• Express 1040
• Rapid Tax

However, without a doubt, the most widely-used online tax prep platforms are TurboTax, H&R Block, and Tax Act. 

Because of the wide spread use of these three platforms, I think it’s important for people to have a good working knowledge about what they offer. However, in my experience helping people with their taxes, the primary thing that my friends get confused about is what these programs offer for free, and what is it you have to pay for. More specifically, I find that they often end up paying for one of the service upgrades being offered, when in fact, their taxes were actually simple enough that they could have just used the free versions.

So, the purpose of this post series is to dissect each of these 3 most popular programs one-by-one to determine what they offer, what is free, and what you need to pay for. Let’s get started, shall we?

TurboTax

TurboTax is perhaps the most well known, oldest, and most respected tax preparation software and online platform. In fact, I can remember walking in to office supply/computer stores when I was 8 years old and seeing TurboTax being sold in the CD-ROM version (maybe even floppy disk, too? haha). As such, it’s the platform we will analyze first:

Shown below is the overall pricing for the various options on offer by TurboTax. In my opinion, this table is a nice overview of the options and is pretty self explanatory/clear for normal folks like us. There are four things that I want to make sure to point out though:

• You don’t actually pay for anything until you officially click “file taxes.” This means you can go through the system and fill in your tax information without worrying about accidentally paying for anything until the very end of the process. 
• The prices in red shown in the below screenshot are only the pricing for filing your federal tax return. What this means is that you will have to pay an extra fee on top of the ones shown in the chart below because you are required by law to file state taxes. Don’t be surprised by this!
• According to TurboTax’s State Tax filing pricing, it costs $28-$37 (price depends on current promos going on) per state to file your state taxes. 
• What this means is that the state tax filing is perhaps where TurboTax makes most of its money…..?
• One of the nice little perks about the paid versions of TurboTax is that they will automatically save and import your previous year’s tax information to the current year. They will also auto-populate your employer details based on solely their EIN. Nice things to have, but maybe not necessarily worth paying for if you are pressed for money..
• Finally, it’s a little confusing in reading the chart below, but if you have a self-employment business/income (including farm business) to report, the only option available through TurboTax is the Home & Business (please note, this is not necessarily the same thing as merely having a 1099-MISC from some random side income you did – more on this will be discussed below in the Income section). 

So, as I mentioned above, this chart is pretty straight-forward and easy to understand. However, the place where it gets confusing and people with simple taxes end up paying for un-needed service add-ons is DURING the process of filing out your tax information as you are going through the various steps in the system. 

Because of this, I feel we need to spend some time discussing places where potential mistakes could occur causing, someone that started their tax filing using the Free Edition (far left above) to end up unnecessarily using the Deluxe (middle, “most popular”) version. This happens quite often, in my opinion, because at almost every step of the way, the questions prompt you to upgrade to one of the paid options.

First, right off the bat, after you create a new TurboTax account, you are taken to this screen:

Now, I’m not sure what your reaction to this screen above is, but to my girlfriend (who I recently helped with her taxes, which are very simple by the way), she read this screen as meaning that if she doesn’t use at least the basic version, she won’t get ANY DEDUCTIONS ON HER TAXES. Because of this, she has been unnecessarily paying for the Basic or Deluxe versions of the program for the past 4 or more years. I can definitely understand where she is coming from on this, as to someone that doesn’t spend a lot of time with critically evaluating personal finance programs, the Federal Free Edition seems like it offers nothing.

However, this simply is not the case. You can still get many deductions owed to you by using the free edition. So, my suggestion would be that people simply ignore this first table and click the continue button.

Five seconds later, after you enter your personal information (address, email, SSN, etc), you get hit with ANOTHER up sell screen, shown below. PLEASE, IGNORE THIS ONE AS WELL!  The Federal Free Edition is still just fine!

OK, Whew! You made it past those first two wallet-zapping landmines.

What is Free and What Must You Pay for Regarding Income?

The next place that people with random side income (such as my girlfriend) can get caught up is when it comes time to enter the amounts of income received on Form 1099-MISC. 

When you go to enter the amount displayed on your 1099-MISC, you will see the following screen below. The goal of this screen is to determine if the income was random/side income or if it can be considered more of the result of steady self-employed business operations. If it is from self-employed business operations, you are required to pay/upgrade to the $75 Home and Business version of TurboTax to continue. There is now way around it. 

On the other hand, if it was not regular, recurring, and/or self-employed business income, merely having a random 1099-MISC does not disqualify you from being able to use the Federal Free Edition of TurboTax.

If you answer YES to any of the questions shown on the below screenshot, you will however, be required to upgrade to the paid Home and Business version because the income is considered self-employment income.

Regarding income from investments, such as stock/mutual fund sale proceeds, interest, rental property, and dividends, listed below is a summary of what you must pay for and what is included in the Federal Free Edition:

• 1099-INT and 1099-DIV are free/included in the Federal Free Edition. 
• If you have a 1099-B (sale of taxable securities), it does actually require you to upgrade to the Premier version to continue with that section.
• If you have a income from rental property, it does actually require you to upgrade to the Premier version to continue with that section.

What is Free and What Must You Pay for Regarding Deductions?

In the deductions section of TurboTax, they also make it fairly confusing to discern what is included in the Federal Free Edition and what you must pay for.

To even further complicate matters, you have to be able to determine when a screen like the one below pops up, whether or not the upgrade to a paid version is a “recommendation” or if the upgrade is absolutely required in order to proceed with that section.

Can you imagine how confusing this screen above would be to someone who is uncomfortable dealing with their finances/taxes and is already stressed out about the situation? Which box do you think they would click? That’s right, UPGRADE CITY! 

However, I am here to tell you that for all of the deductions I inspected (shown on screenshots below), they are all actually included in the Federal Free Edition. 

Many of them, however, do have suggestion screens like the one above that pop up. But, all you have to do is click NO THANKS and then it will let you continue entering your deduction details. Kind of sneaky, eh? But, it is good business and unfortunately, just the way it is.

Just to drive this point home, all of the deductions listed below are in fact included in TurboTax’s Federal Free edition, but just might have little decoy upgrade recommendation screens that you must click, “No Thanks,” to. 

• Home loan interest paid. 
• Kids.
• Car / property tax.
• Student loan interest paid.
• Medical/HSA contributions.
• Estimates taxes paid (as long as they are not for self employment income).
• Charity donations. 

Conclusions

In my opinion, TurboTax offers a super-reliable, very easy-to-use online tax preparation platform that is hard to go wrong with. Even if your tax situation dictates that you have to use one of their paid options, I would consider it money well spent, and likely, a significant tax savings over the use of live tax professional.

I sincerely hope this post helps you to understand not only a little more about what features TurboTax offers, but to also help you determine what level of services/pricing you actually need to use in their platform to accommodate your personal tax situation.

If you’re interested, step on over to Part 2 of this series where I take a look at H&R Block’s online tax preparation platform!

How about you all? Have you ever used TurboTax to do your taxes? If so, did you ever find yourself paying for a upgrade to the online service when you really didn’t need it?

Share your experiences by commenting below!