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Doing your taxes can be less frustrating, less time-consuming and less costly if you're prepared.

E-file your state tax return

The popularity of federal electronic tax filing hasn't escaped the notice of those involved with state taxes.

Software companies quickly saw a business advantage to adding another layer of tax help in their products. And state officials, as they began to more fully use the Internet to distribute tax information and forms to the public, soon jumped on the e-filing bandwagon.

Now, the District of Columbia and these 37 states have combined their electronic tax filing efforts with the Internal Revenue Service:

States

The unified program, available to taxpayers who use professional preparers, allows taxpayers to file their federal and state returns electronically at the same time. The software places federal and state return data in separate packets that are sent to the IRS in one taxpayer "envelope." The IRS then serves as an electronic post office, forwarding the state information to the taxpayer's state tax department for processing.

More than 22.8 million taxpayers opted for the combined e-filing method in 2003, the latest complete numbers from the IRS.

Advantages of combined e-filing
State and IRS officials say the combined filing process has several benefits:

  • Improved accuracy: Tax preparation software at both filing levels generally eliminates most errors. Though there are no statistics for state computer returns nationwide, tax observers agree that electronic state returns tend to be more accurate compared to paper filed returns.

  • Proof of filing: Taxpayers can meet federal and state tax obligations at the same time. The IRS and state agency (except Illinois) will let you know that your return has been received and accepted, usually within 48 hours of e-filing.

  • Fast processing: Tax returns are in officials' hands sooner, meaning the forms are processed more quickly than those that are filed on paper.

  • Fast refund: Because the returns are processed faster, any refunds go out to taxpayers sooner. On the federal level, e-filing generally cuts the wait for a refund check in half, especially early in the tax season.

Taxpayers in California, Maine, Massachusetts and Minnesota don't have to go to tax pros to use the federal/state e-file program. These states allow taxpayers direct access to e-file from their home computers.

Some states even required tax professionals to file clients' returns electronically. Since 2004, that's been the case California, Michigan, Minnesota, Oklahoma, Rhode Island and Wisconsin. Similar mandates went into effect last year for Alabama, Massachusetts, New Jersey and Virginia.

And in 2006, Connecticut, New York and Utah will require e-filing by tax professionals.

Not for everyone
While the combined e-filing program is welcomed by many state taxpayers, it's not for everyone.

Say you don't want to file both returns at the same time. That could be the case if you're getting a refund from Uncle Sam but owe your state tax collector. You might want to file with the IRS first and get the federal cash to pay your state taxes.

However, in states participating in the combined program you must file both returns simultaneously.

Internet filing by states growing
Tax experts expect the number of state taxpayers going electronic to mushroom as states and and filers alike become more accustomed to online transactions. In the tax area, as more people file their federal returns online, a major goal of the IRS, they will likely decide to do the same with their state filings.

What's in it for states? Primarily, Internet filing is cost-effective. Collecting tax returns in cyberspace costs about 50 cents per filing, compared to an estimated $3.50 per paper return. That's why more states are expected to entice taxpayers by making the Internet filing process free.

To see what electronic filing options are available in your state, check out Bankrate.com's state tax profiles for links to individual state tax departments.

-- Updated: Feb. 16, 2006
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