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Bankrate's 2010 Tax Guide
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Tax credit claims could limit Free File

Free File is back for its 20th year, now allowing taxpayers with adjusted gross incomes of $57,000 or less, regardless of filing status, to e-file their 1040s at no cost.

But some filers who likely will turn to tax software to help them decipher a popular new tax break will find they can't take that final step and e-file their return and credit claim, for free or for a price.

Taxpayers who are eligible for the homebuyer credit, either $8,000 as a first-time buyer or $6,500 as a move-up home purchaser, can't use Free File this year even if they meet the income eligibility requirements. It's not the IRS's fault. Rather, when the credit was extended and expanded in November, Congress added a verification component to help stop fraudulent credit claims.

This means these home purchasers must submit paper documentation, such as a copy of an excited settlement statement, along with their 2009 returns. The IRS realizes this will frustrate some filers and is working to bring tax verification compliance into the electronic realm. That possibility, however, is still down the road.

"Within three years we will have the ability to take in documents in PDF format, that is you can scan and attach it when e-filing," said David R. Williams, director of Electronic Tax Administration for the IRS, in announcing this year's Free File program. "But for now, to make sure we're paying the homebuyer credit correctly, we're gong to have to take that information on paper."

New property purchasers can, however, still use Free File to prepare their tax returns, then print and mail the tax forms and documentation paperwork to the IRS.

What to know about Free File
If you plan to use Free File to either just fill out your taxes or complete the forms and e-file them, there are a few other things to keep in mind:
  • The IRS began accepting Free File returns on Jan. 15.
  • To use Free File this year, your 2008 adjusted gross income must be $57,000 or less.
  • The income cutoff applies regardless of your filing status.
  • 19 tax software companies are part of Free File 2010.
  • Free File is for individual, not business, taxpayers. However, if you are a sole proprietor and file a Schedule C with your Form 1040, you can use Free File.
  • Three companies offer Free File products in Spanish.
  • You can e-file your return at any time and schedule any payment of taxes due for a later date, up to the April 15 deadline.
  • Access to Free File is available only by going to the IRS Web site, IRS.gov, and clicking on the Free File icon.

The Free File software versions are similar to the products that the software companies offer for sale. Most use an interview-based format so you don't have to know all the intricacies, tax changes, forms and instructions of the filing process. You answer the question and the software does the rest, including correcting basic tax errors.

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You can peruse the various company offerings or use the IRS's online Free File Wizard, which will direct you to participating software manufacturers that meet your filing needs based on how you answer its questions.

 

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