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Free File as economic barometer

By Kay Bell · Bankrate.com
Tuesday, January 17, 2012
Posted: 1 pm ET

This year is the 10th anniversary of the Free File program allowing millions of taxpayers to prepare their taxes online and file them at, as the name says, no cost.

Although you can only get to the free tax filing option via the Internal Revenue Service website, it's a partnership of the tax software industry and Uncle Sam. And the IRS and private industry have tweaked the system over the years.

The biggest move was in connection with the 2005 tax year (returns filed in 2006). That's when Free File began imposing an income eligibility limit on the service. For 2005 returns, it was $50,000.

The goal, IRS and Free File Alliance officials back then said, was to get the program back to its original intention -- to make e-filing available to taxpayers who otherwise might not be able to pay for tax preparation and electronic filing services.

For the last few years, the goal has been to make no-cost tax preparation software and free e-filing available to 70 percent of the tax-paying population. That percentage is determined by calculating the number of taxpayers earning at or less than a certain income level.

And as part of that process, Free File administrators have nudged up the number of taxpayers who can use the free online filing service by each year bumping up the income threshold.

It's sort of analogous to other tax-related figures, such as standard deduction and personal exemption amounts. In those instances, the dollar amounts of the tax breaks go up a tad each year thanks to inflation. When prices aren't rising, the figures on the tax forms tend to stay the same from year to year.

While the Free File figure doesn't employ that exact inflation adjustment methodology, the eligibility income level has been bumped up a bit year after year. But this filing season, the income threshold fell back a bit.

For 2011 tax returns, the 70 percent mark is achieved by allowing individuals with adjusted gross income of $57,000 or less to use Free File this year.

That's $500 less than last year's income threshold.

Why? It's probably a safe assumption that in the current economy, people are making less money.

Tim Hugo, executive director of the Free File Alliance, agrees.

Hugo noted that since 2005, the income eligibility cutoff amount has gone up or at least stayed the same from filing year to filing year.

"It's a telling tale on the economy," he says of this year's reduction of the income threshold.

But at least more people can now file their taxes for free. And if IRS statistics hold true for 2011 taxes, most of those filers will be getting back refunds.

Do you e-file? Have you ever used the Free File system? If you have, let us know how it worked for you. And if you don't want to use it, please tell us why not.

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