5 Ways Free Tax Software Could Cost You Later, According to a CPA
Free tax software can save you money upfront, but David Leichter, CPA, CEO and owner of Leichter Accounting Services, said it may not always catch the details that can affect how much you owe or how much you get back.
That said, he noted this can be especially true if your tax situation is more complicated than a basic W-2 return. Filing status issues, business deductions, investments and rental properties are among the areas where taxpayers can miss valuable tax breaks or make costly mistakes.
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Here are five "free filing" oversights that Leichter said may end up costing you.
1. Filing Status
Filing status affects the amount of income tax you'll pay, and Leichter said some free tax software options may not ask enough questions to determine the best one for you. For example, a married couple who is separated and heading toward divorce may still be able to file jointly and benefit from the tax savings.
He also gave an example of an unmarried parent who assumes she must file as single. He explained that, depending on her circumstances, she may qualify for head-of-household status instead. “Big tax savings missed!” Leichter pointed out.
2. State Income Taxes
Leichter noted that if you own a business but not a home, you most likely file using the standard deduction. He added that while that's OK, you could be missing out on a fairly large deduction of your state income taxes.
“After all, most states allow you to deduct your state income taxes paid on your business tax return and not on your personal tax return with Schedule A,” he said. “If you're using a free tax service, they will not advise on this deduction (called the PTE tax), so you could be missing out on thousands in tax savings.”
3. Depreciation Deduction
According to Leichter, there are potential limitations on how much you can take in accelerated depreciation expense if you have a small business. Similarly, he said, there are significant loopholes you can use to take advantage of accelerated depreciation in specific situations.
However, it was explained that it takes asking the right questions. Leichter also cautioned that if you do it wrong, it's a huge red flag for the IRS.
4. Cost Basis on the Sale of Stock
Leichter said this is a common free-filing mistake because your 1099-B from your investment advisor often does not include the cost basis for what you sold. He said you’ll think there is a zero-cost basis, and free software won’t catch it.
“A good accountant will be able to ask the questions necessary to find out the cost basis even when it's not readily available,” he added. “Huge savings lost!”
5. Rental Properties (Schedule E)
Leichter explained that free software can miss multiple deductions in this area because it’s not creative enough to know what to ask. He added that more often than not, his firm sees property depreciation computed incorrectly and loan amortization costs not accounted for at all.
“While the IRS is usually slow to snuff out these kinds of mistakes and missed opportunities, the amount you could be saving in taxes will far exceed the cost of an accountant,” said Leichter. “Don't be pennywise and pound foolish.”
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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