Tax Year Explained and Tax Software That Can Help

Images shows a woman taking calendar pages off of a clothesline. Text reads: "What is a tax year? A tax year is the calendar year in which income taxes were withheld OR the year for which an income tax return is being filed. Begins January 1 and goes through December 31. The government will need to know what you earned for the above dates."

Image by Ellen Lindner © The Balance 2020

The term "tax year" refers to the calendar year for most individual taxpayers—the 12 months from Jan. 1 through Dec. 31 when you earned income, had taxes withheld from your pay as an employee, paid in quarterly estimated taxes if you're self-employed, or made tax-deductible expenditures. It's the year preceding the April deadline for filing your tax return. You would file a 2019 tax return in April, 2020.

Sort your important documents by tax year as you gather the receipts, income statements, and other documents you need to prepare your income tax return. In the end, it will make filing easier. Using the right software can simplify the process, and there are plenty of free and paid-for options to choose from.

Calendar Year vs. Fiscal Year

The IRS actually gives you two choices when it comes to your tax year—you're not necessarily stuck with using the calendar year. You can elect to use the fiscal year instead, but there are some important differences:

  • Most individual taxpayers elect the calendar year option, and they must do so if they don't keep adequate books and records to support using a fiscal year.
  • A fiscal year can end on the last day of any month other than December—otherwise, it would be a calendar year. It can vary from 52 to 53 weeks, and it's typically used by businesses.

Sole proprietors, shareholders in S corporations, and partners in partnerships can't simply begin using a fiscal year if they've already filed at least one tax return in previous years that was based on a calendar year. They must get special permission from the IRS to make the change.

How Tax Software Can Help

Ever-evolving tax legislation can make changes to exemptions and deductions from year to year, sometimes significant ones. It can be hard for the average taxpayer to keep up. Tax software is invariably updated to accommodate specific IRS rules according to the year you're filing.

Pay close attention to the complete title and description when you buy software to be sure it's for the right tax year.

Choosing the Best Tax Software

You can buy tax software that you install on your computer or online programs that you can access through an internet browser. In either case, different providers offer several versions to fit a wide range of individual tax needs, and both online and desktop tax software come with some advantages and disadvantages.

One company's "basic" version doesn't necessarily offer the same features as another company's "basic" product. "Premium" versions might share the same base features, but some have additional perks that you won't find in another software package.

Although it's rare, some software comes in a single version with all the features needed for just about any tax situation. But most are available in more than one version.

Free tax software is typically offered only as an option for new customers or those with very basic tax returns. You might have to pay for the product this year if you used a free version last year or choose another free tax software to use this year to avoid charges. You'll probably also have to pay if your tax situation has gotten more complicated.

Among all the options out there, some are more well-known than others.

TurboTax Free Edition

The TurboTax Free Edition allows you to file federal and state income taxes without paying a fee if you have a simple return. TurboTax defines a simple return as a Form 1040 that doesn't require Schedules 1, 2, or 3. You can't:

  • Itemize
  • Have any 1099-MISC income
  • Have rental property income
  • Have income from stock sales

But the Free Edition is enough for many people. It has decent tax help features, including online answers from TurboTax specialists. You can snap and upload a photo of your W-2 to have the data automatically filled in for you, and the program will ask you personalized questions to identify life circumstances that might impact your taxes.

TurboTax searches over 400 tax deductions for you to make sure you get the biggest refund possible.

The next step up from the Free Edition is the TurboTax Basic option. It costs about $50 in early 2020, but keep in mind that the prices of all these software options typically begin rising as the tax season progresses. The closer you get to the filing deadline, the more you can expect to pay.

H&R Block Online Free Edition

The H&R Block Online Free Edition covers many common tax deductions, such as if you have a child and dependent care expenses or education costs. The Free Edition also includes audit support to help you respond to any notices you receive from the IRS. It offers:

  • Refund Reveal with real-time updates to your tax refund amount as you go along
  • Step-by-step guidance for completing your taxes
  • Technical support via chat

H&R Block can handle the earned income tax credit, the child tax credit, retirement and Social Security income, student loan interest, and more.

The Deluxe Online version will run you about $30 early in the filing season if you have a more complicated tax situation.

TaxAct Free Edition

The TaxAct Free Edition includes unlimited help when you're accessing your account by chat, email, or telephone. It offers:

  • Alerts for errors and omissions to reduce your risk of an audit
  • A BluPrint financial report that provides personalized tax saving opportunities
  • A free Federal Student Aid Tax Worksheet that makes completing the FAFSA easier
  • Real-time refund status

TaxAct's free edition only accommodates W-2 income. It can import your previous year's return to streamline things if you filed last year using TurboTax or H&R Block.

The next step up is the Deluxe version. It's $35 early in 2020, but, of course, TaxAct urges you to file early because "prices are subject to change."

Final Tips

There's likely a free tax software option to help you prepare your return in any tax year. All software comes with accuracy guarantees, and that can be a good deal with tax law changes. Most feature a tax refund guarantee to ensure that you get the biggest refund possible.

Most will also file a state tax return for you, but this can come at an additional cost.

Look for free tax software that some companies provide for military members if you or someone in your family is a U.S. service member. And don't overlook the Free File Alliance, a partnership between the IRS and several software providers that provides free return preparation and filing for those with incomes of $69,000 or less as of the 2019 tax year—that return you'll file in 2020.

Fiscal year taxpayers might do best to look into using the services of a tax professional. Not all software is set up to accommodate a fiscal year—especially the free or basic versions.

Article Sources

  1. IRS. "Tax Years." Accessed Feb. 11, 2020.