E-Filing Your Taxes May Cost More Than You Think

Monday, February 16, 2009 7:01 - By The David

Posted in category fees, taxes

I did my taxes this week, and was very happy with the results. But when it came time to choose between e-filing or mailing them in, I had to stop and think about it. It’s tempting to take the money as soon as possible, but is it worth the cost? I decided to do the math.

It’s free to e-file my federal return, so there’s no choice to be made. I prefer the speed and security of filing online. My state taxes are a different story though.

I am due for about a $500 state refund, but it costs $39.95 to file them online (using Turbotax). If e-file them, I’ll have my money in 6-8 days. If not, it’ll take 6-8 weeks.

Is the convenience worth the cost? I decided to put it into perspective.

$39.95 doesn’t sound so bad on its own, and it represents about 8% of my refund. Again, still doesn’t sound so bad. But what if it was a loan, instead of just a one-time fee? What would its APR be?

According to Wikipedia, APR, or annual percentage rate, is:

…the interest rate for a whole year (annualized), rather than just a monthly fee/rate.

So to calculate the APR of e-filing, I need to figure out how much it would cost for a year of such fees. I’d save 6-8 weeks by filing, so here’s what the math is like. 52 weeks in a year / a fee every 8 weeks = 6.5 times I’d pay a $39.95 fee. That’s a total of $259.67.

To figure out the APR, I just divide the annualized fees by the amount of my refund. $259.67 / $500 = 51.9%.

I’d eseentially be paying 51.9% in interest by e-filing. I’d never even consider a loan that charges 51.9% interest, so there is no way I’ll pay that just to get my money back 8 weeks sooner.

In addition to saving money, there are several mental benefits to sending my taxes in the old fashioned way. The biggest is that I’ll have forgotten about my money by the time it gets here. That $500 is so far away that it doesn’t factor into my plans.

When I finally get it, the money will be unexpected. I won’t be thinking about how I could spend it, so it’ll be easier for me to put it towards something like my emergency fund or paying down debt.

They say time is money, but eight weeks is not worth $39.95 (at a 51.9% APR) to me.

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Tags: APR, e-file, taxes

401k_ira

Please give me more information. I love it, Thanks again.

S.

I know bloggers often want to be anon, but do you mind sharing what state you live in?

The David

Sorry, but I'm going to have to plead the fifth on that one. I really want to try to stay anonymous.

I will explain some more details about why it would have cost me so much to e-file my state taxes.

The biggest reason is that I didn't look into any other options for e-filing state other than turbo tax. I'm sure that I could have filed it for free online through the state, but I chose to not even look into that option.

One reason why is that I was lazy. I had to enter my info 3 separate times in turbotax, and by that point, I didn't feel like entering it anywhere else.

Another reason why is that I've found discrepancies between using state tax forms and turbo tax forms. In general, using turbo tax seems to give me slightly higher refunds. Although I'm not sure why that is, I'm going to go with the higher return.

But still, I should have at least tried to calculate my taxes using state-provided materials. Like I said, I was lazy/frustrated, and chose not to.

So there are other free options out there...I just wanted to show what the cost was for people that chose not to take advantage of them.

Thanks for reading, and for the comment. I'm very sorry I can't provide more info about myself.

mike

It may be trivial, but wouldn't you also need to calculate the any potential potential benefit of the interest gained over the time period (8 weeks) on that $500 -- now at a wopping 2% APR rate?

The David

Not trivial at all. If I'm going out of my way to include all the details, I should include all the factors. Even if it doesn't make much of a difference in this case, I'd like to present as fair a picture as possible. If it were something bigger like a loan or mortgage, a small factor could have a huge impact.

Here is the corrected math.

If I did get the return immediately, I could earn 2.2% interest in my ING account, for a total of of $1.83 over the course of 8 weeks.

Now I could be wrong here, but I think this income would be subtracted from the total annualized cost. This would lower it from $259.67 to only $257.83.

After dividing it out, the new and more accurate APR would be 51.5%. So it would make a difference, but not too much in this case.

Thank you very much for the comment - I really appreciate the heads up! I should have included all the details from the beginning.

DivorcedDadFrugalDad

David--

Interesting way to look at it, but what if you had a credit card with a $460 balance and a crazy rate of interest? Not to mention the interest free loan you are giving the state?

I admit it is still highway robbery, but with these other considerations, your "expediting cost" would be reduced somewhat. Furthermore, the personal satisfaction of denying the state and kissing a bill goodbye might be worth it . . .

The David

Excellent point. If you could use the return to pay off something that is even more expensive, then you would technically be saving money.

Another option would be to file my state taxes somewhere else for free, instead of using Turbotax (for the state portion at least).

I hate the idea of giving the government an interest free loan too, but I'd rather do that then pay even more to stop it from happening. The amount of interest I would've made is nowhere near the money I'd have to pay.

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