In fact, 4.2 million tax returns were filed electronically in 1990, the first year the service was offered. Last year, 95 million tax returns, or 66% of taxpayers, filed their returns electronically.

Starting in 2003, taxpayers have been able to e-file for free.

Where to File for Free

According to the IRS, there are three ways to e-file: via tax preparers, through the tax prep apps and products provided by private companies like H&R Block, TurboTax, etc., or through the IRS Free File program.

Tax Preparer

If you hire a tax preparer, these pros can use e-services to file your return for free. If you have a standard Federal and state filing, then last year the average fee for tax preparation varied between $115 to $188.

So, in reality, your Federal filing will still cost you. Also, the charges for filing your taxes are likely to increase for complicated and poorly organized returns.

However, the more complex the tax return, the more benefit you’ll derive from a tax preparer. So, if you’re self-employed, run a small business, or sold a lot of stocks last year, you should probably hire an accountant or other tax pro for the best shot at the most savings.

Traditional Free File Software

This year, you can use tax software to file your Federal return for free if you had an Adjusted Gross Income (AGI) of $57,000 or less in 2009.

The IRS will help you choose a free file company, but here are some of the most popular:

H&R Block — They offer the ability to file your taxes by using their online app, or by downloading their free H&R Block software.

Online: Free package for the most basic tax situations, a Deluxe package for investors and homeowners that costs $29.95, and a Premium product for self-employed people and rental property owners that’s available for $49.95. State filing is $29.95.

Download: $19.95 for Basic, plus $29.95 for State. Download Deluxe is $44.95 and Premium is $59.95. Download Deluxe and Premium packages include State filing.

TaxAct — Claims free Federal filing for everyone, but we have to think this can’t be entirely true — based on the max income level for free filing. Despite this, we can forgive TaxAct because of their low prices. Free for basic, $9.95 for Deluxe, and $17.95 for the Ultimate Bundle – which includes State e-filing.

TurboTax — TuboTax offers a whole suite of tax products at various levels of sophistication for personal and small business use. Both online and downloadable/cd versions are available.

Free Edition. Online only. State is $27.95.

Basic. Online: $14.95 for Federal and $36.95 for State. Buy CD/Download: $24.95 for Federal (e-file up to 5 Federal returns for free) and $19.95 State.

Deluxe. For maximizing deductions. For Online: $29.95 for Federal and $36.95 for State. Buy CD/Download: $59.95 for Federal (e-file up to 5 Federal returns for free). State included.

Premier. For investments and rental property. Online: $49.95 for Federal and $36.95 for State. Buy CD/Download: $59.95 for Federal (e-file up to 5 Federal returns for free). State included.

Home & Business. For self-employed, income from side jobs, sole proprietors, consultants, 1099 contractors, or single-owner LLCs. Online: $79.95 for Federal and $36.95 for State. Buy CD/Download: $99.95 for Federal (e-file up to 5 Federal returns for free). State included.

Business. For S Corps, partnerships, C Corps, or multi-owner LLCs. Only desktop version available. $129 for Federal (e-file up to 5 Federal returns for free) and $19.95 State.

OLT OnLine Taxes — Free Federal and State return filing for everyone 20 and under. For everyone else, Federal and State returns are $7.95 each.

IRS Free File Program

With all of the companies above advertising free e-filing for Federal returns, many people go ahead and do their taxes, only to wonder why they end up getting charged for it at the end. It’s because their AGI was over the limit.

However, even if your AGI is over $57,000, you can still file your Federal return for free.

There are no income limitations if you use the Free File Fillable Forms. You fill in their forms and file them without the tax software. Not recommended for the faint of heart. Of course, this doesn’t apply to State returns, which you’ll have to take care of elsewhere.

What’s the Best Deal?

Well, it depends on the level of support you need.

H&R Block and TurboTax have great prices for people who have more complex tax situation, but can still do their taxes themselves. OLT has some killer pricing for those filing simple returns.

I’ve mentioned it before, but with tax season heating up, this product has had some buzzing discussions take place (no, I don’t mean that Buzz), and warrents a closer look.

Free is Good

First of all, Outright is free. That’s a popular price for items preferred by Gauchos. According to Kevin from Outright (who responded to a comment on this FreelanceSwitch post):

[...] this is Kevin from Outright.com. Just wanted to let you know that the core service will remain free. We will add other paid services (like the online 1099 filing service we launched last month: http://outright.com/contractors/1099) but the core bookkeeping will stay free. Hope that helps.

It does help, Kevin. Tracking and reporting income and expenses in an effort to estimate and stay prepared and keep your taxes on track, or playing catchup at the beginning of April, is usually a difficult and time consuming activity. By automating this process, small businesses can spend more time making money and less time accounting for it.

By the way, all information you keep on Outright is encrypted, so your data is kept secure.

The Live Feed

Many small business owners and consultant will tell you how important it is to use a real, living, breathing tax pro when tax season rolls around.

I’m not going to suggest that Outright might replace getting a real pro to help you. But, if you’re truly running on a shoestring budget, Outright will likely save you a lot of time and frustration. It will help you organize, compute, and report the information necessary if you elect to use a service like TurboTax, H&R Block, or another desktop or web-based product to file your taxes.

If you’re still going to use a bookkeeper, tax consultant, or accountant for help filing your taxes, that’s great. Imagine the time you’ll save when you walk in and drop a highly organized file on their desk with all the reports you’ve provided. You’ll save additional money by paying for less of their time. And, by empowering them to focus on finding additional tax deductions — instead of having them babysit you while you get your basic tax needs in order — they might find a way to save you even more.

Simple

Outright is dead simple to use. I was impressed with its easy navigation and its ability to import data from credit cards accounts, PayPal, eBay, invoicing apps, CSV files, and more.

Once such data is imported, Outright offers flexible and powerful reporting features. These include profit & loss statements, 1099 reports, plus reports on income and expenses by customer, vendor, and category.

Outright helps you to know what deductions you can take at tax time, reminds you about deadlines, helps you to avoid late fees, and has a knowledgeable user community helping to answer each others questions. You can even pay your estimated taxes via a secure payment portal.

It also supports users living in several countries outside the US.

Effortless

If you’re a Freshbooks user, as more and more small businesses and freelancers seem to be, you can link your Freshbooks account to Outright and it will import all of your data. Set the dates you want to import (it defaults to importing only current data), and then in literally a few seconds you’ll be ready to run profit and loss statements and expense reports. Think of Freshbooks as your cash register and Outright as your bookkeeper.

Outright also integrates with shoeboxed, a web product offering free and paid services for managing business receipts. (Use the Outright referral link to get $10 off annual plans.)

Nothing to Lose

Keep in mind that Outright is intended for sole proprietors and single-member LLCs who file a Schedule C tax form.

If you fall into that bucket, then there aren’t many, if any, good reasons for you not to give Outright a try. It will only make your tax season easier and it’s a useful year-round tool for figuring out estimated taxes.

Surprise! No more tax season surprises.