Does the IRS’s DirectFile make sense for you

You probably won’t use Direct File to file your taxes this year. The IRS crafted free-filing pilot program is only available in a dozen states and can’t accommodate common forms, such as those used for freelance work.

It’s worth consideration if you happen to qualify, though, and may be more useful as its capabilities develop in the years to come. 

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What is IRS Direct File?

The Internal Revenue Service (IRS) launched the Direct File pilot program as an option to file 2023 federal tax returns online. While not everyone is eligible to use the program, it is designed to offer a streamlined way of filing your taxes without paying for a software service or dedicated tax professional to guide you through the process. 

It’s available in both English and Spanish, and you can use the tool from a smartphone, tablet or desktop. If you have any questions, you can get real-time support from an IRS customer service representative during support hours, which run from 7 AM to 10 PM EST on weekdays. Representatives can answer technical support questions and basic tax questions.

And, of course, it’s an entirely free tool, which means you won’t have to pay a dime to file your tax return. 

Can you use it? 

Unfortunately, there are strict restrictions on who can use the product, including where you can live and what kind of tax situation you have. 

An estimated 19 million taxfilers will be eligible, per the IRS, and the expectation is that less than a million will use it. For context, there were roughly 165 million tax returns processed in 2022.

Residency 

The first requirement is that you must live in a participating state, which includes:

• Arizona.
• California.
• Florida.
• Massachusetts.
• Nevada.
• New Hampshire.
• New York.
• South Dakota.
• Tennessee.
• Texas.
• Washington. 
• Wyoming.

Types of tax forms

Beyond living in an eligible state, your tax return can only include certain tax forms, excluding millions of taxfilers who have relatively simple situations. 

• Income: You can report income from W-2 wages, Social Security, unemployment via a 1099-G form and interest income of $1,500 or less via a 1099-INT form. 
• Credits: The tax credits you can claim via the IRS Direct File tool include the earned income tax credit, child tax credit and credit for other dependents. 
• Deductions: The tool supports taking the standard deduction. It also supports deductions for student loan interest and educator expenses. 

Therefore anyone who itemizes their deductions is out of luck.

“If you typically itemize your returns and deduct property taxes, personal property taxes, mortgage interest and charitable donations, you can’t include these with the initial pilot system,” says Tom Wheelwright, CPA and CEO of WealthAbility. 

But the program’s limitations leave out more than just itemizers. 

Anyone with freelance income (form 1099-NEC), even if most of your pay came from a salary job, can’t use the program. Neither can those who use the saver’s credit, a benefit designed to help lower income Americans save for retirement. 

Income

You can’t use Direct File if you make more than a certain amount. 

• Single filers are ineligible if they earned more than $200,000, or $160,200 if you had more than one employer.
• If you’re married and filing jointly, you are ineligible if either spouse made more than $200,000, or $160,200 if you had more than one employer, or if you and your spouse earned a combined $250,000. 
• Those with a married filing separately status can’t have earned more than $125,000. 

What’s it like to use?

If you want to work with the IRS Direct File tool, you’ll go through a series of steps to complete your tax return.

Determine Eligibility

If you aren’t sure you qualify, start by heading to directfile.irs.gov. From there, select the ‘check my eligibility’ button.

When checking your eligibility, you’ll be led through a series of seven questions as you create your account, including:

• Confirming you live in a participating state.
• Confirming you have appropriate identification, including a Social Security Number or Individual Taxpayer Identification Number and a government-issued ID. 
• Confirming you only receive income from tax forms W-2, 1099-G, SSA-1099 and 1099-INT. 
• Confirming your and your spouse’s wages are less than $200,000 or $160,200 if you had more than one employer. 
• Confirming your total household income was under $250,000.
• Confirming you plan to take the standard deduction. 
• Confirming you don’t have health insurance from HealthCare.gov or used health savings account (HSA) funds. 

After going through the tool, you can decide if you are able to use the Direct File tool or not. If you do qualify to use the tool, you’ll be directed to create an account through ID.me. 

Answer tax questions

Once you sign into the Direct File tool, you’ll see a Tax Return Checklist. This feature is intended to help you keep track of your progress. It’s also helpful to see what you need to complete if you decide to skip around the tool. 

The Direct File tool will ask you a series of questions, which will be used to complete your tax return. For example, you might be asked, “Could anyone claim you as a dependent on their 2023 federal tax return?” 

If you run into any questions, the tool has embedded links to help you get clarification. But you’ll also have the option of contacting an IRS customer service representative in either English or Spanish via a live chat feature for most of the day. 

Finalize the return

After you enter all your details, you’ll see how much you owe in taxes for the year. Depending on your situation, you might see a refund amount. Direct File provides a breakdown document to show you how the amount was determined. 

Before you file the return, you have the option to download a draft to confirm all the details are correct. If you find errors, you can return to the tool to make any necessary edits. 

Once you are satisfied that everything is correct, you can finalize your return within the tool. 

Should you file with IRS Direct File?

If you’re one of the few tax filers who do qualify for Direct File, you should give it a go. 

“Low and medium income taxpayers, especially those with only a single source of W-2 income, might stand to benefit from a Direct File program,” said Chad Cummings, CPA and attorney based in Naples, Florida.  

The real test will be when Direct File expands in the years to come.

Once government technologists craft a program as sophisticated as TurboTax or H&R Block, then it might be worth your attention, especially if the IRS is able to fill in your tax data before you even get going (since they already have it). 

Today, Direct File is more of a curiosity that offers the hope of a cheaper tax filing experience in the future than a tool that’s best for most people.