• Even the IRS thinks you shouldn't go the paper and pencil route. According to the taxman, you should file electronically for the following reasons:

1. Accuracy: Filing electronically increases the accuracy of your return. This is important because inaccuracies are one of the red flags that can trigger an audit.
2. Simplicity: Online tax services like TurboTax make filing a breeze by literally walking you through every step and preparing whatever schedules and forms are appropriate.
3. Efficiency: Not only can you file your federal and state returns simultaneously, they'll be filed instantly. You'll receive an immediate receipt for your return, and your refund will be processed within a matter of days.

• Services like TurboTax and TaxCut use the same encryption technology used by banks to e-File your tax return with the IRS, and their servers are firewall-protected.

• You, of course, should also protect your computer by running a firewall and regularly scanning your computer for viruses and malware.

• • NOTE: If your income is low enough, you may not have to file an income tax return. Refer to IRS Publication: Exemptions, Standard Deduction and Filing Information (501) or Smart Money's "In Some Cases, You Don't Need to File a Tax Return" for more information.

• Sadly, doing your taxes online doesn't mean you can do away with paper entirely. You still have to compile all your receipts, W-2s and various financial documents for the year. You'll also need to hang on to them in case you're ever audited.

• What you need to do your taxes will depend on how you make your money, the types of investments you have, whether you intend to itemize your deductions and a number of other factors. The following is a list of the basic information you'll need to start your tax return:

1. Social Security Numbers: For you, your spouse (if you're filing jointly) and any dependents.
2. W-2 Forms: You will receive a W-2 form, a statement of the wages you earned for the year, from your employer. You should receive your W-2 by January 31st. If you have not received your W-2 by then, contact your employer. If you are filing jointly with your spouse, you will need to collect the W-2 forms from both of your employers.
3. 1099 Forms: 1099s are forms you receive for dividends, retirement accounts, scholarships and other forms of income. If you are self-employed, you will receive 1099s from the companies you worked for in the past year reporting any money you earned as an independent contractor.
4. Receipts: If you plan on deducting any expenses or charitable contributions from your taxable income, you will need to have those receipts on hand.
   • If you are bringing your receipts to a tax preparer, take the time to organize them into useful categories like medical expenses, mortgage interest, business-related expenses, etc.
5. Bank Account Numbers: If you wish to receive any refund you might be due by direct deposit, you will need your bank's routing number and your bank account number.
6. Adjusted Gross Income from the Previous Tax Year: You will need last year's tax return to accurately complete this year's.

• Receipts and Documentation for all Business-Related Expenses

• The IRS requires that you identify your tax status in one of the following five ways:

1. Single: If, on the last day of the tax year, you were unmarried or legally separated, your filing status is "single." ^[1]
2. Married Filing Jointly: You and your spouse report your incomes on one tax return. You are both required to sign the return. ^[2]
   • Due to the passage of the Federal Defense of Marriage Act in 1996, gay and lesbian couples cannot file joint federal tax returns. However, legally-married couples in Massachusetts can file a state return jointly. Other states dictate civil unions and domestic partnerships differently. Consult About.com's Tax Tips for Gays, Lesbians and Same-Sex Couples for state-by-state rulings on joint filing.
3. Married Filing Separately: If it reduces your tax bill, you and your spouse can file separately. You and your spouse are then each responsible for your own taxes. ^[3]
4. Head of Household: Head of Household is a special status, which entitles you to a lower tax rate. You may be able to file as "head of household" if you are single, paid more than half the cost of keeping up a home and have a "qualifying person" such as child living in your home for more than half the year. ^[4]
5. Qualifying Widow(er) with Dependent Child: This status may apply to you if your spouse died in either of the two preceding tax years and you have a dependent child. ^[5]

• Your filing status typically refers to your situation on the last day of the tax year. If you are having trouble figuring out your filing status, consult IRS Tax Topic: What Is Your Filing Status? (353) or Smart Money's "What's Your Filing Status?".

• The absolute best thing about doing your taxes online is that services like TurboTax and TaxCut translate IRS tax forms into plain English. You'll be prompted with basic questions about your income, lifestyle and expenses. Answer the prompts, and like magic, all the correct tax forms and related schedules will be complete.

• The following is a rough outline of the process the online tax programs will walk you through to complete your return:

1. Calculate Your Gross Income
   • Your gross income includes all of your income—your wages, interest earned on investments, stock dividends, business income, rental income, alimony, prize money, tips, etc. The majority of your income is documented in the various W-2s and 1099s you receive at the beginning of the year. You may or may not receive documentation for things like tips, but you must report all of your income. (See IRS Tax Topic: Tips (402) for more information.)
2. Calculate Your Taxable Income
   • With tax laws changing every year, it's almost impossible to figure out which "adjustments" you can make to your "gross income" to arrive at your "taxable income." Your "taxable income" is the figure the government actually uses to figure out whether or not you owe them or they owe you, and those "adjustments" include everything from tax credits and exemptions to itemized deductions.
     • Your online tax program will ask you a series of questions to figure out whether or not you should itemize and which adjustments you are qualified to make. While the program will do all the work for you, it's not a bad idea to understand what it means to itemize and whether or not a tax credit may apply to you. A breakdown of these various adjustments is provided at the end of this Step.
3. Calculate Your Tax
   • Once the program knows your taxable income, it can calculate your tax based on the IRS tax tables for the current year. Another useful feature of a program like TurboTax is that it will actually keep track of your tax in the sidebar of the screen as you complete your return so you can see that figure rise and fall as you input your financial info.

• There are different types of tax credits—child tax credits, adoption tax credits, retirement savings contribution tax credits, etc. To figure out if any tax credits apply to you, consult IRS Tax Topics: Tax Credits (600).

• For more information about exemptions, refer to IRS Publication 501: Exemptions, Standard Deduction and Filing Information.

• You have a choice when you do your taxes. You can either take the "standard deduction" or "itemize your deductions." What does that mean, and which should you choose?

• The "standard deduction" is a set amount that the government allows you to subtract from your gross income to arrive at your AGI. That figure allows you to avoid all the accounting necessary to itemize your deductions and, if you don't think you have many expenses that qualify as deductible anyway, than you're just as well off going with the standardized amount.

• However, if you believe you'll be able to take more money off your gross income by itemizing and subtracting all your qualifying expenses, than you should consider itemizing. What qualifies as a legitimate deductible expense?

• Medical Expenses (IRS Tax Topic 502)
• Interest (IRS Tax Topic 505)
• Charitable Contributions (IRS Tax Topic 506)
• Casualty and Theft Losses (IRS Tax Topic 515)
• Business-Related Expenses (IRS Tax Topic 509, 510, 511, 512)
• Educational Expenses (IRS Tax Topic 513)
• Miscellaneous Itemized Deductions (IRS Tax Topic 508)

• But, this is where things get tricky. The rules that apply to each deduction can be difficult to interpret. What actually qualifies as a deductible "miscellaneous" expense? What percentage of that expense can you actually deduct?

• This is why people use tools like TurboTax or seek professional help. Being an expert on these rules, which change from year to year, is a full-time job. So, be cautious if you wish to itemize. Don't claim anything dubious. Have documentation for every penny you deduct. And, seek help from a tax professional if you need it.

• Consult IRS Tax Topic: Itemized Deductions (500) for more information on allowable itemized deductions.

Should You Itemize?

• The rule of thumb is that you should itemize if your allowable itemized deductions equal a greater amount than the standard deduction. (The only time you are required to itemize is if you and your spouse file separately. If one of you itemizes, you both have to itemize.)

• But, how do you tell which is greater without going to all the trouble itemizing in the first place? One way to find out is to estimate with the help of an online calculator like TurboTax's Deduction Finder. If you're self-employed, you may also find it advantageous to itemize because your business-related expenses can be written off as deductions, which can help off-set the fact that taxes are not automatically withheld from the income you receive as an independent contractor.

• For more information on whether or not you should itemize, consult IRS Tax Topic: Should I Itemize (501).

• Online tax services like TurboTax and professional tax preparers will prompt you with questions to figure out if you qualify for any of these deductions. If you are doing your taxes independently, follow the instructions provided by the IRS and consult IRS Tax Topics: Adjustments to Income (450).

• While completing your return online increases it's accuracy, that doesn't mean you shouldn't check it over. You'll want to be sure that the numbers you inputed were correct, and you'll want to print out a hard copy to keep in your personal files.

1. Be sure that you have entered all of the necessary information into the program.
2. Preview the tax forms you will be electronically submitting.
3. Check the forms for accuracy, and remember that you must have documentation on file for any deduction you claim.
4. If you owe the government money, you will be prompted to enter a credit card or bank account number to pay your taxes. If you are owed a refund, you will be asked for a bank acccunt and routing number so that a refund can be issued to you via direct deposit.
5. Using the eletronic signature option, e-sign your return. (This will typically consist of choosing a unique PIN number.)
6. Print out a copy of your completed tax return for your records.
7. Electronically file your return.

• • NOTE: Another bonus of using an online tax preparation program is that your state and federal returns will be filed simultaneously!