I had earned a fair amount of income from my jobs on campus (and my summer job) and Turbo Tax was of great help. Living in Florida, I (luckily) didn’t have to worry about state filing costs… the entire experience of entering two W-2s and getting a refund took all of 10 minutes. It was exactly as advertised, and I was 100% satisfied.
Before I knew it, however, my tax situation became more and more complicated. I started my own business, began saving a small amount for retirement, got married, had children, bought a house, started a second business … the basic version of Turbo Tax wasn’t cutting it. Upgraded versions started costing serious money (upwards of $100). Plus, even more money to file my state taxes, now that I live in Connecticut instead of Florida. It has actually become better for me to have a CPA handle my taxes each year, rather than worry about screwing it up myself while still paying $150 via Turbo Tax or H&R Block.
Well, in a new and very surprising move — at least to this financial blogger– Credit Karma now offers FREE tax software for almost every American taxpayer. And when I say FREE, I mean it costs absolutely nothing to file both your Federal and State tax returns. No matter your individual (very important) tax situation, there’s no charge when you open an account, no charge when you file, and no charge whether you’re reporting $45,000,000 or $45,000. (**If you own a small business that files S corp, C corp, partnership, or multi-member LLC paperwork, I’m afraid you’re out of luck this year for filing your business taxes. Credit Karma cannot yet file your return — but this won’t be the case forever, says their CEO.)
Some important points to make before talking about how Credit Karma can provide such a service:
- The software is not yet live but will be in January — you can even “get in line” now to gain access. You will absolutely be able to file your 2016 taxes next year.
- You must have a CreditKarma.com account (it’s free) in order to utilize their tax filing platform.
- Your 2016 Federal and State tax returns are due no later than April 18, 2017.
- You can print and mail your return after completing it using Credit Karma, if you so desire. You don’t have to e-file if you don’t want to.
- Filing your return can only be done by logging into their platform; the software cannot be downloaded.
When Did Credit Karma Become a Tax Software Company?
Earlier this year, Credit Karma purchased a North Carolina based tax preparation company named AFJC Corporation. AFJC Corporation is a provider of online tax preparation, filing solutions, and related services for individuals, certified tax preparers, and financial institutions. As a result of this purchase, Credit Karma is opening a new office in Charlotte, NC, entirely focused on their tax prep services.
Before this purchase, Credit Karma was known for being able to provide you with a free credit score, without even requiring a credit card. Before them, the deal with other credit score providers was that for the first X number of days, you could see your score without charge. After that, though, your free trial period would end and you’d have to pay a monthly service.
Credit Karma didn’t like that system, which all of the other companies were using. They took the idea a step further and decided to make the whole damn thing free. And as you can see from their new tax platform, it’s kind of their thing to take an existing pay-for service and make it 100% free.
How Can Credit Karma Make Tax Filing Free of Charge?
Credit Karma is likely spending millions of dollars on their new office, millions of dollars to develop the software to be able to provide 100M tax returns, millions of dollars in advertising (I just saw a TV commercial for their new software), and millions of dollars to staff it all, so that if problems arise, they have plenty of support available. And, of course, they don’t plan to take in a single penny of revenue from tax filers.
What now? How does Credit Karma plan to make money? Well, every piece of information you provide them when filing your taxes is going to be used to offer you services in those industries. For example:
- When you enter your home mortgage interest, you’ll get an email about suitable refinance options. (If you sign up for any of them, Credit Karma gets a commission.)
- When you enter your business expense report, and show a lot of travel, you’ll get an email about potential travel reward credit cards .(If you are approved for any of them, Credit Karma gets a commission.)
- When you enter your self employment health care costs, you’ll get an email about other medical insurance providers that might save you money. (If you apply for any of them, Credit Karma gets a commission.)
You get the idea. Of course, this is something they’ve already been doing when you get your free credit score through CreditKarma.com. Here, though, they’ll be able to do it on a much grander scale, getting (what should be) 100% accurate information about the consumer and pinpointing offers that might suit their needs. A lot of up front costs now and, if all goes according to plan, a lot of revenue later.
What Happens to Turbo Tax, H&R Block, TaxACT, my CPA…?
If Credit Karma is successful in offering 100% free-of-charge tax returns for tens of millions of Americans, then it’s a grim picture for the names above (and many others not mentioned). Platforms like Turbo Tax and H&R Block make their revenues from the costs they charge to file taxes, even if some of their services are free. Seeing as the news is pretty fresh, I would imagine many other companies are getting ready to cut prices drastically in order to keep business for 2017 and beyond.
What if Credit Karma is not successful in this venture and the revenues cannot sustain the business? Then, you’ll likely see an emboldened group of tax prep providers, strengthening their core products and platforms.
As tax season approaches, I plan to update this article with fresh screenshots and information on the Credit Karma tax prep platform. For right now, they offer no other information than to wait. So, I wait. But be sure to check back in the coming weeks to learn more, as the Credit Karma Tax unveiling gets underway.
Oh, and don’t worry, H&R Block. My parents will still spend $300 to sit down with you for 4 hours, filing their single W-2 with no investment income. (It’s amazing I turned out so well, really.)
Updated December 24, 2016 and originally published December 21, 2016.