Free Tax Filing Limited - The partnership between the IRS and about 20 private tax preparers allows eligible taxpayers to prepare and e-file their federal tax returns for free. But this year, the program is limited to taxpayers with an adjusted gross income of $50,000 or less.

That's a big change from 2005, when several tax preparers, including software giants TurboTax and H&R Block, made their Free File programs available to all taxpayers.

The tax preparers scrapped restrictions last year after some competitors, seeking to attract more business, offered free tax preparation and e-filing to high-income taxpayers. More than 5 million taxpayers filed returns through Free File last year.

All told, more than 68 million tax returns - about 52% of all returns - were filed electronically in 2005.

TurboTax and H&R Block officials made clear they weren't happy with Free File for all. This year, the partnership agreed to limit Free File to taxpayers with AGI of $50,000 or less.

Some Free File offerings are even more restrictive. They limit their programs to low-income filers, residents of certain states or specific age groups.

TurboTax's Free File program, for example, is limited to taxpayers with income up to $28,500, taxpayers eligible for the earned income tax credit and active-duty members of the military who earn up to $50,000.

The IRS offers a link at www.irs.gov you can use to search offers. But if your AGI exceeds $50,000 and you're looking for a way to file your taxes for free, "You need to look outside IRS.gov," says Bert DuMars, head of Electronic Tax Administration for the IRS.

Discounts and deals

If you're not eligible for Free File, you can howl at the moon, or you can look for ways to reduce or eliminate the costs of preparing and e-filing your tax returns. Fortunately, you have lots of options.

TaxAct, a program developed by Second Story Software, offers its standard version for free. You can file over the Internet or download the company's software. The offer is limited to federal tax returns. One caveat: You'll have to endure endless promotions for TaxAct Deluxe, which costs $9.95 for a federal tax return.

Other opportunities for cost cutting include:

Prepare and file online. TurboTax and H&R Block offer desk-top and online versions of their products. If you're comfortable doing your taxes over the Internet, consider using the online versions, which are usually cheaper.

For example, TurboTax's Basic software costs $19.95 for a federal tax return, plus $14.95 to e-file. If you file online using TurboTax Basic, the same $19.95 lets you file for free (these prices are through April 1).

Buy only what you need. Some premium and deluxe versions of tax software and online programs include a state and federal tax return. If you live in a state with no income tax, that's overkill.

Even if you live in a state that has an income tax, you might be able to avoid paying for a state return. Twenty states let residents prepare and e-file their state tax returns directly to their Internet sites for free (see map). An additional 20 states have agreements with private tax preparers to offer free e-filing to eligible taxpayers, says Harley Duncan, executive director of the Federation of Tax Administrators, a trade group for state tax officials. You can check out your own state at www.taxadmin.org.

Keep it simple. Using the shortest return the IRS allows will reduce errors and save you time. It could also save you money. Some tax preparers offer lower prices for the 1040EZ, which you can use if your taxable income is under $100,000 and you meet other IRS criteria (for details, see www.irs.gov). For example, H&R Block's TaxCut Online EZ costs $5.95 for one federal tax return and includes e-filing.

Look for discounts. Before you pay for a tax-preparation program, find out if your bank, credit union or mutual fund company offers a better deal. Dozens of financial institutions offer their customers discounts on H&R Block and TurboTax products. The discounts are usually limited to the online versions.

Keeping it free
If you still qualify for Free File, there's no reason not to take advantage of it, but there are a couple of things to keep in mind. Most offers are limited to federal returns. For a state return, you might have to pay extra.

In addition, make sure you link to the free offers through www.irs.gov - not through the tax preparers' own Internet sites. Otherwise, you might not be eligible for the free offer.

Calculate withholding and tax online with our free tax calculator.