You saw the big promise: “Free tax filing!”
Then you filed your federal return… and suddenly you hit the wall:
“Your state return requires an upgrade — $40.”
This isn’t an accident. It’s a business model.
Here’s how tax software companies lure you in — and how to avoid being trapped by the state return upcharge.
The “Free Federal, Expensive State” Trap
Most online tax prep companies lead with:
- “Free federal filing”
- “File your taxes for free”
- “Zero-cost filing”
But here’s the fine print they don’t want you to notice:
Federal is free — state is not.
The average “state e-file fee” across the industry is:
- $19.99 to $44.99 per state
- Additional fees for additional states
- Extra charges for multiple W-2s or certain forms
Some platforms even require the paid version of the software before they’ll allow state filing at all.
The Real Reason They Charge for State Filing
Because state e-file fees are the profit center.
Federal returns are:
- subsidized by the IRS Free File agreement
- used as a “hook” to acquire customers
- processed at scale with minimal cost
- the marketing bait
State returns are:
- exempt from IRS subsidies
- not covered by Free File agreements
- subject to private pricing
- used to recover profits
Federal returns bring you in the door —
State returns pay for the business.
Who Does This Bait-and-Switch?
Companies known for this structure include:
- TurboTax
- H&R Block Online
- TaxAct deluxe tiers
- Certain browser-based tax filing apps
- Most “free” mobile tax apps
The consumer experience typically looks like this:
- Complete federal return
- Click “continue to state return”
- Software halts the process
- Display pops up:
“State filing requires paid upgrade — $40” - Your data is already inside their system
- You feel trapped
And that’s intentional.
The Psychological Pricing Trick: “Sunk Cost Lock-In”
Once you’ve:
- invested an hour entering your tax info
- imported your W-2s
- added dependents
- entered student loan interest
- uploaded receipts
You won’t want to start over.
Tax software companies know this.
They don’t need to convince you $40 is fair.
They just need to convince you it’s easier than re-entering everything elsewhere.
How to Avoid Paying the Surprise State Fee
There are real alternatives:
1. IRS Free File Partner Services
If your income is within the eligibility limit (typically under $79,000), some partners offer:
- free federal AND
- free state filing
Not all partners do — but several do.
2. Free State Filing Through Your State’s Website
Many states allow:
- free e-file through their official tax portals
Examples include:
- California
- Massachusetts
- Minnesota
… and others.
You can file federal through a software platform —
And file state separately — free.
3. VITA / TCE Programs
IRS-backed volunteer tax services for:
- seniors
- low-income filers
- disabled filers
- limited-English filers
These services complete both returns — for free.
How to Spot the Trap Before You Get Stuck
Look for red-flag language like:
- “Free federal only”
- “State not included”
- “State filing additional fee”
- “State filing not supported in free edition”
The biggest warning sign:
They never mention state filing until AFTER federal is completed.
That’s by design.
If you were promised “free filing” —
But ended up forced to pay for state filing —
You were not mistaken.
You were marketed to.
The truth:
- Federal filing attracts you
- State filing monetizes you
- The fee is strategic, not accidental
You are not obligated to pay the state fee —
You only feel locked in because your data is already entered.
Knowing this trick is the first step in avoiding it.
