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:

1. Complete federal return
2. Click “continue to state return”
3. Software halts the process
4. Display pops up:
   “State filing requires paid upgrade — $40”
5. Your data is already inside their system
6. 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.