Healthcare and Dependent Care FSA Check-up Reminder (Average Loss $157)

Posted on October 21, 2021 // 1 Comment

As we head into the last few months of 2021, this is a reminder to check on your Healthcare and Dependent Care Flexible Spending Accounts (FSA). This NYT article outlines some temporary changes this year, while also revealing that nearly half of all FSA participants have lost some amount of their contributions, with a median lost balance of $157.

Healthcare FSA carryover allowance for 2021 into 2022.

Employers may allow a “full” carry-over of remaining balances for next year — up to the total balance in the worker’s F.S.A. So if you had $1,000 in your account at the end of this year, you could carry it all over into 2022. (The usual carry-over limit is $550.)

Masks, hand sanitizer, sanitizing wipes, and at-home COVID tests are FSA eligible expenses. See official IRS notice. The Amazon FSA and HSA Store accepts your FSA/HSA debit card for hassle-free reimbursements and is also an easy way to find eligible items that may be useful to you.

The accounts can be used for medical care and co-payments, nonprescription drugs, and a variety of health-related services, products and supplies, including menstrual pads and tampons, breast pumps, contact lenses and lens solution.

And the I.R.S. recently clarified that masks, hand sanitizer and other items that protect against the spread of Covid-19 are eligible for reimbursement. At-home Covid tests also qualify, the I.R.S. said, because “the cost to diagnose Covid-19 is an eligible medical expense for tax purposes.”

Dependent Care FSA carryover allowance for 2021 into 2022..

Under a temporary pandemic relief change, however, all funds in dependent care accounts may be rolled over into 2022 — if the employer chooses to allow it.

Balance carryover extensions are thus possible but still require your employer’s approval, so check with your HR department first.

I hate wasting potential tax savings, but this is another year of struggling with my Dependent Care FSA benefits provider over reimbursement approvals. FSA “stores” made some things easier, but many childcare providers simply aren’t used to providing detailed, itemized receipts like Amazon or Walgreens.

Filed Under: Frugal Living, Taxes //

Crazy Rich IRAs: From Peter Thiel to Ted Weschler

Posted on August 31, 2021 // 6 Comments

Propublica recently reported that venture captialist Peter Thiel has a $5 billion Roth IRA. Essentially, he bought some lottery tickets using his IRA wrapper, and they paid off. The controversial part is that these lottery tickets weren’t available to everyone. They were dirt-cheap private shares of a startup that were only available to founders and a handful of early investors. At such an early stage, you can pretty much value your private company shares at whatever you wish. Here’s the Propublica version:

Open a Roth with $2,000 or less. Get a sweetheart deal to buy a stake in a startup that has a good chance of one day exploding in value. Pay just fractions of a penny per share, a price low enough to buy huge numbers of shares. Watch as all the gains on that stock — no matter how giant — are shielded from taxes forever, as long as the IRA remains untouched until age 59 and a half. Then use the proceeds, still inside the Roth, to make other investments.

It’s not clear how they found this data, but they also included the owners of other large IRAs:

Ted Weschler, a deputy of Warren Buffett at Berkshire Hathaway, had $264.4 million in his Roth account at the end of 2018. Hedge fund manager Randall Smith, whose Alden Global Capital has gutted newspapers around the country, had $252.6 million in his. Buffett, one of the richest men in the world and a vocal supporter of higher taxes on the rich, also is making use of a Roth. At the end of 2018, Buffett had $20.2 million in it. Former Renaissance Technologies hedge fund manager Robert Mercer had $31.5 million in his Roth, the records show.

Ted Weschler, along with Todd Combs, are the heirs to the “stock picking” part of Warren Buffett’s job at Berkshire Hathaway. Greg Abel will be the future CEO and help handle all the wholly-owned subsidiary companies within Berkshire, and Ajit Jain will run the large insurance operation.

As a public figure, Weschler submitted this personal statement defending and explaining his IRA, and it reveals some interesting details. He opened his first “IRA” in 1984 as a 22-year-old Junior Financial Analyst making $22,000 a year. He seems to be mixing up the terms for 401k and IRAs in his letter (confirmed in WaPo story below). His timing was lucky, as 401k plans had just been born with the earliest ones starting around 1980. Here is a 1982 WSJ newspaper scan about these newfangled “salary reduction plans”, which were what 401k plans were initially called.

Anyhow, his 401k/IRA balance had grown to $70,385 by the end of 1989, when he rolled it over into a self-directed IRA at Charles Schwab. Fast forward 23 years, and by the end of 2012, his IRA was worth $131,000,000! Thanks to the new Roth IRA conversion option when he promptly rolled it over into a Roth IRA even though he had to pay $29 million in taxes. By 2018, the balance was at $264 million.

Also significant:

I invested the account in only publicly-traded securities i.e., all investments in this account were investments that were available to the general public.

[…] In closing, although I have been an enormous beneficiary of the IRA mechanism, I personally do not feel the tax shield afforded me by my IRA is necessarily good tax policy. To this end, I am openly supportive of modifying the benefit afforded to retirement accounts once they exceed a certain threshold.

This WaPo article is a follow-up with Ted Weschler about his amazing IRA skills.

I also realized that Weschler wanted to encourage young people to do what he did to accumulate his nine-digit net worth: save and invest, early and often, and take advantage of any retirement account benefits offered by their employer. “In a perfect world, nobody would know about this account,” he said. “But now that the number is out there, I’m hopeful that some good can come of it by serving as a motivation for new workforce entrants to start saving and investing early.”

My takeaways:

  • You may not agree with all the tax rules, but there is a reason why standard personal finance advice includes maximizing your Roth IRA contribution each year AND taking full advantage of your 401k plan with any employer contribution.
  • If you believe that your future tax rate after age 60 will be higher than your current tax rate, then you should consider converting any pre-tax “Traditional” IRA balances into Roth IRAs, even if it requires a big lump sum payment today.
  • If your income is too high to qualify for a regular Roth IRA, check if you are eligible to contribute to a “backdoor” Roth IRA, essentially making a non-deductible Traditional IRA contribution and quickly performing a Roth IRA conversion. If you are high-income and a big saver, look up the “mega backdoor” Roth IRA, which involves making a non-deductible contribution to your 401k plan (if allowed by employer plan document).
  • Roth IRAs have differences from Traditional IRAs beyond just the timing of the tax being upfront or at withdrawal. If you want to leave an inheritance (as these rich people most likely do), realize that Roth IRAs don’t have the required minimum distribution (RMD) rules that apply to traditional IRAs. Bottom line: More compounding + more tax shelter = bigger estate.
  • Consider putting your riskiest investments with the highest potential upside inside your Roth IRA. My Roth IRA holds REITs: low tax-efficiency and higher risk/return profile. No sleepy bonds!
  • As a BRK shareholder, if you were to think of a contest to win “The Next Warren Buffett”, finding the person who built the biggest IRA in the world using publicly-available investments would be a pretty smart filter! Maybe Berkshire Hathaway’s investment side will be alright after Buffett and Munger are gone.
Filed Under: Investing, Taxes //

IRS Tools to Track and Manage Enhanced Child Tax Credit Payments (Starts July 15th)

Posted on June 23, 2021 // 3 Comments

The American Rescue Plan Act (ARPA) of 2021 “enhances” the Child Tax Credit, increasing it to up to $3,600 for each child under 6 and $3,000 for each one under age 18. Eligible parents will receive half in advance via direct payments spread out equally over the last 6 months of 2021 (starting July 15th). The other half will be received when you file your tax return. This breaks down to:

  • For each qualifying child under age 6, six monthly payments of up to $300 each ($1,800 total, half of $3,600).
  • For each qualifying child over age 6 and under age 18, up to six monthly payments of up to $250 each ($1,500 total, half of $3,000).

The IRS released the following new tools to help you manage this process:

These advance payment amounts begin to be reduced if your modified adjusted gross income (MAGI) exceeds:

  • $150,000 if married and filing a joint return or if filing as a qualifying widow or widower;
  • $112,500 if filing as head of household; or
  • $75,000 if you are a single filer or are married and filing a separate return.

Kiplinger has a calculator if you’re that phase-out area. You may still be eligible for the “standard” child tax credit when you file your 2021 tax return. These tax credits are now also fully refundable, which is important for those with lower incomes that can’t fully take advantage of these tax credits otherwise.

It’s quite likely you won’t need to use any of these tools, although I still used them to confirm our eligibility. For most households, the payments will automatically be sent to the bank account and/or address used for your previous tax returns. Just be on the lookout around July 15th, 2021. These tools are meant for those that don’t file tax returns, their tax situation has changed significantly since their last return, or otherwise need help updating how their payments are handled.

Also: Expanded Child and Dependent Care Tax Credit. A reminder that there is also an increased tax credit towards childcare/dependent care for 2021.

  • For 2021, now worth up to $4,000 for one qualifying individual or $8,000 for two or more. More expenses are eligible, at a higher percentage. The net increase in value could be worth up to $5,900 (see chart below).
  • Now fully refundable.
  • Qualifying children are under the age of 13 for the entire year.

Filed Under: Taxes //

American Rescue Plan Act of 2021: New 3rd Stimulus Chart, Child-Related Tax Credits, COBRA, Dependent Care FSA Limits

Posted on March 14, 2021 // 14 Comments

The American Rescue Plan Act of 2021 became effective March 11th, 2021 and there is a lot to unpack in the $1.9 trillion economic stimulus bill. Besides the headline $1,400 stimulus checks, there are many other items that could be worth over a thousand dollars each – expanded child and childcare tax credits, subsidized ACA/COBRA health insurance premiums, and increased pre-tax contributions to Dependent Care FSAs. After reading the NY Times, Tax Foundation, Wikipedia, and Kitces round-ups, here again are my minimalist highlights so that you can research further if it applies to your situation.

3rd Stimulus checks / Recovery rebates.

  • $1,400 for each eligible recipient. This includes $1,400 for each child and adult dependent, including college students claimed as dependents.
  • Income phase-out starts at AGI of $75,000 Single, $112,500 Head of Household, and $150,000 Married Filing Joint. Fully phased out at $80k/120k/160k. Qualify using your 2019 or 2020 income (once filed), or even 2021.
  • Track status at IRS Get My Payment tool.

Unemployment benefits.

  • Previous changes extended (including expanded eligibility) for additional 25 weeks, until 9/6. $300 weekly supplement also extended until 9/6.
  • For 2020, the first $10,200 of UI benefits are now tax-free if your income is under $150,000.

Expanded Child Tax Credit.

  • For 2021, it increases to up to $3,000 per child ($3,600 for ages 5 and under). The age limit for qualifying children also rises to 17, from 16. Previously, the max credit was $2,000 per child (and was only $1,000 as recently as 2017).
  • Now fully refundable.
  • Income phase-outs start at MAGI of $150,000 for married filing joint ($75,000 single).

Expanded Child and Dependent Care Tax Credit.

  • For 2021, now worth up to $4,000 for one qualifying individual or $8,000 for two or more. More expenses are eligible, at a higher percentage. The net increase in value could be worth up to $5,900 (see chart below).
  • Now fully refundable.
  • Qualifying children are under the age of 13 for the entire year.

Dependent Care Flexible Spending Accounts.

  • For 2021, you can now contribute $10,500 (married filing joint) into a Dependent Care FSA instead of the normal $5,000 (married filing joint). Single filers can contribute up to $5,250, up from $2,500.
  • Employers must choose to allow this option. Bug your HR department and hopefully they’ll make the change before it’s too late.

Student loans.

  • For student loan debt forgiven between 1/1/2021 and 12/31/2025, the forgiven amount will no longer be considered as taxable income.
  • No actual student loan debt is being forgiven as part of this bill, but it may be wise to prepare for the possibility in the near future. (I might not consider paying down any student loan amounts under $10,000, especially while they are in deferral.)

COBRA Health Insurance.

  • If you lost your job involuntarily (or had job hours cut and thus lost coverage), the government will pay for your entire COBRA health insurance premium from 4/1 through 9/30. This could add up to several thousand dollars.

Health insurance bought from ACA exchanges.

There will always be debate about details of this bill, but that is theoretical while my goal is to be actionable. The goal here is to help taxpayers be proactive and make sure they get any benefits and aid for which they qualify.

Filed Under: Deals & Offers, Taxes //

Stimulus 2nd Round, Unemployment, FSA Changes, PPP Loans 2nd Draw

Posted on January 13, 2021 // 5 Comments

I know I’m a bit late on this, but after reading several media articles, here again is my curated collection of highlights and perhaps overlooked items that might be worthy of additional research.

Second round of Economic Impact Payments. Many people have already received this direct deposited to their bank accounts, up to $600 per taxpayer ($1,200 for married filing joint) plus $600 per qualifying child under age 17. If have questions, try using the IRS Get My Payment tool.

The amount starts getting phased out at $75,000 AGI for most single filers and $150,000 AGI for most married joint filers. Here is a graphical chart per Tax Foundation:

If you made too much according to your 2019 income, but your income in 2020 was actually low enough, you will be able to claim the rebate when you file your taxes. If you qualified based on your 2019 AGI but your 2020 ended up too high, you get to keep the payment; there is no clawback.

Unemployment benefits expanded again. The new COVID-19 relief package extends certain unemployment benefit programs for 11 weeks, including an unemployment supplement of $300 a week for many people from December 26, 2020 to March 14, 2021. It also increases the maximum number of weeks of benefits to 50 from 39 for many people. Certain self-employed workers will also see an addition $100 per week benefit.

Charitable Deductions. In 2020, you were able to deduct $300 in charitable (cash-only) donations, even if you used the standard deductions. In 2021, this deduction was extended and increased to $300 for single and up to $600 for married filing joint, again even if you use the standard deduction.

Healthcare FSA, Dependent Care FSAs. If you didn’t use up all your “use-it-or-lose-it” FSA funds in 2020, the new law allows your employer the option of carrying over unused balances for an additional 12 months (through the end of 2021). For Dependent Care FSAs, the age limit was also increased from 12 to 13 (since those 2020 funds may have been for your former 12-year-old). Check with your HR department and/or benefits manager.

PPP Forgivable Loan, 2nd Draw. The new COVID-19 relief package clarifies that businesses can still deduct expenses paid with forgiven PPP loans. (Typically, forgiven debt is considered taxable income, but forgiven PPP loans are specifically marked as NOT taxable income.)

Certain small business owners can now apply for a second draw of forgivable PPP loans (up to $2 million). Applying for the first round does not prevent you from applying for the second round. Second-draw loans are limited to businesses with fewer than 300 employees and at least a 25 percent drop in gross receipts in a 2020 quarter compared to the same quarter in 2019. (If this is your first time taking a loan, there is no requirement for the drop in gross receipts.) Businesses taking a PPP loan may now also be eligible for the Employee Retention Tax Credit (ERTC).

Sources: WSJ Article, Tax Foundation, IRS.gov

Filed Under: Deals & Offers, Entrepreneurial, Taxes //

Should I Roll Over My 401k into an IRA? How to Decide

Posted on April 30, 2020 // 13 Comments

The WSJ article What to Do With a 401(k) When Leaving a Job did a good job summarizing the various things to consider when that time comes. Here is a chart showing what happens to the 401k and 403b plans held across Vanguard-sponsored employer plans:

Now, Vanguard-sponsored 401k plans are mostly from big employers and are highly likely to have both low-cost investment options and reasonable fees. I don’t know if these percentages apply to all 401k and 403b plans in general. I’ve seen some pretty bad ones with absurdly high fees, although that was several years ago. Here’s a summary of the right questions to ask:

Investment selection? Are the available investments better in your 401k or in your choice of IRA custodian? Some 401ks offer choices not available to retail investors. For example, access to mutual funds from Dimensional Fund Advisors (DFA). Or institutional shares of certain funds with low expense ratios. Or stable value funds with higher interest rates than retail bond funds. On the other side, you may be itching to buy something like real estate in a self-directed IRA. These days, both probably have some sort of all-in-one Target retirement fund, but is yours a low-cost option from Vanguard (Target Retirement) or Fidelity (Freedom Index)?

Account fees? Part of the total cost picture is the expense ratio of the funds inside, but you may also be subject to overall account management fees or maintenance fees. Some 401k plans have zero or minimal management fees. Other 401k plans have crazy-high fees on the order of 1.75% of assets annually. Nearly all of the major IRA providers now offer no annual fees and commission-free ETF trades.

Need Advice? Some 401k plans offer some level of included advice that you may value. Other people have their own personal advisor that would love to customize that IRA.

Age 55 Rule (Early withdrawal?). Starting in the year that you turn 55, you can make a withdrawal from your 401k without the 10% early withdrawal penalty. You will still owe income taxes for a pre-tax 401k withdrawal, just not 10% penalty. For IRAs, you would have to wait until age 59.5. Potential early retirees may value these 4.5 years of additional flexibility.

Asset protection needs? There is a lot of legal fine print here, but 401k plans in general appear to offer some of the highest levels of asset protection. IRAs do offer a certain level of asset protection as well, just not quite as high as a 401(k). The difference will probably not matter much for the vast majority of workers, but it may matter for high-income professionals with liability concerns like doctors.

Non-deductible / Backdoor IRA contributions? The article didn’t cover why I didn’t roll over my last 401k plan into an IRA when leaving the employer. My situation is admittedly somewhat uncommon, but not unheard of. Call it “finding-yeast-in-April-2020” uncommon.

Due to my higher income level at the time, I contributed to a non-deductible IRA each year and then converted that to a Roth IRA. (This is also known as a Backdoor Roth IRA.) However, when you do the conversion, if you have any other pre-tax “traditional” IRAs, your conversion must include the pre-tax IRA amount as well on a pro-rated basis. For example, if you had a $20,000 pre-tax deducted IRA and a $5,000 non-deductible IRA, and then decided to convert $5,000 into a Roth IRA it would be considered 80% from the pre-tax IRA and only 20% non-deductible. You’d have to pay taxes on the entire pre-tax IRA amount (contribution + gains) since you never paid taxes initially. By keeping my pre-tax 401k at the employer, I am able to take full tax advantage of all annual Backdoor Roth contributions. Thankfully, the old 401k was at Fidelity with solid investment options and no annual fees.

How much do you value simplicity? If you do a lot of job-hopping, then do you really want to juggle five old 401k accounts? Merging them all into one IRA can save you time and hassle. On top of keeping tabs on your investments and asset allocation, you’d have to do all the mundane things like keep all your contact info and beneficiaries up to date. I would worry also that my spouse would forget about an old 401k plan if I something happened to me.

Filed Under: Investing, Retirement, Taxes //

Official IRS Tool to Check Status of Stimulus Check

Posted on April 16, 2020 // 3 Comments

The IRS has released an official tool to check the status of your stimulus check, otherwise known as Economic Impact Payment / Coronavirus Tax Relief. It seems like you can also add your bank account information for direct deposit if they don’t have it on file, definitely if you were not required to file a 2018 or 2019 tax return. Data is updated once every night. You may need information from your 2018/2019 tax return for identification purposes.

Filed Under: Deals & Offers, Taxes //

Good Time to Convert Traditional IRAs to Roth IRAs?

Posted on March 29, 2020 // 13 Comments

It might be a little painful, but it may be worthwhile to check on your pre-tax IRAs during this dip. If you have been thinking of converting your “Traditional” IRAs over to Roth IRAs, your shrunken gains will lead to a smaller tax bill now, while your (hopefully) future gains from this point onward will be tax-free after 5 years and age 59.5.

Roth IRAs have a few unique benefits like a lack of minimum required distributions, but the primary consideration regarding conversions is still whether you think your tax rate will be lower today or when you withdraw. This is outlined in greater detail in the WSJ article A Strategy for Taking Advantage of the Market Meltdown (paywall?). One interesting suggestion is to convert just enough money from a traditional IRA to make full use of your current income-tax bracket. Here are the 2020 IRS marginal tax brackets (source) – remember the left column is adjusted gross income so it comes after subtracting the standard deduction of $12,400 (single) and $24,800 (joint).

Depending on your income situation for 2020, you might have a good amount of room to convert and pay a 10%, 12%, or 22% rate. For example, a married couple could make up to $105,050 in gross income (before the standard deduction) and still be in the 12% bracket. You get the most tax-deferred benefit if you can pay for your tax bill with external funds as opposed to the IRA balance itself.

Backdoor Roth IRAs. In case you aren’t already aware, you can make a “backdoor” Roth IRA contribution even if you exceed the standard income limits on Roth IRA contributions. This is primarily because there are no longer any income limitations on Roth IRA conversions. There are some finer points that experts debate, but the general idea is that you first contribute to a non-deductible traditional IRA and then quickly convert that to a Roth IRA (ideally with no gains and thus tax owed). One catch is that if you already have other deductible pre-tax IRA balances, then these would mix together and you’d have to pay tax on a pro-rated basis.

Given the recent stock market drop, if you made non-deductible IRA contributions in the past few years, but your “Backdoor Roth” was complicated by also having some other pre-tax IRA balances mixed in (say, from a 401k rollover), then this might be a chance to convert everything over to a Roth IRA with much smaller tax consequences.

Filed Under: Investing, Retirement, Taxes //

Federal and State Tax Payment Deadline Extensions Due to Coronavirus

Posted on March 18, 2020 // 8 Comments

Updated March 20th. The US Treasury has announced taxpayer relief for federal tax in response to COVID-19. Here is the Treasury press release, official IRS notice, and a CNBC article. On March 20th, the filing deadline was also changed. Below is my brief summary for most taxpayers.

  • The standard deadline for filing your individual federal income tax returns is now July 15, 2020. This is a change as of 3/20.
  • If you’re getting a tax refund, you should try to file right away. Might as well get your money sooner, as this relief won’t help you if you don’t owe money.
  • The deadline for tax payments if you owe money has been postponed by 90 days. If you owe money on your return, instead of April 15, 2020, you now have until July 15th, 2020. Penalties and interest that you would otherwise have accrued will be waived. This applies on up to $1 million in tax owed.
  • Filing a tax extension can still help. If you can’t make the filing deadline of 4/15, you should file for a free automatic online extension by 4/15. This extends your tax filing deadline all the way to October 15th. Late filing penalties are quite significant.
  • 2020 1st quarter estimated tax payments due April 15th are also now due July 15th. This can be confusing as the 2nd quarter deadline is still currently June 15th. This may help many self-employed workers whose income is hard to predict right now.

Check your state tax situation as well. The American Institute of CPAs has a handy list of state-specific coronavirus taxpayer relief.

Filed Under: Deals & Offers, Taxes //

Credit Karma Tax Review: $0 Federal, $0 State Tax Filing w/ No Last-Minute Charges

Posted on January 29, 2020 // 10 Comments

cktax0Tax season is officially here as the IRS has started accepting E-files. For you early birds, Credit Karma Tax is now on its 4th year of offering 100% free Federal AND State tax preparation software with free e-File and no income restrictions. You can have itemized deductions, business income, self-employment tax, and/or capital gains and losses. They now also have a Max Refund Guarantee and Audit Defense if you get audited.

My favorite feature of this product is that there is no “upgrade” version, so there are no upsells and no last-minute fees. Your bill will always be $0 Federal, $0 State. I hate the feeling when you have spent hours (days?!) typing in all that data and you expect a certain price, but at the very end they charge you more. You are just too tired to do it all over again, so you accept, but it leaves a bad aftertaste.

cktax1

Is this legit? What’s the catch? Yes, they are legit. Credit Karma purchased AFJC Corporation, which was a private-label software provider and previously supplied the online tax software for Jackson Hewitt. They’ve been running this offer since 2016.

The “catch” is that you must also sign up for the main CreditKarma.com site, which takes your personal information and provides you access to your credit scores and reports from two of the three major consumer credit bureaus. They make money by also using that personal information to show you customized advertisements for things like credit cards, auto/home lending, and insurance products.

What’s included?

  • Free Federal filing with free e-File for 90%+ of filers with no income restrictions.
  • Free State filing with free e-File for 40 states + Washington DC. (Not all states require you to file state income taxes.)
  • Max Refund Guarantee
  • Free Audit Defense
  • Option to print and snail mail if you choose not to e-File.

Here are some popular forms included by Credit Karma Tax that other “Free” options often don’t cover:

  • Schedule C – Profit or Loss from Business (Sole Proprietorship)
  • Schedule D – Capital Gains and Losses (Stock Sales)
  • Schedule E – Supplemental Income and Loss (Rental property)
  • Schedule SE – Self-employment tax

What’s NOT included? Credit Karma will NOT support the following this year:

  • Multiple state filings
  • Part-year state filing
  • Foreign earned income
  • State returns for married filing separately in community property states*
  • State filing without a federal filing

While Credit Karma Tax supports Sole Proprietorships and income reported on Schedule C/E/SE, they do NOT yet support business tax returns for an S corporation, C corporation, partnership or multi-member LLC.

Tell me more about how Credit Karma makes money. Quoted from their site:

When you visit Credit Karma, we show you offers and recommendations (like credit cards or loans) that could save you money. If you take one of these offers, the bank or lender usually pays us. We never charge you a dime. And we never sell your info to marketers.

For example, if they know you have a 4% rate mortgage, they could sell you a 3.5% refinance mortgage. If they know you are older and have a paid-off home (i.e. you pay property taxes but no claim no mortgage interest), they could sell you a reverse mortgage. If they know your income, they can estimate the amount of life insurance you need. You could actually like this customization, be creeped out completely, or simply plan to ignore the ads.

Try before you commit. Nearly all online tax prep software only bills you when you are ready to file. If you’re not sold on a single product, why not sign up and fill out this and a competitor side-by-side in two different browser tabs. It’s a bit more work, but not a lot if you’re doing it simultaneously. That way, you can double-check the calculations. Ideally, you should get the same refund/due amount for both and then you can be confident that you are maximizing your filing (and still file for free).

Bottom line. Credit Karma Tax will give you free Federal and State tax returns. There is no other version, so you will never be hit with a last-minute upcharge. In exchange, you let them show you ads based on your financial data. In terms of technical accuracy, I expect that they are roughly equal to the other major providers. However, you may value the convenience factors offered by competitors (easily import last year’s data, better and/or unlimited phone support, automatic import of 1099-B tax lot data). I like the idea of using two side-by-side.

Filed Under: Deals & Offers, Taxes //

Solo 401k vs. SEP IRA Contribution Limit Example For $50,000 Income

Posted on December 10, 2019 // 2 Comments

I use a Solo 401k plan because it lets you contribute the most tax-deferred money for a modest amount of self-employed income. At the end of each year, I can more clearly estimate my total income for 2019 and thus my maximum contribution limits. There are several online calculators out there (try Dinkytown or BCM Advisors), although I would cross-check your answers to make sure they agree. Your Solo 401k contribution has two components:

  • Employee salary deferral contribution. Employees may defer up to 100% of their compensation, up to $19,000 for the 2019 tax year ($25,000 for employees age 50 or older).
  • Employer profit sharing contribution. Employers may contribute up to 25% of compensation (sole proprietorships must make a special calculation), up to a combined total of $56,000 for the 2019 tax year ($62,000 if age 50 or older).

Here are some sample numbers if you are under age 50 with $50,000 in Schedule C income as an unincorporated sole proprietorship. The numbers are a bit tricky because you have to do things like take out half of the self-employment tax paid, etc. Let the calculator figure out the details, but you can still see that the Solo 401k (aka Individual 401k, aka Self-Employed 401k) offers a much higher contribution limit than a SEP IRA or SIMPLE IRA.

Here are some sample numbers if you are under age 50 had a $50,000 W-2 income from your S-Corporation. These numbers are a bit cleaner, as when you run payroll the employer side of payroll taxes are taken out of the employee paycheck.

Being able to defer up to 63% of your income ($31,500 out of $50,000) into tax-advantaged accounts is great for aggressive savers. In addition, both Traditional Pre-tax and Roth versions are allowed for the employee portion of contributions as long as your administrator supports it. Note that if you are already making employee contributions to a 401k-type plan from another job, you are still responsible for staying under the $19,000/$25,000 total cap across all your jobs. If you are consistently maxing out your 401k salary deferral in another job, then it may make more sense to stick with the SEP-IRA as it comes with less paperwork.

Filed Under: Entrepreneurial, Retirement, Self-Employment, Taxes //

The Double Tax Advantage of Donating Appreciated Stocks Directly

Posted on December 4, 2019 // 7 Comments

If you own stocks in a taxable brokerage account and make charitable donations, consider donating your stocks this year instead of just writing a check. Why? Given the all-time market highs, your stocks, mutual funds, and/or ETFs probably have unrealized capital gains. When you donate an appreciated security that you’ve held for at least a year, you’ll both avoid paying long-term capital gains tax AND get a tax deduction for the full current market value.

This HCR Wealth Advisors graphic shows the benefit using the example of donating $50,000 of stock to charity with an original cost basis of $30,000. It assumes the highest long-term capital gains tax rate of 23.8% (20% plus the 3.8% Medicare surtax for high-income earners).

Here is a similar graphic from Fidelity using the example of donating $50,000 of stock to charity with an original cost basis of $20,000.

The size of your benefit is your unrealized gain times your tax rate. This basic idea still applies if you’re only donating a smaller amount of stock at the lower long-term capital gains rate of 15%. If you bought a stock for $1,000 and it’s now worth $2,000, donating it directly will save you $150 to $238 in taxes ($1,000 x 15% or 20% or 23.8%). If someone didn’t know and simply changed the order (sell stock, then immediately donate the cash proceeds), that tax savings would disappear.

The problem is that not all individual charities are equipped to accept such stock donations. That’s where donor-advised funds (DAFs) come in handy. Fidelity, Vanguard, and Schwab all have donor-advised funds that can accept such donations, get you that tax deduction upfront, and allow you to make a cash grant to your individual charities. DAFs do charge for their services – an administration fee of about 0.60% of assets annually on top of investment expense ratios. There is also a minimum initial donation of between $5,000 and $25,000. You can then weigh the options of investing your donations for growth, or distributing it immediately to charities for immediate impact.

I am fortunate to have some appreciated stocks, so this year I plan to open an account with Fidelity Charitable. I chose them because they seem to have been in the game the longest and are also the most flexible with a $5,000 minimum initial donation, no minimum requirement for future donations, and a low $50 minimum grant size. Their administrative fees are also comparable with Schwab and Vanguard. I hope that I can finish the process by year-end.

Filed Under: Giving Back, Investing, Taxes //
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