Free Estate Planning Guide and Workbook from American Red Cross

arc_estateIf one of your New Year’s Resolutions is to create an estate plan for you and your loved ones, here’s a good starter kit. The American Red Cross has a free Estate Planning Guide and Workbook which comes in both electronic fillable PDF form or a paper workbook format if you give them your address. It is roughly 50 pages and includes blanks to store your asset and beneficiary information, make future edits when needed, and print multiple copies to share with your attorney and family members. The guide will help you to:

  • Understand estate planning and the importance of having a will.
  • Gather the information they need to prepare to draft or update your will.
  • Discover ways to minimize taxes and liabilities for your families.
  • Explore the benefits of making charitable gifts in your estate plans.

Here’s a snapshot of the Table of Contents:

  • Why Everyone Needs a Will
  • When to Revise Your Will
  • Get a Head Start on Writing or Updating Your Will
  • Three Pillars of Every Estate Plan
  • Will Planning Workbook
  • Charitable Giving Through Your Will or Other Gift Plan
  • Including the Red Cross in Your Will
  • Making a Gift Outside Your Will
  • Gifts that Benefit You and Keep the Red Cross Strong

The American Red Cross also offers another free PDF resource called Disasters and Financial Planning: A Guide for Preparedness and Recovery.

ETF Tax-Loss Harvesting: 70% Overlap Rule of Thumb for Substantially Identical

calc_10keyTax-loss harvesting (TLH) is a common practice used to improve after-tax returns by realizing losses to either offset realized capital gains or to defer capital gains into the future. Many robo-advisors including Betterment and Wealthfront offer automated tax-loss harvesting as a feature. As nearly all of them hold ETFs, they accomplish this by selling the primary ETF for each asset class and replacing it temporarily with an alternative, secondary ETF. DIY investors can perform a similar maneuver as well.

The IRS wash sale rule states that you can’t deduct a loss by selling a security and immediately replacing it with something “substantially identical”. Instead, harvesters buy an ETF that is slightly different. It’s a grey area, as there is no solid definition of what “substantially identical” means. However, this recent Barron’s article (paywall, use Google News) offered up a rough rule of thumb that I hadn’t seen before (bolding mine):

Although the wash-sale rule remains ambiguous, there may be an alternative standard that investors can use for guidance. In the 1980s, the IRS created the “straddle rules” to address a loophole in hedged long-short portfolios. For tax-loss purposes, the portfolios on the long side couldn’t be “substantially similar” to those on the short, which the IRS defined as having over 70% overlap. “Some people use the straddle-rules definition as a surrogate to apply to the wash-sale rule,” says Eric Fox, a principal at Deloitte Tax. “If two ETFs don’t have more than 70% overlap and they’re not substantially similar, how could they ever be considered substantially identical?” That should give loss harvesters some confidence.

I was surprised by the conservativeness of this rule of thumb. Most of the TLH articles I have read by both human and software-based advisors implement more aggressive strategies than the 70% maximum overlap suggested above. A traditional advisor quoted in the Barron’s article admitted swapping between the Vanguard Total International Stock ETF (VXUS) and the Vanguard FTSE All-World ex-US ETF (VEU). VXUS and VEU have a 76% overlap by weight, according to this ETFResearchCenter.com Overlap Tool:

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Perhaps more importantly, these two ETFs have a near 100% performance correlation. Here’s a chart of the two ETFs over the last 12 months, per Morningstar (click to enlarge):

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Meanwhile, this Wealthfront whitepaper shows their ETF tax-loss pairings and their correlations. Out of the 7 pairs, 4 have correlations of 97%+ and all of them are over 70%.

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Commentary. There are few firm answers here. If robo-advisors marketing aggressive ETF tax-loss harvesting gather a lot of assets, I suspect the IRS will eventually provide additional guidance. I imagine the worst-case scenario as the IRS classifying past trades as violating the wash sale rule, nullifying your tax losses and possibly imposing additional penalties. I guess current practitioners don’t see a big risk of that happening. They essentially see a nearly free lunch by substituting these similar ETFs. Still, when you market something publicly as 99% correlated, aren’t you basically admitting that they are “substantially identical”?

Flexible Spending Account Reminder: Last-Minute FSA Expenses Ideas

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Updated. Here’s my annual reminder to use up your Healthcare Flexible Spending Accounts before the end of the year. First, here are some possible exceptions:

  • Some plans allow a grace period until March 15th of the following year as opposed to a December 31st deadline to use your 2016 funds, but it may only apply to claims and not late purchases. Check with your employer.
  • Some plans allow participants to carry over up to $500 in unused FSA funds into next year. Check with your employer.

What are FSA-eligible expenses? Here are the large, well-organized lists:

Quick tip. Since 2011, certain over-the-counter (OTC) items such as cough medicines, pain relievers, acid controllers, and diaper rash ointment now require a prescription for reimbursement. In addition to the written prescription for the OTC medicine, you should obtain a detailed receipt that includes the following:

  • Date of service or purchase
  • Name or description of the item
  • Amount of purchase

Last-minute FSA-eligible items. If you didn’t exhaust your funds with insurance copays or deductibles, here are eligible items that you can still buy over-the-counter without a prescription. Examples included are the best-sellers in each category at Amazon.

Finally, only your FSA administrator can provide you with the exact guidelines for reimbursement according to your plan. I learned this the hard way when our FSA administrator switched one year from in-house to Conexis. Wow, Conexis was a pain in the butt. So many hurdles and rejections without good explanations. I had to submit some claims three times before finally getting approved. If you count the time wasted, I probably lost money by participating in the FSA at all. The other employees in the company must have also complained so much that the very next year, FSA reimbursement was again managed in-house.

Credit Karma Tax: Free Federal and State Tax Software, What’s The Catch?

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Credit Karma is expanding beyond free credit scores and free credit monitoring. Beginning in January 2017, they will offer completely free Federal and State tax preparation software with free e-File and no income restrictions. You must first join CreditKarma.com and then you can reserve a spot for when it opens. The tagline is “$0 Federal, $0 State, $0 Always. Truly Free Tax Returns.” Here’s an overview of what is and isn’t included in this offer.

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Is this legit? Yes. Credit Karma purchased AFJC Corporation, which was a private-label software provider and previously supplied the online tax software for Jackson Hewitt. They use your personal information to show you targeted ads. They used to do this with your credit report data, and now they want to do it with your tax return data.

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 90%+ of filers with no income restrictions.
  • No upsells, no upgrades, no “premium version”.
  • You can print and snail mail if you choose not to e-File.

Here are some popular forms included by Credit Karma Tax that the download edition of TurboTax Deluxe 2016 will require you to upgrade to Premier (~$20 extra) or Home & Business (~$30 extra).

  • 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 forms this year:

  • Filing multiple state or non-resident state returns
  • State filings without a federal return
  • Non-resident federal filing – 1040NR (non-resident tax return)
  • Foreign earned income credit
  • Non-dependent earned income credit
  • Married filing separately (MFS) in common law states
  • Estate and Trust income from K1 forms

No business tax returns. Credit Karma Tax supports Sole Proprietorships and income reportable on a Schedule C/E/SE, but does NOT yet support business tax returns for an S corporation, C corporation, partnership or multi-member LLC.

Credit Karma Tax does NOT support importing tax return information from other providers this year. There is no download version. There is no app version.

How does Credit Karma make money then? 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.

My take? They should say they won’t sell your information to other marketers. They are the marketers, and now they’ll know more about your financial situation than anyone else besides you. On top of your credit report data, they’ll have income and expense data. 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.

What could go wrong? The most common drawbacks mentioned are the idea that (1) “you are the product” and (2) what if they get hacked and you lose your personal information?

  1. Well, yes you are the product. Google and Facebook work the same way. You use their free service, they show you targeted ads and hope to extract money from you indirectly.
  2. If you really are worried about your personal information, you should buy tax prep software on physical CDs so that nothing is stored on anyone’s cloud servers. Don’t use any online tax prep software, including that of TurboTax/H&R Block/TaxACT.

I would say a less-mentioned drawback is lack of customer service or support. If there is a bug or tax question that I need help on and I have to spend an hour to fix it, then I’d rather have just paid upfront for better service. Other providers advertise human phone support and/or unlimited live chat.

Bottom line. It’s a pretty simple deal. Credit Karma will give you free Federal and State tax returns. You let them show you ads based on your financial data. Is this a good deal? For most people that have straightforward taxes and don’t usually need support, then quite possibly yes. If you do Federal + State + e-Files with TurboTax or H&R Block, the total cost can be $100+. If you have a complicated tax return or can get value from the conveniences offered by competitors (import last year’s data, unlimited phone support for weird situations, import of 1099-B tax lot data), then it may be worth paying extra elsewhere. I signed up on the waiting list and hope to compare the accuracy early next year.

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Mortgages, Imputed Rent, and Early Retirement

mcman286In a Quora question What do economists think about buying vs renting a house?, in addition to the previously-mentioned answer by Alex Tabarrok of Marginal Revolution, there was another well-ranked answer by Erik Brynjolfsson, professor at MIT Sloan. One of his three points was about the value of imputed rent (read the other ones as well):

Second, there’s a huge tax benefit to housing which comes from the hidden “dividend” it pays. I’m not talking (just) about the (too) generous mortgage deduction, but rather the fact that you don’t have to pay taxes on the implicit rent you earn on your house since its paid to yourself. A house generates enormous rental value each month — like a dividend. If you rent it to yourself, you take the money out of one pocket and pay it to the other one, and the IRS doesn’t tax that. In contrast, if you earn money some other way and then use that money to pay rent, you probably also have to pay taxes. That can add up.

From the Wikipedia entry on imputed rent:

Consider a model: two people, A and B, each of whom owns property. If A lives in B’s property, and B lives in A’s, two financial transactions take place: each pays rent to the other. But if A and B are both owner-occupiers, no money changes hands even though the same economic relationships exists; there are still two owners and two occupiers, but the transactions between them no longer go through the market. The amount that would have changed hands had the owner and occupier been different persons is called the imputed rent.

In other words, as a homeowner you could be considered both the landlord and the renter. Let’s say you would rent your house for $1,600 a month. If you were in the 25% marginal tax bracket, you have to earn $2,133 a month pre-tax to cover that rent (and pay $533 in income tax).

As part of my “rough model” of early retirement, I recommend setting your mortgage payoff date to coincide with your retirement date (for those that choose to buy a home). Part of the reason for that is that you won’t have to generate that extra income to pay your mortgage anymore. This could lower your marginal tax bracket into the next lower bracket, and also the tax rate on your capital gains.

For example, $1,600 in monthly rent equates to nearly $20,000 a year in after-tax expense, or nearly $26,000 in gross income at the 25% tax bracket. Here are the 2016 federal income tax rates (source):

2016taxschwab

Ideally, I would target my household expenses to stay in the 15% tax bracket for married joint filers in retirement. Being able to reduce my taxable income by over $25,000 would definitely help someone stay in the 15% tax bracket range. Also, if you are the in 15% ordinary income tax bracket, your tax rate on qualified dividends and long-term capital gains becomes zero!

Now, the idea of imputed income could be extended further. When I cook at home, I save the money from eating out an Applebee’s. Let’s say a dinner out costs $40 for the family. To reach $40 after-tax, I’d have to generate $53 of income at a 25% tax rate. Same with childcare, housekeeping, laundry, yard maintenance, etc. But housing is an area with significant impact, usually the biggest item in a household budget.

IRS Estimated Taxes Due Dates 2016

irsclipIf you have self-employment or other income outside of your W-2 paycheck this year, you may need to send the IRS some money before the usual tax-filing time. Here are the due dates for paying quarterly estimated taxes in 2016; they are supposed to be in four equal installments. This is for federal taxes only, state and local tax due dates may be different.

IRS Estimated Tax Payment Calendar for Individuals

Tax Year / Quarter Due Date
2016 First Quarter April 18, 2016 (Monday)
2016 Second Quarter June 15, 2016 (Wednesday)
2016 Third Quarter September 15, 2016 (Thursday)
2016 Fourth Quarter January 17, 2017* (Tuesday)

 
* You do not have to make the Q4 payment due January 17, 2017, if you file your 2016 tax return by January 31, 2017 and pay the entire balance due with your return.

Who needs to pay estimated taxes?
In general, you must pay estimated tax for 2016 if both of the following apply:

  1. You expect to owe at least $1,000 in tax for 2016, after subtracting your withholding and refundable credits.
  2. You expect your withholding and credits to be less than the smaller of
    • 90% of the tax to be shown on your 2016 tax return, or
    • 100% of the tax shown on your 2015 tax return. Your 2015 tax return must cover all 12 months.

If you forget to pay (like I’ve done before), then you should make a payment as soon as possible even though it is late. This will minimize any penalty assessed.

How do I pay? When does the payment count?

  • By check. Fill out the appropriate IRS Form 1040-ES voucher (last page of the PDF) and snail mail to the indicated address. The date of the U.S. postmark is considered the date of payment. No fees besides postage.
  • By online bank transfer. You can store your bank account information and pay via electronic funds transfer at EFTPS.gov or call 1-800-555-4477. It takes a little while to set up an online account initially, so you’ll need to plan ahead. For a quick one-time payment, you can also use IRS Direct Pay (just introduced in 2014) which does not require a sign-up but it also doesn’t store your bank account information for future payments. Both are free, there are no convenience fees. The date of payment will be noted online.
  • By debit or credit card. Here is page of IRS-approved payment processors. Pay by phone or online. Fees will apply, but the payment will count as paid as soon as you charge the card. You may also earn rewards on your credit card. Check if there is a discounted fee available via limited-time promotion.

How much should you pay in estimated taxes? You’ll need to come up with an expected gross income and then estimate your taxes, deductions, and credits for the year. The PDF of Form 1040-ES includes a paper worksheet to calculate how much in quarterly estimated taxes you should pay. You can also try online tax calculators like this one from H&R Block to estimate your 2016 tax liability, and divide by four quarters.

Pay Taxes With Credit Card: Lowest Fee Rates and Limited-Time Promotions

1040clipWe all know that personal income tax filings are due soon, but so are the first round of quarterly estimated taxes for 2016. Many of us with freelance or side-gig income must makes these payments in order to avoid a tax penalty at the end of the year.

You can pay taxes with a credit card, but there is usually a convenience fee attached. So why would you bother?

  • You may wish to earn rewards for the purchase in the form of cash back, points, or miles. These rewards may be of greater value to you than the fee. (* See bottom of post for examples.)
  • You may want to pay off the balance more gradually, especially if you have a low interest rate offer like 0% for 12 months on purchases.

Here I’d like to keep track of the current rates for convenience fees, any limited-time promotions, as well as some credit card with rewards greater than the convenience fees.

Limited-time offer: 1.75% fee with Mastercard from Plastiq. I received an e-mail from Plastiq stating:

Taxes are due in less than a month, so make it easier on yourself by paying them through Plastiq. To make taxes even less painful, we’re offering a special promotion starting today. Get a 1.75% rate for all federal and state tax payments when you use your MasterCard!*

So get ahead of the game and pay your taxes now. This special rate will expire on April 18, 2016 a 5 p.m. PT, so sign in and take full advantage of this limited-time offer!

There is no landing page, but the offer is mentioned on their Twitter so I assume it is not targeted. You must initiate your purchase from this link, which ensures that you can only use the offer to pay federal or state taxes. The sub-categories include income taxes, payroll withholding taxes, self-employment taxes, business taxes, and more.

Standard convenience fee rates for 2016 start at 1.87%.

The IRS keeps a list of approved payment processors and updates it regularly. Here is the list, along with fees valid until December 31st, 2016. All of them accept Visa, Mastercard, Discover, and American Express.

Note that there is a frequency limit on how often you can make credit card payments. You can make credit card payments towards estimated taxes up to twice per quarter.

Screenshot:

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Are the fees tax-deductible? You may also want to take into consideration that the convenience fee may be tax-deductible or a business expense:

  • The fee is deductible for personal tax types as a miscellaneous itemized deduction. However, only those miscellaneous expenses that exceed 2% of adjusted gross income can be deducted. For more information, see IRS Publication 529.
  • For business tax types, the fee is a deductible business expense.

Personal experiences. I have used Plastiq to make credit card payments (though not tax payments yet), and I have used PayUSATax.com back when they were the cheapest option. Both experiences were positive with no issues. Your credit card statement will list this payment as “United States Treasury Tax Payment.” The convenience fee will be listed as “Tax Payment Convenience Fee” or something similar. Here’s what my statement looked like:

irstaxcredit3

Notably, I know of no reason why you would not just go with the cheapest available payment processor. If they are on the IRS list, they are all officially accepted by the IRS. In fact, in my testing I found the most expensive one to offer the worst in-browser user experience.

To avoid any headaches, I would take great care when making the payments to make sure they are properly designated, as the payments are not reversible or refundable by the processor.

Specific credit card examples. The following cards currently have the ability to offer cash back rewards equal or greater than 1.75%, meaning you can actually make money by paying your taxes with them. Please read my card-specific reviews for details.

TurboTax vs. TaxACT vs. H&R Block Online 2016 Lightning Review

1040clipFor the last few years, I’ve completed my personal returns top-to-bottom using each of the three most popular online tax prep providers – TurboTax, H&R Block, and TaxACT. I started my 2015 tax year returns this weekend, but each one was close enough to last year’s experience that I couldn’t bring myself to do all that repetitive data entry again. I did run through the major categories, explored the import features, and tried contacting their customer support.

The major differentiating factors remain price, time-saving features, audit support, and ability to answer specific tax questions. All three offer a “Maximum Refund Guarantee” (relative to competing software) as well as an “Accuracy Guarantee” (relative to your tax bill or refund amount) that says that they will pay any penalty and interest assessed by the IRS or your state due to calculation errors on their part (though H&R Block limits this to $10,000). Actual cost can vary widely with sales and discounts, listed here are just the everyday prices. My condensed review:

TurboTax Onlinett180

  • Most expensive. Federal Deluxe regular price is $34.99 w/ e-file and supports itemized deductions. However, you need Premier at $54.99 if you have an investment gains or rental property. State return price is $36.99.
  • Best import features. Imports a lot of information from last year’s return. Automatically imports W-2s from many payroll providers and (by far the most) 1099 forms directly from financial institutions, both saving time and improving accuracy. Works with free “ItsDeductible” program to help with recording charitable donations.
  • Moderate audit support. You get help, but no in-person representation.
  • Moderate tax advice – You can request a phone call-back, wait time given upfront (10 minutes for me). Good online question database.
  • Annoying upsells. Intuit always feels like they are trying to extract the most money out of you.

Bottom line: The time-saving choice if you have a lot of brokerage transactions, W-2s, or other 1099 forms to electronically import this year. Also if you have a lot of details to import from last year’s return with TurboTax. It may be worth the extra cost to avoid tedious data entry.

ta200TaxACT Online

  • Least expensive. Federal Plus regular price is $19.99 w/ e-file and supports itemized deductions, capital gains, and rental income. Federal + State return combined including e-file at $19.99.
  • Limited import support (worst of the three). Free Donation Assistant® feature to track charitable donations.
  • Limited audit support (worst of the three).
  • Limited tax advice quality (worst of the three). The hardest to find real person help. You can get phone support, but only if you pay first. Online question & answer database is available.

Bottom line: The value choice if you just want accurate DIY tax return software and don’t need any extra assistance.

hr160H&R Block at Home Online

  • Middle-of-road pricing. Federal Deluxe regular price is $34.99, which supports itemized deductions and capital gains. You need Premium at $49.99 for rental property. State return price is $36.99.
  • Moderate import support for 1099s and W-2 (not as broad at TurboTax, better than TaxACT).
  • Best free audit support. Only product that includes an H&R Block Enrolled Agent actually attending your audit in-person. However, consider whether you would hire your own representative in the actual event of an IRS audit.
  • Easiest to get in-person tax advice. Free Live Chat included, wait time given upfront (4 minutes for me). Good online question database.

Bottom line: The most helpful choice if you don’t quite want to pay to person to do it all for you, but you are worried you might need some assistance. Based on overall experiences, H&R Block uses their brick-and-mortar experience to provide the best answers if you have tax questions. You also get the assurance that a federally-authorized enrolled agent will guide you for free through a potential albeit unlikely audit.

Tim Gray did his annual NY Times comparison as well, with very similar experiences to my own. As he puts it:

Each program’s maker has staked out a place in the market where it excels. TurboTax’s technology is the smoothest to use — the program rarely frustrates and offers a few features each year the competitors don’t match. Block’s tax help is the easiest to understand and get access to. TaxAct’s offerings are the cheapest.

I would add that although each product still has their strengths, this year the margins are getting closer. All three offer guidance throughout the filing process. In terms of price, TaxACT is still the cheapest but the total cost is higher than in previous years. In terms of online interface, all three are pretty similar, with TaxACT modernizing parts of their interview process. H&R Block remains best at one-on-one tax advice, but all three offer tax question databases (and really, there’s always Google for everything else). As the feature leader, TurboTax added a few more incremental things like a slick smartphone and iPad apps which you can use simultaneously with the traditional web browser version. Overall, the competition has made for slightly better products across the board.

All of these sites work on a “start for free” basis, so you can also try them out yourself before having to commit and pay anything.

TurboTax Desktop Software 2015 Deals, 40% Off at Amazon

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Tax prep season is coming up soon, and Amazon has some deals going on for desktop versions of Intuit TurboTax for Tax Year 2015. Here are some reasons that you may choose the desktop software version (CD or download) over their more-popular TurboTax.com online version:

  • With desktop software, you keep all your sensitive data (Social security number, income, etc.) on your own home computer instead of on someone else’s cloud server.
  • The desktop software allows up to 5 Federal tax returns (including 5 separate e-Files) per product purchase. So if you have extra family members or close friends, you can share it and save money.
  • Depending on the promotion, buying the download/CD version can be cheaper than using the online version. Note when comparing prices: If the download/CD version only says State download is included and not explicitly State e-File, then you can complete a state return, but the State e-File will be an additional cost of $19.99 per return. (By contrast, the TurboTax.com online version charges $36.99 for the state software add-on, but it includes one state e-File.) My suggestion is to simply print out your return, mail it in for the cost of a stamp and envelope, and pocket the savings.

There are two separate Amazon promotions going on right now. First, receive up to 40% off the desktop software versions of Intuit TurboTax 2015 (either Mac or PC, download or physical CD). You can get only Federal or Federal + State. Promotion link. Expires January 30th, 2016. Example prices:

Buy a bundle including both Intuit TurboTax and Quicken on CDs, and save $20 on the entire bundle. You have to add to cart and go to Checkout in order to see the discount. Note that this is physical CD only, but both Mac and PC versions are on the TurboTax CDs. However, Quicken for PC and Mac are different prices. Promotion link. Example prices:

(Note: Please verify prices, as they have been changing. Pretty annoying actually, as only the $20 off is set, but they keep changing the original price of the bundle instead.)

At the time of writing this post, it works out to getting Quicken 2016 PC for about $10 extra. If you turned around and sold the Quicken on Amazon Marketplace or eBay, you’d probably get more than $10, which means your net price for TurboTax would be even lower than the first promotion (in exchange for some extra work).

How To Generate and Issue Your Own 1099-MISC Forms

1099blanksDid you as a small business pay another person or unincorporated business more than $600 total in the last year for services rendered? You may have to provide them a 1099-MISC form.

Here are the specific rules as laid out in the official IRS Form 1099-MISC Instructions [pdf]:

The Internal Revenue Service (IRS) requires businesses (including not-for-profit organizations) to issue a Form 1099 to any individual or unincorporated business paid in excess of $600 per calendar year for services rendered. This is required whether these payments are spread out over the course of the year or are paid in one lump sum payment. The most effective way to obtain the information needed to prepare the Form 1099 is by requiring that an IRS Form W-9 be completed prior to any payment being made. The penalty for failure to file Form 1099 can be as much as 50% of the amount paid for services.

Note that last sentence: The penalty for failure to file Form 1099 can be as much as 50% of the amount paid for services.

The 1099-MISC forms must typically be sent out to independent contractors by January 31st following the end of the tax year in which you made the payments. (As 1/31/16 is a Sunday, the deadline is February 1st for 2016.) You must also file a Form 1096 and submit the information to the IRS by March 31st.

If you’ve got your own accountant or payroll service, then you can pay them to generate the proper forms and send out these 1099s. However, I have done it myself as well, it is not very difficult. Here are your options for generating and issuing a Form 1099:

  • You can order physical, blank 1099 forms from the IRS for free, but it may take up to 4-6 weeks. Here is the IRS.gov order page. You’ll need at a minimum, Form 1099-MISC and Form 1096. You then print it out yourself and mail it. Cost: Free.
  • You can buy physical, blank 1099 forms at an office supply store like Staples or OfficeMax. You then print it out yourself and mail it. Cost: ~$30 for a kit of 24.
  • You can order physical, blank 1099 forms online. Here is the top-reviewed blank 1099-MISC kit from Amazon.com which includes multiple copies, envelopes, and 1096 forms. You then print it out yourself and mail it. Cost: ~$22 shipped for a kit of 25. You can get it with the printing software for about $35 shipped.
  • You can use a 3rd-party online service where you fill out the information online and they’ll create a PDF for you. The most popular is Intuit’s version (they make TurboTax). You will still need to print it out and mail the 1099 forms to your independent contractors, but they will e-file the information to the IRS. Cost: ~$15 for up to 3 forms, $4 each additional.
  • You can use 3rd-party desktop software where you will be guided as with tax software as to how to fill out the appropriate forms. The most popular is TurboTax for Business (not the personal edition), which will provide guidance and generate both 1099-MISC and W-2 payroll forms for you. It comes with a 60-day money back guarantee from Intuit, so if it doesn’t work to your satisfaction, you can return it within 60 days for a full refund. Cost: ~$105 for tax filing software which includes unlimited 1099 and W-2 forms.

You can fill out the physical forms with a typewriter or printer. There are various ways to get the numbers “set” correctly for printing including some free homemade templates out there, but I can’t vouch for any specific one (they may contain viruses or malware, etc). You can also buy forms + software packaged together to fill them out. Don’t forget to fill out the red copies for the IRS.

Note that you cannot use the blank 1099 PDFs that you find online; they are only examples.

Finally, remember that your first job is to get a W-9 form [pdf] filled out by the person you paid, so that you’ll have their Tax ID to enter onto your tax forms.

Home Improvement Receipts: Scan Now, Save Indefinitely

housecostbasis2For many people, when they sell a home they don’t even consider taxes. But over time, especially if you live in a relatively expensive area, more and more people will bump up against the federal capital gains exclusions of $250,000 for individuals and $500,000 for couples. (You must have lived in the home for at least two out of the five years before the sale.)

This NY Times article projects that the following share of homeowners in certain high-cost cities will exceed the 250k/500k limits within the next 10 years, assuming just 3.5% annual growth and no further improvements. (Also consider the uncomfortable idea that you really can’t know if you’ll be single or married when it comes time to sell your home.)

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Most importantly, the article provides a good reminder to save all of your home-related receipts because they can raise your cost basis and thus reduce any potential capital gains. It’s so easy, and those little pieces of paper can literally be worth thousands of dollars down the road when the tax bill hits.

In general, you should save all of your home repair and remodeling receipts, although things considered maintenance won’t count (painting, fixing leaks, patching cracks, etc.). Here are a bunch of things taken from IRS Pub 523, Selling Your Home. Don’t take this as specific tax advice, but instead as a potential reminder in case you have done something on this list but don’t have the receipts properly stored away and archived.

Home Acquisition and Closing Costs.

  • Charges for installing utility services, legal fees for preparing the sales contract, title search fees, recording fees, survey fees, transfer or stamp taxes, and owner’s title insurance.

Home Improvements

  • Additions. Bedrooms, bathrooms, garages, decks, patios.
  • Exterior. New roof, siding, satellite dish, storm windows.
  • Interior. Built-in appliances, kitchen modernization, flooring, wall-to-wall carpeting, fireplace.
  • Lawns and grounds. New driveways, landscaping, fences, retaining walls, sprinkler system, swimming pools.
  • Systems. Heating, air conditioning, furnace, duct work, air/water filtration, security system.
  • Plumbing. Septic, water heater, water softener, water filtration.
  • Insulation. Attic, walls, floors, pipes, ductwork.

Physical receipts can get lost or fade over time, but the IRS accepts electronic records so it is quite easy to make a PDF using either your home scanner or just your smartphone. I use the well-reviewed Scanner Pro app and am impressed by its quality, but there are many competitors out there that I haven’t tried. You can then save to a cloud service like Dropbox or Evernote, or simply e-mail them to a searchable gmail account as another form of backup.

Completed Sample IRS Form 709 Gift Tax Return for 529 College Savings Plan

529Let’s say you are fortunate enough to be able to make a large contribution to a 529 college savings plan, perhaps for your children or grandchildren. You read from multiple sources that you are able to contribute up to $70,000 at once for a single person or up to $140,000 as a married couple, all without triggering any gift taxes or affecting your lifetime gift tax exemptions (for 2014 and 2015). What you are doing is “super funding” or front-loading with 5 years of contributions, with no further contributions the next four years.

Those are pretty big numbers, but you also discover that any contribution above $14,000 will require you to file a gift tax return because that is the annual gift tax exclusion limit for 2014 and 2015. You’ll need to fill out IRS Form 709 [pdf], “United States Gift (and Generation-Skipping Transfer) Tax Return”. The instructions are quite long and confusing. You ask your accountant and they suggest talking to your estate lawyer. You may wish to avoid paying the $400 an hour or whatever it will cost as you know the form should be pretty straightforward.

So how do you fill out form 709 for a large but simple 529 contribution? You search for sample completed forms online but very few clear resources turn up. Here are the resources that I found most helpful:

Here’s a redacted version of my completed Form 709. Let me be clear that I am not a tax professional or tax expert. I am some random dude on the internet that did his own research to the best of his abilities and filled out the form accordingly. This is what my form looks like. It could be wrong. You’ll need to make changes to conform to your specific situation. Feel free to offer a correction, but please support your statement.

For my version, I am assuming that you and your spouse contributed the maximum $140,000 together in 2014. (No, I didn’t actually put in that much.) Note that you’ll need to file two separate gift tax returns, one for you and one for your spouse. Mail them to the IRS in the same envelope, and I like to send them certified mail.

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Here is my Form 709, Schedule A, Line B Attachment

Form 709, Schedule A, Line B Attachment

– Donor made a gift to a Qualified State Tuition Program (a 529 plan).

– Total amount contributed $140,000 in 2014.

– Donor elects pursuant to Section 529(c)(2)(b) of the IRS Code of 1982, as amended to treat the gift as having been made equally over a 5-year period.

– The gift was made jointly by the taxpayer and the taxpayer’s spouse on January 1st, 2014 and will be split equally in half.

– Election made for $140,000 over 5 years is equal to $28,000 total per year, or $14,000 per person per year.

– The contribution is for

Juniper Doe
Daughter
1234 Main St
New York, NY 10001

When to file Form 709. When taking the 5-year election, you must fill out the gift tax return (Form 709) by April 15th of the year following the year in which in the contribution was made. So if you make the contribution in 2015, you must file Form 709 by April 15th, 2016. If you make the upfront contribution in the first year and then make no future contribution in the next four years, you do not have to file a gift tax return after the one you did for the first year.

What if you’re late? Well, you should file the Form 709 as soon as possible. If you did not exceed the limits then technically there is no gift tax due, and there is no penalty that I could find for late filing when there is no taxes due. Still, I would file ASAP.

The tax information set forth in this article is general in nature and does not constitute tax advice. The information cannot be used for the purposes of avoiding penalties and taxes. Consult with your tax advisor regarding how aspects of a 529 plan relate to your own specific circumstances.