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

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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.

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Crazy Rich IRAs: From Peter Thiel to Ted Weschler

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

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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.

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

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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.

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

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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

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Health Care Flexible Spending Accounts: Don’t Lose Your FSA Money

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Updated for 2020. Here’s my annual year-end reminder – to myself, really – to get back all the money sent into Healthcare Flexible Spending Accounts (HC FSA) before it disappears forever (see possible extensions below). The maximum salary deduction limit is $2,750 for 2020. You choose your deduction amount during Open Enrollment season, but it can also be adjusted during “qualifying life events” like the birth of a child, marriage, or divorce.

Quick ideas. 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. Just order things online and then submit the receipt. Amazon even has a special FSA-eligible page that accept FSA/HSA debit cards, complete with an “under $25” and “little-known eligible items” section. (Tip: Use this time to stock your hurricane/earthquake/snowstorm emergency kits.)

Edit: For 2020, the CARES Act added back over-the-counter drugs without a prescription. Certain menstrual care products, such as tampons and pads, are also now eligible medical expenses.

Certain over-the-counter (OTC) items such as cough medicines, pain relievers, acid controllers, and diaper rash ointment require a prescription for reimbursement. This is an added hassle, but worth a quick ask if you have a doctor appointment anyway.

When getting a receipt, make sure it clearly includes the following:

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

Deadline extensions. Employers have the option of adding one of the following:

  • Some plans allow a grace period until March 15th of the following year as opposed to a December 31st deadline to use your 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.
  • Due to COVID-19, companies were given the option of extending the grace period for 2019 HCFSA funds until the end of 2020.

Big, exhaustive lists. Some of these are searchable by keyword as well.

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 (now since acquired by WageWorks). Wow, Conexis was a pain. 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 skeptic in me suspects that this bureaucratic nightmare is part of their business model. (Remember mail-in rebates?) Guess who gets to keep unreimbursed FSA funds? The employer, which can then use the money to pay for… the FSA administrator.

Got a Health Savings Account (HSA) and think you are ineligible for an FSA? Look for a “limited-purpose FSA” option that is restricted to dental and vision care services. These have the same max annual salary deduction.

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

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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.

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Official IRS Tool to Check Status of Stimulus Check

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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.

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

Good Time to Convert Traditional IRAs to Roth IRAs?

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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.

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Federal and State Tax Payment Deadline Extensions Due to Coronavirus

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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.

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

E-File Federal and State Tax Extension Online For Free (Updated 2020)

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards and may receive a commission. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned.

stopwatch2Updated for 2020. This year, the deadline for federal tax filing is Wednesday, April 15th, 2020. If you file for an extension before that date, you can extend the time allowed to file your return by six months to Thursday, October 15, 2020. It does not extend the time to pay any tax due, although due to the coronavirus the IRS has extended the tax payment deadline by 90 days for everyone. There are many legitimate reasons to ask for such an extension, and the extension is granted automatically without needing to provide a specific reason.

The penalty for late filing is many times higher than the penalty for late payment! If you are not 100% sure you can file in time, file for an extension.

Here’s how to e-File a federal and state tax extension for free. (State extension where available.) I have done a dry run with each option. Advantages of using e-File include:

  • You save the time and postage costs of paper mailings.
  • You can estimate your tax liability using online software and/or calculators.
  • You receive confirmation of receipt via e-mail or text, often within hours.
  • The potential convenience of filing your state tax extension online at the same time.

Option #1: TaxACT

2016extend_taxact0This is how I usually do my extension because they include state as well. Tax prep software TaxACT.com allows you to e-File your Federal and State extension (where applicable) for free through them. You don’t need to actually use them to file your taxes later, although you certainly can.

Directions
First, register for free at TaxACT.com with your e-mail address and pick a password if you haven’t previously. Next, if you wish to perform a state tax extension, you must go to the “State” menu option on the left and add the appropriate state tax return. You don’t need to fill it out, just add it so they know what state you are filing for. Some states don’t even require a separate filing, but TaxAct supports the electronic filing of extension forms for the following states:

  • Arizona
  • California
  • District of Columbia
  • Kentucky
  • Louisiana
  • Maryland
  • Massachusetts
  • New Jersey
  • North Carolina
  • Pennsylvania
  • Tennessee
  • Texas

To go directly to the extension form, click on the “Filing” tab on the left menu, and then the “File Extension” link right below it. You will be able to choose whether to file extension for Federal, State, or both. You will then be guided through the Form 4868 in a question-and-answer format. TaxACT will file the form electronically for you (or you can print and snail mail).

TaxACT also provides a tax liability estimator to help you determine if you need to make a payment with your extension. If you fill out more details in the main software, then the estimate will be improved. If you don’t think you’ll owe any taxes, you can just put down zero as your expected tax liability. If you wish to make a tax payment, you will be able to choose to pay with direct withdrawal from a bank account (account and routing numbers required) or pay with a credit card (IRS fees apply).

Afterward, you can confirm the status of your extension e-file by going to efstatus.taxact.com. They will even send you a confirmation via e-mail or text message. I got my confirmation less than 3 hours after submission.

Option #2: TurboTax

TurboTax.com also allows you to file a Federal extension online for free after signing up for a free account. They are rather vague on state tax extensions, stating that they will only show the state extension option where available after you have completed the majority of your state return. (Doesn’t this kind of defeat the purpose?) After logging in, look for the big search box on the top right and type in the keyword “extend” to be directed to their extension section.

It will walk you through the information needed for Form 4868. Again, if you don’t think you’ll owe any taxes, you can just put down zero as your expected tax liability. If you wish to make a tax payment, you will be able to choose to pay with direct withdrawal from a bank account (account and routing numbers required) or pay with a credit card (IRS fees apply).

According to the Turbotax website, you should receive a confirmation email from the IRS within 48 hours of filing the extension.

Option #3: Free File Fillable Forms

freefileAs the name suggests, FreeFileFillableForms.com is another privately-run site (now owned by Intuit!) that allows you to fill out Federal IRS forms online, for free. They are basically the exact same paper forms that the IRS would provide you, with no additional guidance or assistance. State tax extensions are not included.

For some reason, they make you create a new account every year. After you’re signed in, on the top left of Form 1040 you should see an icon with the label “File an Extension”.

This will bring up Form 4868. Click around the form to fill the boxes out. As above, you’ll need to estimate your total tax liability, but since this is just an online version of the form so there is no guidance included. You can request your estimated tax payment to be withdrawn electronically by supplying your bank’s routing and account numbers. For identification purposes, you’ll need your adjusted gross income (AGI) from your previous year tax return.

Bottom line. There are many options to e-file your tax extension for free. Confirmation is usually provided within 48 hours, as opposed to having to worry about if your paper form got snail-mailed to the IRS successfully. Filing an extension only extends the time to file your return and does not extend the time to pay any tax due. To avoid late payment penalties and interest you must estimate what tax will be due and pay that when you file the extension. However, the penalty for late filing is many times higher than the penalty for late payment. If you are not 100% sure you can file in time, file for an extension.

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

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

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards and may receive a commission. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned.

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.

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.