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.

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

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.

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.

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.

The Double Tax Advantage of Donating Appreciated Stocks Directly

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.

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.

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.

Super Simple Portfolio Rebalancing: Check Once A Year, Rebalance Every 6 Years On Average!

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.

All this talk about portfolio rebalancing is to improve your risk-adjusted return, not to maximize absolute returns. You are trying to squeeze the most return out of a given degree of risk. Otherwise, if you do nothing eventually whatever has a higher return (historically always stocks) will outperform and take over the portfolio.

Here’s another take on the proper frequency of rebalancing your portfolio to your target asset allocation. Vanguard Research has a new paper called Getting back on track: A guide to smart rebalancing [pdf]. The chart below shows the results of various combinations of time and threshold rebalancing strategies on a traditional 60/40 portfolio from 1926-2018.

I added the yellow highlights, which focus on the two extremes:

  • If you rebalanced every single month for 93 years straight (1,116 times!), your result would have been a 8.20% annualized tax-adjusted return and 11.7% volatility. Sharpe ratio 0.50.
  • If you checked in your portfolio only once per year, and then only actually took actions if your target percentage was off by 10% of more (i.e. 50/50 or 70/30), you would have rebalanced only 14 times over 93 years. That an average of once every 6.6 years! Your result would have been a 8.20% tax-adjusted return and 11.6% volatility. Sharpe ratio 0.50.

My kids like to dance to a popular kids YouTube channel called Super Simple Songs. I think the last method should be called Super Simple Rebalancing. You just need to make sure you’re taking action on those rare trigger dates.

Historically, your risk-adjusted return was a bit better if you rebalanced at a 5% threshold with quarterly checkups (8.31% with 11.6% volatility), but there is no guarantee that this small edge will apply in the future. However, this does explain why Vanguard uses the 5%/quarterly method in their paid portfolio management program Vanguard Personal Advisor Services. Historically, this has worked out to rebalancing once every two years on average, which isn’t so bad either.

This last sentence in the paper is a good summary of tax-aware investing:

Investors may also be able to improve portfolio performance, without sacrificing risk control, by practicing tax-efficient rebalancing through the use of tax-advantaged accounts, rebalancing with portfolio income, incorporating tax- and cost-sensitivity awareness into their rebalancing decision, and gifting overweighted and highly appreciated securities.

Bottom line. You could have rebalanced 1,000+ times from 1926-2018, or you could have just done it 14 times and it really wouldn’t have made much difference. The key is to pick a simple, consistent rebalancing rule and stick with it!

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.

Roth vs Traditional Pretax 401k? Compare With These Example Worker Profiles

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.

T. Rowe Price has an article Evaluating Roth and Pretax Retirement Savings Options by Roger Young that covers the basics on the choice between a “Traditional” pretax or Roth IRA or 401k account:

The primary factor to consider is whether your marginal tax rate will be higher or lower during retirement. If your tax rate will be higher later, paying taxes now with the Roth makes sense. If your tax rate will be lower, you want to defer taxes until then by using the pretax approach.

With the Traditional pretax, you get to avoid paying income taxes on the contribution now, but you must pay taxes up on withdrawal. With the Roth, you pay income taxes now, but you don’t own any taxes upon withdrawal. However, I am linking to it because it also includes a table with some sample worker profiles. This may help clarify things for people who are still confused about which to pick.

There are other considerations due to our overly-complex tax code, but I think this is still a helpful tool.

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.

Free State Income Tax E-File Options For All 50 States (Updated 2019)

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.

50stateefile2

Links checked and updated for 2019. With DIY tax prep software, it is always wise to note the cost of your state return and e-File as it may actually cost more than your federal return (especially if you wait until April to file). As such, you may wish to do your state return separately. Based on their current, regular published prices at time of writing:

  • TurboTax Online Deluxe and Premier charge $39.99 for a single state return with free state e-File. Simple state tax returns are free (no itemized deductions, no 1099-MISC, no stock sales).
  • H&R Block Online Deluxe and Premium charge $36.99 for a single state return with free state e-File. Simple state tax returns are free (no itemized deductions, no 1099-MISC, no stock sales).
  • TaxACT Online Plus and Premium charges charges $39.95 for a single state return with free state e-File. Basic state tax returns are $19.95.*

Got a simple return? Both TurboTax Free Edition and H&R Block Free Edition will let you file Fed + State + eFile for $0 if you only have the following situations:

  • W-2 income
  • Limited interest and dividend income reported on a 1099-INT or 1099-DIV
  • Claim the standard deduction
  • Earned Income Tax Credit (EIC)
  • Child tax credits

You can’t itemize deductions, have stock sales, or have 1099-MISC income, for example.

Now, the convenience that these programs offer may be worth the extra money to you. But there may be other options available. States that levy individual income taxes fall into three categories:

  1. They offer all taxpayers free electronic filing via official state-supported software.
  2. They offer all taxpayers access to free “fillable forms” which are basically electronic versions of the paper forms where you can type in numbers and any mathematical calculations are done for you. If your state tax returns are relatively simple, this may be all you really need.
  3. They allow commercial vendors via the “FreeFile Alliance” to offer free online filing for certain groups, usually through income limits, age restrictions, and/or active duty military personnel. The vendors in turn make money when some folks end up not qualifying and have to pay at the end.

Below, you’ll find free e-file information for all 50 states.

In alphabetical order (just click on the state):

State Restrictions
Alabama Free electronic filing using through My Alabama Taxes (MAT). No income restrictions.
Alaska (no state income tax)
Arizona File using AZ-specific fillable forms; No income restrictions. FreeFile options also available; income and/or other restrictions apply.
Arkansas Various FreeFile options; Income and/or other restrictions apply.
California Free electronic filing using through CalFile, UDS, and others. No income restrictions.
Colorado Free electronic filing using through Revenue Online. No income restrictions.
Connecticut Free electronic filing using through TaxPayer Service Center (TSC). No income restrictions.
Delaware Free electronic filing through official state website. No income restrictions.
Florida (no state income tax)
Georgia FreeFile options available; income and/or other restrictions apply.
Hawaii File for free at Hawaii Tax Online.
Idaho FreeFile options available; income and/or other restrictions apply.
Illinois Free electronic filing through MyTax Illinois. No income restrictions.
Indiana FreeFile options available through INfreefile; income and/or other restrictions apply.
Iowa FreeFile options available; income and/or other restrictions apply.
Kansas Free electronic filing through KS WebFile. No income restrictions.
Kentucky FreeFile options available; income and/or other restrictions apply.
Louisiana Free electronic filing through Louisiana File Online. No income restrictions.
Maine Free electronic filing through Maine FastFile. No income restrictions.
Maryland Free electronic filing through Maryland iFile. No income restrictions.
Massachusetts FreeFile options available; income and/or other restrictions apply. WebFile for Income was shut down in 2017.
Michigan FreeFile options available; income and/or other restrictions apply.
Minnesota FreeFile options available; income and/or other restrictions apply.
Mississippi FreeFile options available; income and/or other restrictions apply.
Missouri FreeFile options available; income and/or other restrictions apply.
Montana FreeFile options available; income and/or other restrictions apply. Looks like they recently get rid of free electronic filing through Taxpayer Access Point (TAP).
Nebraska Free electronic filing through NebFile. No income restrictions.
Nevada (no state income tax)
New Hampshire Free electronic filing through e-File New Hampshire. No income restrictions. (No state personal income tax, but there is tax on investment income.)
New Jersey Free electronic filing through NJ WebFile. No income restrictions.
New Mexico Free electronic filing through New Mexico Taxpayer Access Point. No income restrictions.
New York Free electronic filing of select forms online with New York State Income Tax Web File, but note that New York law prohibits commercial software from charging an additional charge for e-filing.
North Carolina FreeFile options available; income and/or other restrictions apply.
North Dakota FreeFile options available; income and/or other restrictions apply.
Ohio Free electronic filing through I-File from Ohio Online Services. No income restrictions.
Oklahoma Free electronic filing through Oklahoma Taxpayer Access Points (OkTAP). No income restrictions.
Oregon File using OR-specific fillable forms; No income restrictions. FreeFile options also available; income and/or other restrictions apply.
Pennsylvania Free electronic filing through PA DirectFile. No income restrictions. Free Fillable PDF Forms also available.
Rhode Island FreeFile options available; income and/or other restrictions apply.
South Carolina File using SC-specific free fillable forms; No income restrictions. FreeFile options also available; income and/or other restrictions apply.
South Dakota (no state income tax)
Tennessee Free electronic filing through state website of Hall Income Tax. No income restrictions. (No state personal income tax, but there is tax on investment income.)
Texas (no state income tax)
Utah Free electronic filing through Taxpayer Access Point (TAP). No income restrictions.
Vermont FreeFile options available; income and/or other restrictions apply.
Virginia File using VA-specific free fillable forms; No income restrictions. FreeFile options also available; income and/or other restrictions apply.
Washington (no state income tax)
Washington DC File using DC-specific free fillable forms; No income restrictions. FreeFile options also available; income and/or other restrictions apply.
West Virginia FreeFile options available; income and/or other restrictions apply.
Wisconsin Free electronic filing through Wisconsin efile. No income restrictions.
Wyoming (no state income tax)

 
Whew, that took a while. Please share this if you think it’ll help others! Also let me know if you find any errors or changed links.

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.

Dependent Care FSA: Save on Daycare, Preschool, Summer Camps, After-School, and Elder Care

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.

One of the newer work perks that we took advantage of this year was the Dependent Care Flexible Spending Account (DCFSA). This is separate from the Health Care Flexible Spending Account (HCFSA) and the Health Savings Account (HSA). However, they do work in a similar way in that you can pay for eligible expenses with pre-tax money and thus save money by being exempt from income taxes on that amount. For example, we were able to pay for $5,000 in preschool expenses using your DCFSA in 2018. At a a 30% marginal total tax rate (see below), that was a $1,500 savings.

Eligible expenses for children (under age 13)
The overall idea is to cover childcare while you are working:

  • Nannies, Au pairs, and babysitters
  • Daycare and Nurseries
  • Preschool
  • Before and After School Care Programs. (Non employer-sponsored.)
  • Summer Day Camps

Eligible expenses for adults
The overall idea is to cover care for an adult dependent (spouse, relative) who is physically or mentally incapable of caring for themselves and lives in your home for more than half the year:

  • Adult or Senior day care center
  • In-home custodial caregiver (Non-medical, like eating and bathing assistance)
  • Transportation to/from eligible care (by your care provider)

You should keep detailed supporting documentation and itemized receipts for your HR department and potentially the IRS.

Maximum contribution amounts
The annual contribution limits for 2018 and 2019 are below. (They are not adjusted automatically for inflation.) Note that you can’t exceed your earned income.

  • $5,000 per year if you are married and file a joint tax return or if you file as single or head of household. (If MFJ, one person can get $5,000 when the other does not participate at all.)
  • $2,500 per year if you are married and file a separate tax return. (If MFS, both of you can get $2,500 individually.)

Similar to the Healthcare FSA, these funds must be claimed during the year deducted (plus any grace period) or you will lose the funds. “Use it or lose it”.

Total tax benefit
When you are able to pay with pre-tax money, you are avoiding taxes on:

  • Federal income tax
  • State income tax
  • FICA (Social Security tax)
  • Medicare tax

For 2018, the Social Security tax rate is 6.2% on the first $128,400 wages paid. The Medicare tax rate is 1.45% on the first $200,000 and 2.35% above $200,000. For us in the 22% federal marginal tax rate, that’s a total of 22 + 6.2 + 1.45 = 29.65%. So we’re nearly at a 30% savings even ignoring state income taxes. A 30% total tax savings on $5,000 in childcare expenses is $1,500. This is definitely worth enrolling and submitting a few receipts, even if our claim submission system is a bit slow and clunky.

This is also separate from the Child and Dependent Care Tax Credit. You are not allowed to “double-dip” and claim the same specific expense for both this DCFSA and the tax credit. But if you have enough total expenses, you can get both.

Bottom line. If you pay for childcare or care for a disabled adult dependent, you should check if your employer now offers a Dependent Care Flexible Spending Account (DCFSA). The times to check are when you get a new job, have a new child, change marital status, your spouse loses benefits, or during Open Enrollment. If you pay for full-time care, it is quite likely you can max this out and save some serious money. Just be sure to file those claims on time!

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.

2018 IRS Federal Income Tax Brackets Example (Married No Kids)

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.

The Tax Cuts and Jobs Act (TCJA) changed up the personal income tax brackets, exemptions, and deductions. Here is an updated graphical breakdown of a simple scenario for a married filing joint couple with no children in Tax Year 2018. I’ll also try to illustrate the relationship between gross income, taxable income, marginal tax rate, and effective tax rates. See also:

2018 federal income tax rates for married joint filers. Taken from the official IRS tax tables (source):

The following changes also apply for Tax Year 2018:

  • The personal exemption deduction is now gone ($0), from $4,050 in 2017.
  • The standard deduction for single taxpayers and married taxpayers filing separately rises to $12,000 from $6,350.
  • The standard deduction for married taxpayers filing joint returns rises to $24,000 from $12,700.
  • The standard deduction for heads of household rises to $18,000 from $9,350.
  • The Child Tax Credit was expanded with higher income phaseout limits and is now worth up to $2,000 per qualifying child.

Let’s say your household combined gross income is $100,000 a year. You are a married couple with no children, and both earn $50,000 gross income. You are both employees that receive W-2 income only (i.e. neither are self-employed). You don’t have any additional income sources like interest, capital gains, rents, etc. You don’t have any deductions like IRA/401k contributions or mortgage interest that will allow you to itemize deductions. We will ignore any state or local income taxes.

Gross income. Let’s start with your annual $100,000 gross household income. There are no personal exemptions. Instead, you get the larger standard deduction which is $24,000 for married joint filers in 2018. Since you don’t have a lot of itemized deductions, you fall back onto the standard deduction.

The first 24,000 of your gross income is not taxable. Without doing anything special at all, your $100,000 in gross income is now only $76,000 in taxable income after personal exemptions and the standard deductions.

The first $19,050 of taxable income is subject to a 10% tax rate. Shave off 10% of $19,050 and put that on your tax bill ($1,905). The remaining $56,950 of taxable income is moved onto the next tax bracket.

The next $58,350 in taxable income is subject to a 12% tax rate. However, we only have $56,950 left. So we shave off 12% of $56,950 ($6,834) and add that to the existing $1,905. The total tax bill is now $8,739.

In this example, this 12% is your marginal tax bracket. If you earned another $1, it would be taxed at this marginal rate of 12%. Even with a six-figure income, a married couple can still land in the 12% marginal tax bracket (pre-tax 401k or IRA contributions would reduce taxable income even more).

(Have kids? See this example for married with children.)

Payroll taxes. These aren’t technically federal income taxes, but you must each pay a Social Security tax (OASDI) of 6.2% and Medicare payroll tax (HI) of 1.45% of your gross income. That’s $3,100 a year for Social Security and $725 a year for Medicare. You both earn $50,000 gross and don’t exceed the income caps. (Your respective employers pay the same amount.)

Overall effective tax rate. You paid $8,739 in federal income taxes on $100,000 of gross income, for an overall effective tax rate of 8.7%. You also paid 7.65% in payroll taxes.

For comparison, the same married couple with no kids in 2017 would have paid $11,278 in federal income taxes on $100,000 of gross income, for an overall effective tax rate of 11.3%. Payroll taxes would be the same.

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.

2018 IRS Federal Income Tax Brackets Breakdown Example (Single)

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.

The Tax Cuts and Jobs Act (TCJA) changed up the personal income tax brackets, exemptions, and deductions. Here is an updated graphical breakdown of a simple scenario for a single filer with no dependents in Tax Year 2018. I’ll try to illustrate the relationship between gross income, taxable income, marginal tax rate, and effective tax rates. See also my previous post 2018 Income Tax Breakdown (Married w/ 1 Child).

2018 federal income tax rates for single filers. Taken from the official IRS tax tables (source):

The following changes also apply for Tax Year 2018:

  • The personal exemption deduction is now gone ($0), from $4,050 in 2017.
  • The standard deduction for single taxpayers and married taxpayers filing separately rises to $12,000 from $6,350.
  • The standard deduction for married taxpayers filing joint returns rises to $24,000 from $12,700.
  • The standard deduction for heads of household rises to $18,000 from $9,350.
  • The Child Tax Credit was expanded with higher income phaseout limits and is now worth up to $2,000 per qualifying child.

Let’s say your individual gross income is $60,000 a year. You are single with no dependents, aged 64 and under. You are an employee that receives W-2 income only (i.e. you are not self-employed). You don’t have any additional income sources like interest, capital gains, rents, etc. You don’t have any extra deductions like IRA/401k contributions or mortgage interest. You live in a state with no state income tax. We will ignore any state or local income taxes.

Gross income. Let’s start with your annual $60,000 gross income. There are no personal exemptions anymore. You do get the larger standard deduction which is $12,000 for single filers in 2018. Since you don’t have a lot of itemized deductions, you fall back onto the standard deduction.

The first 12,000 of your gross income is not taxable. Without doing anything special at all, your $60,000 in gross income is now only $48,000 in taxable income after personal exemptions and the standard deductions.

The first $9,525 of taxable income is subject to a 10% tax rate. Shave off 10% of $9,525 and put that on your tax bill ($952.50). The remaining $38,475 of taxable income is moved onto the next tax bracket.

The next $29,175 in taxable income is subject to a 12% tax rate. So we take 12% of $29,175 ($3,501) and add that to the existing $952.50. The tax bill is now $4,453.50. The remaining $9,300 of taxable is moved onto the next tax bracket.

The next $43,800 in taxable income is subject to a 22% tax rate. However, we only have $9,300 left. So we take 22% of $9,300 ($2,046) and add that to the existing $4,454 (let’s round up that dollar). The total tax bill is now $6500.

In this example, this 22% is your marginal tax bracket. If you earned another $1, it would be taxed at this marginal rate of 22%.

Payroll taxes. These aren’t technically federal income taxes, but you must pay a Social Security tax (OASDI) of 6.2% and Medicare payroll tax (HI) of 1.45% of your gross income. That’s $3,720 a year for Social Security and $870 a year for Medicare. (Your employer pays the same amount.)

Overall effective tax rate. You paid $6,500 in federal income taxes on $60,000 of gross income, for an overall effective tax rate of 10.8%. You also paid 7.65% in payroll taxes.

The same single filer in 2017 would have paid $8,139 in federal income taxes on $60,000 of income, for an average or overall effective tax rate of 13.6%.

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.

2018 IRS Federal Income Tax Brackets Breakdown Example (Married w/ 1 Child)

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.

The Tax Cuts and Jobs Act (TCJA) changed up the personal income tax brackets, exemptions, and deductions. Here is an updated graphical breakdown of a simple scenario for a married filing joint couple with 1 dependent in Tax Year 2018. I’ll also try to illustrate the relationship between gross income, taxable income, marginal tax rate, and effective tax rates. In future posts, I will also run 2018 examples for single filers and married joint filers without kids.

2018 federal income tax rates for married joint filers. Taken from the official IRS tax tables (source):

The following changes also apply for Tax Year 2018:

  • The personal exemption deduction is now gone ($0), from $4,050 in 2017.
  • The standard deduction for single taxpayers and married taxpayers filing separately rises to $12,000 from $6,350.
  • The standard deduction for married taxpayers filing joint returns rises to $24,000 from $12,700.
  • The standard deduction for heads of household rises to $18,000 from $9,350.
  • The Child Tax Credit was expanded with higher income phaseout limits and is now worth up to $2,000 per qualifying child.

Let’s say your household combined gross income is $100,000 a year. You are a married couple with one child 16 or under, and both earn $50,000 gross income. You are both employees that receive W-2 income only (i.e. neither are self-employed). You don’t have any additional income sources like interest, capital gains, rents, etc. You don’t have any deductions like IRA/401k contributions or mortgage interest that will allow you to itemize deductions. We will ignore any state or local income taxes.

Gross income. Let’s start with your annual $100,000 gross household income. There are no personal exemptions for you and your dependents any more. You do get the larger standard deduction which is $24,000 for married filing joint in 2018. Since you don’t have a lot of itemized deductions, you fall back onto the standard deduction.

The first 24,000 of your gross income is not taxable. Without doing anything special at all, your $100,000 in gross income is now only $76,000 in taxable income after personal exemptions and the standard deductions.

The first $19,050 of taxable income is subject to a 10% tax rate. Shave off 10% of $19,050 and put that on your tax bill ($1,905). The remaining $56,950 of taxable income is moved onto the next tax bracket.

The next $58,350 in taxable income is subject to a 12% tax rate. However, we only have $56,950 left. So we shave off 12% of $56,950 ($6,834) and add that to the existing $1,905. The total tax bill is now $8,739.

In this example, this 12% is your marginal tax bracket. If you earned another $1, it would be taxed at this marginal rate of 12%. Even with a six-figure income, a married couple can still land in the 12% marginal tax bracket (pre-tax 401k or IRA contributions would reduce taxable income even more).

Federal Child Tax Credit. As this income doesn’t exceed the phaseout limits and your child is 16 or under, you also get the full $2,000 Child Tax Credit. A tax credit lowers your tax bill dollar-for-dollar as opposed to a deduction that only lowers your taxable income. Thus, your tax bill is reduced from $8,739 to $6,739. (If you had additional children, each one would reduce your tax bill by another $2,000. Note that there is a limit to the refund-ability of the credit if it makes your tax bill negative.)

Payroll taxes. These aren’t technically federal income taxes, but you must each pay a Social Security tax (OASDI) of 6.2% and Medicare payroll tax (HI) of 1.45% of your gross income. That’s $3,100 a year for Social Security and $725 a year for Medicare. You both earn $50,000 gross and don’t exceed the income caps. (Your respective employers pay the same amount.)

Overall effective tax rate. You paid $6,739 in federal income taxes on $100,000 of gross income, for an overall effective tax rate of 6.74%. Again, you also paid 7.65% in payroll taxes. Your average tax rate is lower than a couple without kids due to the child tax credit. In this case, having a kid reduced your tax bill by $2,000.

The same married couple with one child in 2017 would have paid $9,340 in federal income taxes on $100,000 of gross income, for an overall effective tax rate of 9.34%.

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.

Completed Sample IRS Form 709 Gift Tax Return for 529 Superfunding / Front-Loading

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.

529Updated. Let’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 $75,000 at once for a single person or up to $150,000 as a married couple (2018), all without triggering any gift taxes or affecting your lifetime gift tax exemptions. (From 2013-2017, these numbers were $70k/$140k). What you are doing is “superfunding” or “front-loading” with 5 years of contributions, with no further contributions the next four years.

Those are pretty big numbers, but any contribution above $15,000 will require you to file a gift tax return because that is the annual gift tax exclusion limit for 2018. ($14,000 for 2013-2017.) 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 the form should be pretty straightforward.

So how do you fill out form 709 for a large but simple 529 contribution? Here are the resources that I found most helpful:

(Note that I have found what I consider minor errors and/or inconsistencies in some of the sample 709 forms above.)

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. (I didn’t actually contribute that much.) The 2014 form is shown below, but I just did this for another kid using the 2017 form and I couldn’t find any differences. 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.

f709_generic1_ediated

f709_generic2

f709_generic3

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 2018, you must file Form 709 by April 15th, 2019. 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.

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.

TurboTax Absolute Zero ($0 Fed, $0 State w/ E-File For Simple Filers) Ends 3/15

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.

ttzero2017TurboTax.com has their “Absolute Zero promotion” again this year where simple filers can get Federal + State + Federal eFile + State eFile all for $0. You must qualify for IRS Forms Form 1040A or 1040EZ – that means taxable income of $100,000 or less, no itemized deductions, no business income, no investment sales. You can still claim certain things like educational tax credits, child and dependent care expenses, retirement plan (IRA) contributions, and the earned income credit. You can even receive interest and dividend income.

TurboTax just announced that this promotion ends March 15th. Prices tend to increase across the board as the deadline nears.

The simplest way to see if you qualify is to fill everything out and confirm the price as $0 before you file. You’ll always be presented with the price before being charged. (If you really have a simple situation, this shouldn’t take very long.) Here is their product comparison chart (click to enlarge).

ttchart2018

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.