Get smart with your money
Taxpayers face a cliffhanger again this year as Congress dithers about extending more than 50 expired tax breaks, including popular deductions for college tuition and fees, mortgage insurance and sales taxes.
As we wait for lawmakers to act, though, we still have time left in the year to make adjustments based on changes that have already happened. In my latest for Reuters, I share four ways to get a head start on tax season.
In my latest for Bankrate, how to find an honest financial advisor.
Today’s top story: How to estimate your major medical costs. Also in the news: Financial planning for the child-free, steps to take before buying a car, and hacks to winterize your home and cut your heating bills.
How to Predict the Size of Your Next Major Medical Bill
Doing your research can save you from sticker shock.
No Kids? You’re Not Off the Hook for Financial Planning
Steps to take if you’re child-free.
Financial steps to take before buying a car
Prepare yourself for the tricks of the dealership.
Filed A Federal Tax Extension? 7 Money Must-Dos Before October 15
Tick tock…
13 Hacks to Winterize Your Home – and Trim Your Heating Bill
Winter is coming…and not just to Westeros.
Dear Liz: I fell behind on making my quarterly estimated tax payments for a long list of reasons, and when I file my return, the IRS will find out. I have heard they can seize your IRAs, which I have but do not want to cash out to pay.
I found a service on the Internet with good references and no bad reviews. The company said it can help get a payment program and often a reduction in the amount owed. It seems worth a couple thousand dollars to try it. Your thoughts?
Answer: There are a number of reasons why a company might have no negative reviews online. Maybe it’s a great company. Or maybe it’s not, but it just launched or took over a legitimate firm with the intention of fleecing as many people as possible.
Don’t be persuaded by the idea that the company might reduce what you owe. Settlements aren’t impossible, but the taxpayers who get them (typically after long and drawn-out battles) are those whose financial situations are dire and not expected to improve.
The IRS has many, many ways to collect its due and won’t just roll over because you don’t want to pay.
In any case, you don’t need to hire someone else to set up a payment plan for you.
If you owe $50,000 or less as an individual or $25,000 or less as a business, you can request an installment plan online and get an immediate response. If you owe more than those amounts, you can request an installment agreement using Form 433F.
The costs are low. If you can pay your balance within 120 days, the plan is free. Otherwise you’ll pay $52 for a direct debit agreement or $105 for a standard or payroll deduction agreement. Lower-income taxpayers can get a reduced fee of $43.
For more, visit http://www.irs.gov/Individuals/Payment-Plans-Installment-Agreements.
If you can’t pay your balance in the allotted time, you may need to hire some help. You can get referrals to CPAs who can represent you in front of the IRS from www.aicpa.org.
Dear Liz: I am changing jobs because of a layoff. I contributed to my former employer’s 401(k) to the extent possible. My new employer also offers a 401(k), but I won’t be eligible for a year.
I want to use an IRA in the meantime. I do not understand how I should answer the question on the tax form about whether my employer offers a retirement plan when I am determining how much of my IRA contribution I can deduct. My employer does, obviously, but I can’t participate yet. Advice, please?
Answer: You’re smart to continue your retirement savings while you wait to become eligible for the new employer’s 401(k). Missing even one year of contributions could cost you tens of thousands of dollars in lost retirement income.
When you’re not covered by an employer plan, all of your contribution to an IRA is typically deductible.
When you are covered, your contribution’s deductibility is subject to income limits. In 2015, the ability to deduct an IRA contribution phases out between modified adjusted gross incomes of $61,000 to $71,000 for singles and $98,000 to $118,000 for married couples filing jointly.
To be considered covered by an employer plan, you have to be an active participant, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. That means money has to be put into your account by you or your employer or both.
Here’s the twist: You’re considered covered for the whole tax year if you participated in a plan during any part of that year. So the IRS will consider you an active participant for 2015 because you were contributing to your former employer’s plan for part of this year.
If you start contributing to your new employer’s plan when you become eligible next year, you’ll be considered covered for 2016 as well.
You could decide not to contribute to the new employer’s plan until 2017 to preserve your IRA’s deductibility, but it probably makes more sense to start contributing to the new plan to get both the tax break and any match.
If your contribution to an IRA isn’t deductible, consider making a contribution to a Roth IRA instead.
In retirement, withdrawals from a regular IRA will be subject to income taxes while withdrawals from a Roth IRA will be tax free. In 2015, your ability to contribute to a Roth phases out between modified gross incomes of $116,000 to $131,000 if you’re single and $183,000 to $193,000 if you’re married.
Today’s top story: The most dangerous threat to your identity. Also in the news: How to stop living paycheck-to-paycheck, how to improve your credit score by separating business from pleasure, and the Social Security fix that could hurt your retirement.
The Most Dangerous Identity Theft Threat
What you need to watch out for.
How to Stop Living the Paycheck-to-Paycheck Lifestyle
Time to start saving.
Will Fixing Social Security Hurt Your Retirement?
How a fix could hurt your bottom line.
How to Improve Your Credit Score by Separating Business From Pleasure
Separate expense categories are essential.
If You Hired Mo’ Money Taxes To Prepare Your Return, You Continue To Have Mo’ Problems
Catchy commercial, bad company.
Today’s top story: How your Social Security benefits will be taxed. Also in the news: A Millennial’s guide to moving out, how to make sure your favorite charity isn’t a scam. and what would you do if you had a surprise windfall?
How will your Social Security benefits be taxed?
What everyone needs to know.
Millennial’s Guide to Moving Out of Your Parent’s House
You have to leave sometime!
How Do You Know Your Favorite Charity Isn’t a Scam?
Making sure your money is going to the right place.
The $10,000 Question: What Would You Do With a Surprise Windfall?
Following the 90/10 rule.
Today’s top story: More than half of college students don’t check their credit scores. Also in the news: Avoiding common home buying mistakes, the habits of successful savers, and three employee benefits you may be missing.
More Than Half of Students Don’t Check Their Credit Scores
A very big mistake.
How To Avoid Common Home Buying Mistakes
Don’t turn your home into a money pit.
6 Habits of Highly Successful Savers
Learning from the best.
3 Sweet Employee Benefits You May Be Missing
You may be leaving money on the table.
What’s a Tax Consultant, and Do You Need One?
Deciding when you need tax help.
Dear Liz: I was intrigued by your answer to the question about paying taxes through the IRS Electronic Tax Payment System. I went to the website you mentioned (www.irs.gov/payments) and found that there was a fee.
You didn’t point this out, and I think it is relevant. My quarterly estimated payment would be $1,726 and the fee for a Visa payment would be 2.29%, which equals $39.55. If my math is correct, that is quite a significant amount. Did I reach the correct interpretation of fees being charged?
Answer: If you return to www.irs.gov/payments, you’ll see two big blue buttons. The one on the left, IRS Direct Pay, takes you to the IRS’ free payment system for individuals. Directly below that button is a link for the Electronic Federal Tax Payment System, which offers a free method for businesses to pay their taxes.
Only if you choose the button on the right that says “Pay by Card” will you be taken to various payment processors that charge a fee. Those fees can be significant, which is why it’s worthwhile to take the time to explore the free options.
Today’s top story: The benefits to joining a credit union. Also in the news:
When to sign up for a financial advisor, apps that will make next year’s taxes easier, and how to build your credit from the ground up.
6 Perks You Can Get at a Credit Union
Free checking!
When To Sign Up A Financial Advisor
Knowing when it’s time.
10 Apps to Use Now to Make Taxes Easier Next Year
Help is just an app away.
6 Ways to Build Your Credit From the Ground Up
Needing credit to get credit.
6 Ways You’re Cheating on Your Budget
Removing your hand from the cookie jar.
Dear Liz: I just received a letter from the IRS informing me that I missed a quarterly tax payment last September with several resulting penalties. I made that payment with a check from a securities trust account that I don’t closely monitor, so I didn’t realize the check hadn’t been cashed. The check was placed in a pre-addressed envelope with the IRS payment notice, stamped and deposited at the post office and has never been seen since. Do I have any recourse, and should all payments to the IRS be sent by certified mail with receipt required?
Answer: Electronic payments are typically the best and safest method for getting money to the IRS. Electronic payments generate a digital trail that shows the money leaving your account and landing at the IRS.
If you insist on paying with checks, use certified mail, return receipt requested. This paper trail isn’t a sure way of proving your case — after all, you could have mailed an empty envelope — but at least you’d have something to show the IRS.
Still, you shouldn’t give up hope of getting the penalties waived, said tax pro Eva Rosenberg, an enrolled agent who publishes the Tax Mama site. You can request a penalty abatement based on “reasonable cause,” Rosenberg said. According to the IRS site, “Reasonable cause relief is generally granted when the taxpayer exercised ordinary business care and prudence in determining his or her tax obligations but nevertheless failed to comply with those obligations.”
The IRS may say that you didn’t exercise “ordinary business care and prudence” since you didn’t use certified mail. But you can make the counter-argument that you’ve consistently made previous estimated tax payments this way without incident and this is the first time you’ve encountered a problem.
Rosenberg said the key to prevailing is to keep trying. The IRS may reject your first and second attempts to get a penalty waived but acquiesce on the third, she said.
“Don’t give up after the first two rejections,” Rosenberg said.
One more thing: Given the high rates of identity theft and database breaches, closely monitor all your financial accounts. That means checking them at least monthly, if not weekly. If you have more accounts than you can adequately monitor, consider consolidating accounts.