Ask Liz Weston

Get smart with your money

Q&A

Q&A: How IRS Free File works

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Dear Liz: I wanted to alert you to the fact that online tax preparation companies are up to their old tricks again this year despite being called out last year for deceptively hiding their free tax filing from eligible filers. My son, who qualifies for free filing, was redirected to the paid “deluxe” version when it turned out he qualifies for a “Savers Tax Credit.” He makes modest tax-deferred contributions through an employer that matched contributions. (He’s a low-income student who works in retail.) He logged out of that website and instead successfully used a competitor provider for free.

Answer: The way to access the IRS’ Free File program is through the IRS website, which directs people to the private tax preparation companies that have agreed to offer this service. Unfortunately, many of those same companies spend a lot of money trying to obscure that fact that most Americans can file for free.

Independent news organization ProPublica reported last year that tax preparation companies were hiding their free file options from online search engines and steering people instead into paid tax preparation. A government report in February confirmed that more than 14 million taxpayers paid for tax preparation last year that they could have received free.

The companies have since been banned from hiding the free option and are supposed to include a link that returns people to the IRS Free File site if they don’t qualify for the company’s free offer. But ProPublica found that they continue to steer people away from free filing in various ways, including advertising that misuses the word “free.”

Also, many people like your son discover only late in the tax preparation process — often after they’ve added most of their information — that they don’t qualify for that company’s free option, although they would qualify elsewhere.

Here’s what people need to know about free filing:

People with adjusted gross incomes under $69,000 a year can qualify for free filing, but they should start their search at the IRS Free File webpage.

People in the military and their families can use MilTax, provided by the Department of Defense.

They can also get advice from a tax professional at (800) 342-9647.

In addition, people may qualify for the IRS’ Volunteer Income Tax Assistance if they make less than $56,000, live with a disability or speak limited English. Use the Volunteer Income Tax Assistance locator tool or call (800) 906-9887.

People who don’t qualify for the above services can still use free fillable forms. In addition, some tax preparation companies may have free options for people filing basic forms. The types of income and credits that allow someone to file for free should be prominently displayed on the company’s free file page.

Q&A: Worried about stocks? Why you shouldn’t try to time the market

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Dear Liz: I’m a federal employee with a Thrift Savings Plan account. I’m 35 and have put about $125,000 into my TSP. However, I never changed it from the low-risk G fund so it’s not gaining as much interest as it should. Should I wait for the market to tank before moving it around or is it OK to move it now due to my age and amount of time I have before retirement? I’m worried I’ll move it and I’ll lose the value in a downturn, so maybe I should wait for a downturn to act.

Answer: You sent this question a few weeks ago, before the recent correction. Did you use the downturn as an excuse to hop into the market? Or did you stay on the sidelines, worried it might drop further?

Many people in your situation get cold feet. You’re better off in the long run just diving in and not trying to time the market.

Waiting for a downturn sounds good in theory, but in reality there’s no sure way to call the bottom of any stock market decline. And when the stock market recovers, it tends to do so in a hurry. If you delay too long, you risk missing much of the upside.

It won’t feel good if the market plunges a day, a week or a year after you invest your money, but remember that you’re investing for the long term. The day-to-day or even year-to-year gyrations of the stock market don’t matter. What matters is the trend over the next 30 years — and long term, stocks outperform every other asset class.

Q&A: When should retirees stop actively investing?

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Dear Liz: I am retired. My income is from a small pension, Social Security and dividends and interest from investments. I’ve made some bad investments, but I’m still earning a satisfactory return. Is there some kind of formula that I can use to determine whether I should sell a stock, take the loss and seek another investment or keep the stock, enjoy the dividend and worry the stock might drop further?

Answer: One approach is to ask yourself if you’d buy the same stock today. If not, then it may be time to sell these shares. Be sure to consult with a tax pro first because you may be able to use losses on one investment to offset taxable gains on another.

You also might ask yourself if it’s time to transition away from active investing and individual stocks. Most people aren’t able to buy the stock of enough companies to be truly diversified. Then there’s the daunting task of staying up to date on the fortunes and prospects of each company and industry. That’s way more work than most people can handle. Even if you’re up for the task now, you might not be in the future.

Also, most people don’t do well with active investing. Trying to figure out when to buy and sell for maximum gain usually results in excess trading costs that lower your returns. It’s also too tempting to hang on to a losing stock rather than admit you made a mistake, or to chase “hot” stocks that have already had their biggest gains.

A better approach would be a portfolio of mutual funds or exchange traded funds that’s regularly rebalanced, either by a financial advisor or a computer algorithm. If you opt for funds that mimic a market benchmark, you’ll be assured of matching the market and getting a better return than most active investors can achieve.

Q&A: Culture and parental advice

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Dear Liz: You recently answered a question from a parent who wanted to know how to fix a financial issue in an adult child’s marriage. Your advice was basically to butt out. I think that may depend on culture. What if your advice saved your child’s marriage? What if it prevented your child from going into bankruptcy? Would it be worth the uncomfortable conversation? In some cultures, the approach is to butt in and confront the issue; if it causes problems, well then you deal with that also.

Answer: There may well be a culture in which the interference of in-laws is gladly received, rather than merely tolerated. There may even be people who enjoy being the target of unsolicited advice. It’s hard for some of us to imagine, but it’s certainly possible.

It’s probably safer to assume that your counsel is unwelcome and annoying unless it’s been specifically requested — and often even then.

Q&A: Different approaches to marital finances

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Dear Liz: Thank you for mentioning that many couples like to keep their finances entirely or mostly separate. Our solution was to create a joint bank account just for paying joint expenses, such as rent, food, entertainment together, vacations and so on. We each funded this account proportionately, based on our income (for example, the person earning 65% of the total income contributed 65% of the funds). Expenses, such as gifts to our separate children, entertainment on our own, car payments and all personal expenses were paid out of our own separate accounts. Each year at tax time, we’d revise the proportion of the joint account, if necessary, based on our separate tax return figures. It was so simple and tension-free. This was a second marriage for both of us, and we never had disagreements about money.

Answer: Congratulations for finding an approach that worked so well for both of you. As you demonstrate, there’s no one right way for couples to handle their money. Some prefer to have everything in joint accounts, others keep everything separate, and most are somewhere in between.

Q&A: To build credit, try this set-it-and-forget-it trick

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Dear Liz: I have little credit history and my Experian credit score is about 620. My wife has no credit history. We are in the process of increasing our creditworthiness. I have an unsecured credit card from my credit union. She will be getting a secured credit card. We will use these lightly and regularly, paying them off each month. Does using my credit card to pay a utility bill each month work for building credit?

Answer: Absolutely. As long as your credit cards report to all three credit bureaus, your on-time payments will build your scores.

To make things easier, you could set up a recurring charge and automatic payment. Utilities typically allow customers to pay their bills automatically with credit cards, and credit cards usually offer the option of paying automatically each month. You’re normally given three options: paying only the minimum, paying in full or paying a set dollar amount.

Recurring charges ensure your card shows regular activity, while automatic payment should eliminate the risk of missing a payment. A single skipped payment could be a significant blow to your credit scores.

Another option to consider is a credit builder loan, which many credit unions and community banks offer. Typically, the amount you borrow is placed into a savings account or certificate of deposit while you make payments.

When you’ve paid the loan in full, usually after 12 months, you claim the cash. The payments help build your credit, and the cash could be the start of an emergency fund.