Tools to Limit Your Tax Liability

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This is a sponsored post written by me on behalf of E*TRADE. All opinions are 100% mine.

One week from today is tax day. For some that day is more frightening than all the witches and ghosts on Halloween. Unlike most people, I don't mind paying taxes. It typically means that I made a good amount of money.

I do mind tediously putting all the numbers together. I'd rather face a vampire. I've watched enough Buffy the Vampire Slayer to feel like I know how deal with them (Roundhouse kicks always work).

Whichever way you feel about tax day, the E*TRADE Education Center is here to help. It's completely free and you don't even have to be an E*TRADE customer to use it. There's no sign-up or log-in.

I focused immediately on the Small Business Taxes section. That's the hairiest part of my taxes. However, you might be more interested in in this tax planning section:

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If you happen to be an E*TRADE customer, you have access to the E*TRADE Tax Center. That center provides an array of tools and resources for customers, such as important information on everything from cost basis reporting and tips on managing capital gains and losses, to frequently asked tax questions.

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Why is the Education Tax Center important?

E*TRADE conducted a recent StreetWise survey to find out what investors believed when it comes to taxes. It turns out that many investors heavily consider taxes, which I found relieving. Unfortunately the same survey found that most people don't use the tax tools available to them. That's something that E*Trade is looking to change.

What else was interesting? Some 45% most investors believed in putting money in tax-advantaged accounts such as IRAs, 401Ks, and Health Savings Accounts. I had expected more, but I generally over-estimate people's investment knowledge.

I found it surprising that 18% believed in selling positions that lost value to offset the capital gains, but only 17% believed in holding investments for a year to ensure lower taxes on gains. I would have thought the latter would be more well-known. Perhaps people weren't focused on the taxes on the gains because they are investing in tax-advantaged accounts.

One number that stood out to me that is that only 4% look to invest in funds with low turnover. At first glance that seems low to me. However, I usually look at the expense ratio in an ETF and use that as my proxy for all this information. Most of the high turnover is in managed funds, which I typically don't get involved with anyway.

The moral of the story, you don't have to like paying taxes, but you can make moves to lessen the bite of paying them. If someone is going to give you the tools for free, you might as well use them.

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Posted on April 8, 2015.

What I Learned by Doing My Own Taxes

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This post is part of the TaxACT #DIYtaxes blog tour which shares stories and tips about doing your own taxes and how it makes you smarter about the overall health of your finances. Do your own taxes today at TaxACT. You got this.

My taxes weren't always this complicated. It used to be a pretty W-2. The most complicated parts were the few write-offs like the excise tax in MA. Over the years, I've added a wife and the requisite 2.5 children (a dog counts as half, right?)

The wife is in the military, which lead to us moving away and turning each of our existing condos we owned into income properties (they were too far underwater to sell). And this blogging "thing" took off to being its own full-time business. Suddenly we've got military exceptions, rental property, business and child care write-offs.

As complicated as it is, it could be a lot worse.

Back in the dot-com boom, I used to actively trade internet stocks. Sounds glorious, doesn't it? Well my account had about $8000 in it, which means if I worked out a 1% gain on the day (which is huge on an annual basis), I would make a grand total of $80. I'd pay a good part of that gain in commissions to Datek who had my brokerage account. It wasn't a super-smart plan and I did it mostly for fun. I wasn't expecting to get rich.

Then tax-time came around. That's when the tax software I used told me about the "wash rule." Essentially, when you are buying and selling the same stock, you can't claim a loss unless 30 days go by. (This is a purposeful gross simplification. There are many great resources that are far better suited at explaining it than I am.) Fortunately, tax time rolled around before I had done too much trading that would have been effected by the rule.

There's something powerful in getting down and dirty with your taxes. It forces you understand the reality of how you did financially the previous year. Here's just one example. I often keep a running tab of how much money I make on my internet businesses each month. It isn't until tax time that I dig into the expenses. I find domain names that I never used. They seemed like a great idea at the time. I also found a hosting service that I no longer use. Why am I paying a monthly fee for it? (Note: As I'm writing that sentence, I'm canceling the service.)

I suppose I could hand a bunch of paperwork and statements to someone else and have it done for me. If I did, I would avoid looking at these expenses for years.

Friends and family sometimes consider me the "money expert." With that, comes questions like, "Do you do your own taxes?" I think what they mean to ask is, "Should I do my own taxes?" Most people don't have rental properties and small businesses with military exceptions. I probably fall in the 3-5% range of people who have "weird taxes." I always recommend my friends and family do their own taxes.

The last few years, I have had a tax advisor. She's a friend of the family and very good at what she does. I also get a good price (not sure if I get a family discount or not). Combine that with my tax situation and there are enough factors to push me to use her services. Before she even looks at a single piece of paper, I've done hours of work analyzing expenses, pouring over receipts, and getting dirty with the numbers.

Beating the tax deadline doesn’t have to be stressful. With TaxACT, everything you need to confidently prepare and e-file your taxes is right at your fingertips. You got this. File your simple or complex federal return FREE today with TaxACT Free Edition.

This post was produced in partnership with Kasai Media.

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Last updated on March 19, 2015.

Looking for Free Tax Filing? Here You Go…

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Free Tax USA

Last year at the annual Fincon conference, I met with representatives of more than 75 companies. After meeting with the representative of this company, I put an appointment in my calendar to write about it. I can't remember ever making an appointment to write an article four months in the future.

The gist is: This company knocked my socks off. I think you'll like what they have to offer.

The company is FreeTaxUSA. It is appropriately named and the title of this post should sums up their value proposition well.

I know you are thinking: "Free tax filing? That doesn't make sense. It is probably only for a 1040EZ."

The big players (H&R Block, TurboTax) offer free tax filing for 1040EZ. That's great news for some in the lower income levels. However, once your taxes start to get more complicated you'll need to buy their products ranging from $35-60 for federal and then another $35 or more for state taxes. By the time you are done, you could spend $75 or $100.

With FreeTaxUSA, you can do fairly complicated taxes for free. Business owners can file their schedule C for free. With TurboTax you have to buy the Home and Business which is typically over a $100 for federal alone.

Do I have your attention? Good, here's the 30-second high-level pitch from FreeTaxUSA:

When I heard the pitch, my "too good to be true" spidey-sense went off.

My first thought, "This is a fly by night company with no experience." Nope, they've filed more than 14 million tax returns.

My second thought, "They are probably really bad at spotting deductions." I haven't tried it, but they do have a "Deduction & Credit Maximizer." From software development perspective this is usually not very complicated and deductions are typically similar year after year. I don't think you'll lose out on any tax refund cash going with them.

My third thought, "I really don't want anyone messing up my taxes. I want someone I can trust." (In my head, I used a different word than "messing".) When I look down at their list of services, I can see that their accuracy is guaranteed. Combine that with the 14 million tax returns filed and I feel like they've earned my trust.

So what's the catch with FreeTaxUSA?

First off, I don't know if I'd call it a catch. However, I think FreeTaxUSA is expecting that after you put all your information in to get the free federal return, you'll be fine with paying $12.95 for their state tax product.

It feels like the old razor and blades business model, where they give away a razor for free to get the more lucrative recurring blade income stream. However, in this case you get a free razor and the blades are cheaper than you'd pay anyway. Sometimes, when I see this kind of deal, I wonder if the company can stay in business. In this case, I wouldn't worry too much. There are millions and millions of people filing taxes and even if they get a small percentage of that business, it is tens of millions of dollars... enough to put together some very good software.

If you are going to shave this seems like the best way to do it, right?

Are you going to give FreeTaxUSA a try? Let me know in the comments.

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Posted on February 11, 2015.

Should We Boycott Burger King for Avoiding Taxes?

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The other day, I got some coupons from Burger King in the mail. Typically, I give them one look and discard them.

Why? Most of the time they require the purchase of fries and a drink. I have trouble looking at that without thinking, "Hmmm, fried starchy carbs and sugary or chemically drinks at extremely high margins."

This time, there were a couple of items of interest, some buy one get one free breakfast sandwiches. These, of course, are not a pillar of health, but at least there's significant protein. With the coupons they would be reason.

I mentioned it to my wife and she was not interested. Instead she cited the recent news regarding Burger King.

By now, you've probably read of Burger King buying the Canadian company Tim Horton's. It seems that everyone has come to the conclusion that it has done so to legally move its headquarters to Canada and avoid paying US taxes.

A couple of days later, I mentioned that the idea of boycotting Burger King could make for an interesting article. She doused it a bit by bringing up the points that it was already extremely low on her list of places to eat. She doesn't like the food (save the Italian chicken sandwich) and the health topic has already been addressed. I'm more tolerant of the food's taste, but even so, I only visit it about once a year.

I'm sure Burger King is trembling at the thought of losing $7 a year of revenue from us.

Tossing that aside, should we boycott companies that make moves like these? I consider myself a very Patriotic person and my instinct is to say, "Hell Yeah!"

When I think about it more, I'm not so sure. Burger King has a responsibility to its shareholders to maximize profits. If taking advantage of legal tax codes allows it to do that, is that so terrible? I haven't met anyone who has said, "I like to pay more taxes for the good of my country, so I'm not going to take advantage of my 401K/Roth IRA."

If Burger King doesn't take advantage of these legal tax codes should we chastise them for not maximizing profits for its shareholders?

Sometimes I think big moves like this are needed to fix a broken system. Perhaps the United States government should take a look at this and ask, "Is our tax code effective if companies are effectively trying to buy their way out of country? What can we do to make the system better?"

I'm not sure what the answer is there. I'm not a tax expert and when it comes to corporate taxes, I admit to being particularly ignorant. However, perhaps if the majority of taxation was shifted towards sales tax at the point of purchase, it would matter less where a company's headquarters is located.

It's rare where I can see sympathize with both sides. Readers know that I tend to have strong opinions. If it wasn't obvious in the article, I'm clearly on the fence. Let me know what you think

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Posted on September 3, 2014.

Devil’s Advocate: Give Uncle Sam a Free Loan!

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I was reading an article from Yes I am Cheap suggesting that people Stop Giving Uncle Sam A Free Loan. She's writing about popular finance experts' mantra that you should set your deductions such that you don't get a big refund at tax time. When you do, it means you could have received a little more each month during the past year. By not taking this money when you could, you are letting Uncle Sam use that money for free. He doesn't pay any interest on that money... and it is your money.

As Sandy points out, it's far better to be on the side that receives a big refund than having to pay thousands. Having been on both sides, I can say I firmly agree. Some people, such as myself, have such irregular income that it is hard to plan taxes and minimize the loan that I give Uncle Sam. For that reason, I'm err on giving him too much money.

The article also quoted that "according to the IRS, of the 48 million tax refunds processed through the end of February, the average tax refund was $3034." Let's look at this number in a little more detail. First people getting their money back in February are going to be the ones who are more likely to get a lot of money back... that's why they getting their tax refunds in early. Right from the start, this number might not be indicative of the overall average refund.

Secondly, the average refund is interesting in itself. By nature it only consists of people getting a refund, so it doesn't count the people who planned well and were off by a few dollars having to give a small payment to Uncle Sam. I'd be curious to know what the average tax payer has to pay or get refunded, so you have both sides to balance it out. If you only count positive numbers, it is more likely to be a high positive number, right?

Lastly, how much of a loan are you really giving Uncle Sam. Interest rates at banks are hovering around 1% (if you are lucky), which means it could be as little as $30 in lost interest using $3034 as the average refund. Even if you were expecting a 8% return in the stock market (not that you should "expect" this), you'd still be looking at less than $250. In fact, it could be considerably less since it isn't like you are getting that $3034 up front, you are getting it throughout the year. You wouldn't have access to the money at the start to earn that income.

At the end of the day, giving Uncle Sam a free loan may not cost you nearly as much as you think. It probably amounts to somewhere between $30 and $100. I'd rather have the piece of mind that comes with no owing a lot of money. And if your taxes are as complicated and income is as irregular as mine is, it simply isn't worth stressing over.

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Posted on April 11, 2014.

Marriage Penalty or Marriage Bonus?

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Several years ago, a friend and I were discussing taxes.  One of his complaints was the frequently mentioned marriage penalty.  I pointed out that in his particular case, he and his wife were actually the recipient of a marriage bonus.

What is the marriage penalty?

Here is a table showing the upper limits for each tax bracket (taxable income) for tax year 2013 for the statuses of Single and Married Filing Jointly (MFJ), the two most common filing statuses.  Note that taxable income is not gross income, but has been adjusted for personal exemptions, deductions, and credits.

Rate Single Married Filing Jointly
10% $8,925 $17,850
15% $36,250 $72,500
25% $87,850 $146,400
28% $183,250 $223,050
33% $398,350 $398,350
35% $400,000 $450,000
39.6% All income > $400,000 All income > $450,000

Some of you may have already figured out where this is going by just looking at the tables. Let's do a quick example to illustrate the point.

Chris, Robin, Pat and Casey all make the exact same amount of money, $150,000.  The combined taxable income of Chris and Robin and the combined income of Pat and Casey is $300,000 in each case.

  • Chris and Robin are married, using the married filing jointly status.  They pay $75,313 in federal taxes.
  • Pat and Casey each pay $35,293.25 each in taxes, for a total of $70,586.50.

Chris and Robin are paying $4,726.50 extra in taxes simply because they are married.

Note that this is a very simplified example for the sake of illustration.  There are other wrinkles that come into play.

Why does the marriage penalty exist?

It is often said that "two can live as cheaply as one".  That's not true, of course.  However, a couple can quite often live more cheaply than two single people.  It's true that you need twice the food and twice the clothes as a single person, but you don't need twice the square footage in a house, two furnaces, two washers, two lawn mowers, two particle accelerators - the list goes on.

Essentially, a married couple with $300,000 in taxable income should have somewhat more disposable income than two single people whose combined income is $300,000.  (Of course, co-habitating people can reduce expenses similarly.)

The basic premise of tax theory is to spread the load based on the taxpayer's ability to pay, so for this reason, the upper limits of the married filing jointly brackets are not simply twice the limits of the single brackets.

Note that I'm just explaining the theory - I'm not taking a side on whether this theory is correct or fair.

The marriage bonus

I'm sure some of you think I'm blowing smoke when I mention the marriage bonus.  But let's tweak those income numbers a bit.  Both couples still have $300,000 in taxable income, but 90% is attributable to one partner and 10% to the other.

  • Chris and Robin still pay $75,313 on their combined taxable income of $300,000.
  • Pat pays $73,230.75 on a taxable income of $270,000.  Casey pays $4,053.75 on a taxable income of $30,000.  Combined, Pat and Casey pay $77,284.50.

Chris and Robin are receiving a "marriage bonus" of $1971.50!

Penalty or bonus?

Most often, the marriage penalty will occur when each spouse make a similar income.  The marriage bonus occurs when spouses have very different incomes.  The most common example of this would be when one spouse is a stay-at-home parent.

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Posted on April 7, 2014.

Two Really Last Minute Tax Deductions: Traditional IRA and HSA

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Last year, during my annual tax visit to the accountant, we discovered that there was a close call with my income. One more deduction would have been just the thing. After a minute of thought, the accountant reviewed my Health Savings Account contributions and realized that I hadn't maxed out the contributions. He pointed out that I could still make a previous year contribution to the account, and the deduction would bring my income down just enough for a fairly significant tax savings.

If you are still casting about for a last minute tax deduction for last year's taxes, you might be in luck.

Contribution Deadline: Tax Day

There are some tax advantaged accounts with contribution deadlines on tax day. So, as long as you make your contribution to a tax-advantaged investment account by that time, you can still reduce your income for the previous year.

You can make contributions to a Traditional IRA up until tax day, so if you haven't maxed out your contribution for the last tax year, you can do so now -- without impacting your ability to contribute to your account this year. This also applies to the SEP IRA. Make sure you understand the contribution limits for the tax year of the contribution, though, since limits change in response to inflation.

You also have the opportunity to contribute to your HSA, if you have one. If you have a high deductible health insurance plan, it's possible for you to make contributions up until tax day. So, if you have maxed out your contributions, now is a good time to do so. One of the great things about the HSA is that you get a tax deduction for your contributions, and the money grows tax-free on top of it, as long as you use the money for qualified health care expenses. The HSA is one of the most convenient tax-advantaged accounts -- as long as you can handle the higher out of pocket costs that come with a high deductible plan.

When you make previous year contributions, you need to make sure you do it right. Your contribution should be clearly marked as a previous year contribution. When you contribute online, most institutions will ask you to check a box for the appropriate year. If you send in a check (it should be postmarked by tax day), the memo line should clearly state the year you want the contribution applied to. If you don't mark it as a previous year contribution, it will be applied to the current year, and you'll miss out on the deduction.

Bonus: 529 State Tax Deduction

You don't receive a federal tax deduction for contributions made to a 529 plan. However, there are some states that will offer you a tax deduction when you contribute to your state's 529 plan. Check your state's policy to find out if you can get a tax deduction. This is a great way to grow your child's college fund with the help of compound interest, and reduce your tax liability at the state level.

In many cases, states that offer deductions for 529 contributions also allow you to make previous year contributions up until tax day. That way, even if you missed out on contributions in the previous year, you can still get help on your state taxes when you make an extra contribution. As with the Traditional IRA and HSA contributions, though, you need to make sure you haven't already maxed out your contribution for the previous year, and you need to clearly indicate which year the contribution is meant for.

Just because December 31 has passed doesn't meant that all hope is lost. You can still get another tax deduction. Look at your tax-advantaged accounts, and see if there is room for a previous contribution.

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Last updated on March 26, 2014.

Get TaxAct for Less than $10

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Last week, I showed you how you can get expert tax advice from H&R Block's software.

That was for people who missed out my article from a couple of weeks ago. That article showed you how to save money on Turbo Tax. Most people could use the deal there to save $10. It's not a big win, but get the Deluxe version of TaxAct. That's right, TaxAct is only going to set you back $10 if you sign up through the link.

I wish I could say that I've used the software and that it is as good as TurboTax or H&R Block, but I can't. What I can say that TaxAct allows you get started right away for free. You only pay at the end when you file. So if you are somewhere in the middle and realize that they don't address the tax ramifications of your monkey butler (we've all been there), so you can cut your losses without spending a dime.

And once again, it goes without writing, but I'll write it anyway... no more procrastination get this TaxAct and get started on those taxes now.

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Last updated on February 26, 2014.

Tax Planning for the Year to Come

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The books are closed on another year, but that doesn't mean that you can't start planning your taxes better for the year to come. In fact, you might be better off if you look ahead to possible credits and deductions for the year ahead. If you were scrambling to squeeze in one more deduction at the end of last year, make it a point to figure out how to improve your situation right now. Looking ahead can make the entire process easier next year, and you are less likely to miss out on deductions and credits to which you are entitled.

Where Will You Spend Your Money?

Your first step is to look ahead and see where you are likely to spend your money. What are your necessary expenses? Figure out how much you need to spend, and then determine whether or not you will be able to deduct those expenses.

If you want to give more to charity, figure out a smoother way to go about it, putting aside money each month for the purpose, rather than rushing in at the end of the year to make it happen. You'll provide better for the cause of your choice, and your cash flow will improve. Plus, you can get a bigger tax deduction. This process applies to your mortgage payments, child care costs, retirement account contributions, student loans, and your business expenses.

Look ahead and do your best to plan your year. Then keep track of which spending is likely to be tax deductible or result in a credit. Determining that ahead of time can save you trouble later -- and ensure that you don't forget something come tax time.

What About Your Income?

You can also keep in mind your income in your tax planning for the coming year. Here are some things to consider now, before tax filing season rolls around next year:

  • Tax withholding: The first thing that many financial gurus suggest you do is review your tax withholding. Are you withholding too much? Too little? Look at where you can improve your withholding to better fit your goals. Do you want to give the government an interest-free loan? Or are you more concerned with using your tax withholding as a forced savings to ensure that you have money for something specific later? Do what works for you, and adjust your withholding to help you reach your goals.
  • Quarterly taxes: If you have side income, you might need to pay quarterly taxes. Plan for this now so that you aren't caught by surprise later. Set money aside each month so that you have what you need when quarterly taxes are due.
  • Investment planning: Remember that your investment gains can impact your income tax. Make sure that you understand the difference between long-term and short-term gains, and how they are taxed. Long-term gains come with a favorable rate, so you don't owe as much. Your investment gains can provide you with income, as long as you are smart about how you sell. It's also possible to use investment losses to offset some of your income, reducing your tax liability.
  • Marriage penalty: Realize that there are cases, if you and your partner both have high incomes, in which your marriage can mean a tax penalty. As you both earn more money, take this into consideration during your tax planning. Married filing jointly usually makes more sense for couples in which partners have large disparities in income.

If you aren't sure about what to do about your tax situation, consult with a tax professional. There are reputable accountants who can help you figure out the best way to plan your finances for the coming year so that you get the best tax advantage.

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Last updated on March 9, 2014.

Get Expert Tax Advice from H&R Block Software

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Last week, I shared with you a deal on Turbo Tax. That limited time special is now over. If you missed it, I'm sorry, but I did warn you to act quickly.

While I don't have a special deal for you today, I have a little of a consolation prize. I noticed that H&R Block has a expert tax advice as part of their software. For years, I did my taxes with online software (now I have a tax professional). I couldn't count the number of times, I wish I had someone available via a chat window to help me out. That's exactly what H&R Block is offering here.

Given the choice of saving a little money and having a real expert there to help if I need it, I'll take the expert everyday of the week.

It should probably go without writing, but I'm going to write it anyway. One of the reasons, I'm writing this post is to motivate you (and myself) to get taxes done early this year. We don't want it hanging over our heads and spend hours in line at the April 15th tax deadline.

Now go get your taxes done at H&R Block or however you choose to do them.

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Last updated on February 19, 2014.

 
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