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IRS Reports 9 Common Tax Prep Errors

errorsUnless you’ve been under a rock for the past several years, you know that this time of year is tax season. If you haven’t already filed your 2015 income tax return, of course you’ve got some work ahead of you. Unfortunately filing your tax return often results in errors – and these can be quite costly in terms of delays in processing as well as potential penalties and interest if your error results in underpayment of tax.

In addition, an error on your return could result in missing out on refunds or credits that you are entitled to.

Recently the IRS issued Tax Tip 2016-42, which lists out 9 common filing errors that they see, and tips to avoid the errors. The actual text of the Tip follows:

Avoid Errors; File an Accurate Return

The IRS encourages you to file an accurate tax return. Take extra time if you need it. If you make an error on your return then it will likely take longer for the IRS to process it. That could delay your refund. You can avoid many common errors by filing electronically. IRS e-file is the most accurate way to file your tax return. Seven out of ten taxpayers can use IRS Free File software at no cost.

Here are nine common tax-filing errors to avoid:

1. Wrong or Missing Social Security Numbers.  Be sure you enter all SSNs on your tax return exactly as they are on the Social Security cards.

2. Wrong Names.  Be sure you spell the names of everyone on your tax return exactly as they are on their Social Security cards.

3. Filing Status Errors. Some people use the wrong filing status, such as Head of Household instead of Single. The Interactive Tax Assistant on can help you choose the right status. If you e-file, tax software helps you choose.

4. Math Mistakes. Math errors are common. Tax preparation software does the math for e-filers.

5. Errors in Figuring Tax Credits or Deductions. Many filers make mistakes figuring their Earned Income Tax Credit, Child and Dependent Care Credit, and the standard deduction. If you’re not e-filing, follow the instructions carefully when figuring credits and deductions. For example, if you’re age 65 or older or blind, be sure you claim the correct, higher standard deduction.

6. Incorrect Bank Account Numbers. Choose direct deposit for your refund. It’s easy and convenient.  However, be sure to use the right routing and account numbers on your return. The fastest and safest way to get your tax refund is to combine e-file with direct deposit.

7. Forms Not Signed.  An unsigned tax return is like an unsigned check – it’s not valid. Both spouses must sign a joint return. You can avoid this error by e-filing your taxes since you must digitally sign your tax return before you send it to the IRS.

8. Electronic Filing PIN Errors.  When you e-file, you sign your return electronically with a Personal Identification Number. If you know last year’s e-file PIN, you can use that. If you don’t know it, enter the Adjusted Gross Income from the 2014 tax return that you originally filed with the IRS. Do not use the AGI amount from an amended return or a return that the IRS corrected.

9. Health Care Reporting Errors. The most common health care reporting errors that taxpayers make involve failing to claim a coverage exemption and not reconciling advance payments of the premium tax credit. If you don’t have qualifying health care coverage but meet certain criteria, you might be eligible to claim an exemption from coverage and avoid an unnecessary payment when you file your tax return. If you enrolled in health coverage through the Health Insurance Marketplace and received advance credit payments, you must file a tax return to reconcile the advance payments made on your behalf with the amount of your actual premium tax credit.

Each and every taxpayer has a set of fundamental rights they should be aware of when dealing with the IRS. These are your Taxpayer Bill of Rights. Explore your rights and our obligations to protect them on

Additional IRS Resources:

IRS YouTube Videos:

Taxes and the 401k Withdrawal

401k withdrawalIf you take a 401k withdrawal and the money in the 401k was deducted from your taxable income, you’ll be taxed on the funds you withdraw. Depending on the circumstances, you may also be subject to a penalty. There’s a lot of confusion about how the taxation works – and the taxation and penalties can be different depending upon the circumstances.

Taxation of the 401k Withdrawal

When you take a distribution of pre-tax money from a 401k plan, the amount of the 401k withdrawal that is pre-tax will be included in your income and will be taxed at your marginal income tax rate in that year.

Unless you meet one of the exceptions noted in the article 16 Ways to Withdraw Money From Your 401k Without Penalty, your 401k withdrawal will also be subject to a 10% early withdrawal penalty.

For example – if you have a 401k plan at a former employer and you are 45 years of age, unless your 401k withdrawal meets one of the exceptions, taxation would work like this for a $50,000 401k withdrawal:

Taxable Income before withdrawal $60,000
Tax (assumes MFJ) $8,072.50
Effective Tax Rate 13.45%
401k Withdrawal $50,000
Other taxable income $60,000
Total taxable income $110,000
Tax (assumes MFJ) $23,836.75
Effective Tax Rate 21.67%
Penalty (10%) $5,000
Total Tax and Penalty $28,836.75
Total Effective Tax Rate 26.22%

Nothing really dramatic about the first part, it’s just more taxable income and you’ve likely grown to understand the effect of the graduated tax schedule. But what will likely open your eyes is the fact that this $50,000 was actually taxed at a rate of 41.53%! Your 401k withdrawal of $50,000 resulted in $20,764.25 in taxes and penalties, so in effect you only “net” $29.235.75 from this withdrawal. Almost makes a payday loan look cheap by comparison.

On the other hand, if you met one of the exceptions (such as being age 59½ or older, the penalty would not apply. The effective tax rate on the 401k withdrawal is 10% less, at only 31.53%.

Mandatory Withholding

Another thing you need to understand about your 401k withdrawal is the mandatory withholding. Unless your 401k withdrawal is a direct rollover to another plan (such as an IRA), part of a Series of Substantially Equal Periodic Payments (SOSEPP, or 72t option), is a Required Minimum Distribution or a hardship distribution, there is a requirement for the administrator to withhold 20% from the 401k withdrawal.

This 20% is sent to the IRS and will be included as part of your withholding and estimated tax payments that will apply against your tax when you file. If the withholding was too much, you’ll get a refund of the extra withholding, just as you do from extra withholding or estimated payments.

Here’s a continuation of the previous example to illustrate withholding:

401k Withdrawal $50,000
Mandatory Withholding (20%) $10,000
Other Withholding (from W4 wages) $9,000
Total Withholding $19,000
Total Tax and Penalty (from prior) $28,836.75
Amount You Owe $9,836.75

As you can see, even though the mandatory withholding from the 401k withdrawal is substantial, it’s not enough in many cases to cover the tax and penalties from the withdrawal.

Information on the 403(b)

Image courtesy of KROMKRATHOG at

Image courtesy of KROMKRATHOG at

As many of our readers know, employees that work for a school district, hospital, university or other non-profit organization may have access to a retirement plan called the 403(b). Similar to its cousin the 401(k), the 403(b) works very similar in that it allows employee contributions, and the employer may or may not match a percentage of those contributions.

The 403(b) is also subject to the maximum contribution rules. In other words, an employee is allowed to contribute up to $18,000 annually if they’re under age 50 and those aged 50 and older are allowed an additional $6,000 catch-up contribution. Many of these plans also allow Roth contributions for their employees.

A unique aspect of the 403(b) that readers may not be aware of is the 15-year rule for contributions. Generally, the 15-year rule allows an employee with at least 15 years of service (and their plan allows it) to make an additional contribution to their 403(b). An employee’s years of service are the total number of years worked as a full-time employee for the same employer that maintains the 403(b).

The limit on additional contributions is increased by the least of:

  1. $3,000
  2. $15,000, reduced by the sum of:
    1. The additional pre-tax elective deferrals made in prior years because of this rule, plus
    2. The aggregate amount of designated Roth contributions permitted for prior years because of this rule; or
  3. $5,000 times the number of your years of service for the organization, minus the total elective deferrals made by your employer on your behalf for earlier years.

It’s also important to understand that the 15-year catch-up can be used in addition to the age-based catch-up. For example, if an employee (age 50 or older) qualified, they could contribute the maximum salary deferral for 2016 of $18,000. Then, they could contribute the 15-year catch up of $3,000. Finally, they would be allowed the age-based catch-up of $6,000. This totals a whopping $27,000.

An important point to understand is that if an employee qualifies for both the 15-year catch-up and the aged-based catch-up, amounts over the initial $18,000 employee deferral are applied to the 15-year rule first, then to the age-based rule.

For example, if an employee contributed $23,000 to his 403(b), the $18,000 maximum employee deferral is considered first, followed by the 15-year contribution. In the case, $18,000 is considered to be contributed first, followed by $3,000 for the 15-year serviced-based catch-up. The remaining $2,000 is then applied to the age-based catch-up limit.

While the age-based catch-up is based on an annual limit, the 15-year serviced-based catch-up is subject to a use test, lifetime, and annual limit. Additionally, employee deferrals to a 403(b) are subject to the aggregation rule if an employee is also participating in a 401(k), SIMPLE, another 403(b), etc., but not a 457(b). In other words, if an employee under age 50 has access to both  403(b) and a 401(k), the maximum she can contribute in total for both plans is still $18,000, not $36,000.

If you find yourself as a participant in one of these plans, it pays to check and see what your options are regarding how much you’re able to contribute.

Restricted Application – the Definitive Guide

this fellow didn't file a restricted applicationMuch has been written and discussed regarding the option to file a Restricted Application for Social Security spousal benefits, but there are still many, many questions. This article is an attempt at covering all of the bases for you with regard to restricted application.

The topic of restricted application is so popular these days because it’s being eliminated as a result of the Bipartisan Budget Act of 2015 (BBA15). In fact, if you were born on or after January 2, 1954, the changes to the rules have eliminated the option to file a restricted application for you altogether.

So – unless you were born on or before January 1, 1954, you might as well stop reading, because restricted application is not available to you. Period.

Restricted Application Rules

Okay, if you’re continuing to read, you (or your client, if you’re an advisor) must have been born early enough to be eligible for a restricted application. There are a few rules that you must be aware of for filing a restricted application:

  1. THERE IS NO DEADLINE FOR FILING A RESTRICTED APPLICATION OTHER THAN YOUR AGE 70. In other words, the upcoming deadline of April 30, 2016 has nothing to do with restricted application eligibility.
  2. You must be at or older than Full Retirement Age (FRA) to file a restricted application.
  3. You must not have filed for your own Social Security benefit previously. This includes File & Suspend.
  4. You may have previously received Social Security benefits as a young parent of a child under age 16, or as a child yourself under age 18. These benefits do not eliminate your eligibility for a restricted application.
  5. You cannot be actively receiving disability benefits. If you previously received disability benefits that were terminated some time in the past because the disability (or your eligibility) ceased, you may still be eligible for a restricted application.
  6. Your spouse must have filed for his or her own benefits. May also have suspended benefits, if the suspense was completed before April 30, 2016. But if the suspense was after April 30, 2016 you will not be eligible for spousal benefits until the suspense is lifted.
  7. If you are divorced and the divorce was finalized more than 2 years prior, your ex-spouse must only be at or older than 62 years of age, and is not required have filed for benefits. (*This is the exception to the rule in #6.)
  8. Only one member of a married couple may file a restricted application (doesn’t include ex-spouses).

Why Would You Want to File a Restricted Application?

A restricted application allows you to receive spousal benefits while delaying your own benefit, in order to accrue the delayed retirement credits (DRCs).

For example, Jeff and Cindy are both at FRA, age 66 this year. Jeff has filed for his benefits, in the amount of $2,000 per month. Cindy’s own benefit could be $900 if she filed now, but she wants to delay her benefit until age 70, when the DRCs will have increased her benefit to $1,188 (DRCs are 8% per year of delay).

Since Jeff has already filed for his benefit, and Cindy is at FRA in 2016 (therefore having been born before January 2, 1954), Cindy is eligible to file a restricted application for spousal benefits. She’ll receive a spousal benefit of $1,000 (50% of Jeff’s benefit at his age 66) and then her own benefit will accrue the DRCs since she has not filed for her own benefit.

For another example, Simon is 67 years of age and his wife Patty is 63 this year. Simon’s age 66 benefit would have been $1,500, and Patty’s would be $1,000. Patty has just retired from her job, and is filing for her own Social Security benefit. She’ll receive a reduced benefit in the amount of $800 since she filed early. Simon has not filed for Social Security benefits prior to this, as he intends to delay his filing until age 70.

Since Patty has filed for her own benefit and Simon is older than FRA in 2016 (therefore having been born before January 2, 1954), he is eligible to file a restricted application for spousal benefits. Simon will receive $500 per month for the coming three years, and then at age 70 he will file for his own benefit, which has increased to $1,980 with the DRCs.

So you can see, there may be much to be gained by filing a restricted application in the right circumstances.

How to File a Restricted Application

In order to accomplish the filing of a restricted application, you have four options to choose from. These options are listed below:

  1. Go to and apply using the online application. When you do this, fill out the application as if you will be receiving ordinary benefits, and there’s a question on the application which asks: If you are eligible for both retirement benefits and spouse’s benefits, do you want to delay receipt of retirement benefits? Answer this question “Yes”, and continue to complete the application. You have now filed a restricted application.
  2. You can file a paper application (Form SSA-1-BK is available online as well). Fill it out as if you were going to receive benefits, and then indicate in the REMARKS section “I want to restrict the scope of this application to spousal benefits only. I wish to delay filing for my own benefit to age 70.”
  3. Call 1-800-772-1213 to apply by phone. Tell the representative that you wish to file for benefits and restrict the application to spousal benefits only, and that you wish to delay filing for your own benefits to age 70 in order to earn the delay credits.
  4. Visit your local Social Security Administration office. Tell your representative that you wish to file for benefits and restrict the application to spousal benefits only, and that you wish to delay filing for your own benefits to age 70 in order to earn the delay credits.

That’s it. You don’t need to do anything else. It’s not necessary for your spouse to file & suspend (only to file), so the April 30, 2016 deadline for file & suspend doesn’t necessarily have anything to do with this.

And whoever is filing the restricted application definitely does not file & suspend – see the 3rd rule earlier in this article. File & suspend would actually derail your plan to file a restricted application.

The Spare Change Challenge

credit for delayingMany individuals who know me know that I’ll run in front of oncoming traffic to pick up a penny (or anything shiny for that matter). While some may think that this is a waste of time and that “it’s only a penny”, the fact is that the small change adds up. Whenever I get weird looks or folks laugh at the mention of a penny to be grasped, I always ask, “Would you walk past a $100 bill?” The point being, it all adds up. The tiniest snowflakes create earth-moving avalanches.

The small amounts I pick up are usually deposited into my kids’ piggy banks. When we’re together and we find money they call the change “lucky coins”. The interesting thing is that these lucky coins have gotten pretty heavy in their banks. Both of my kids can barely lift their piggy banks due to all of the luck we’ve come across. What I’ve never really done, it add it all up – at least over a specific period.

So here’s what I’d like to propose. And it’s something I’m going to do myself for the next year. Every coin I find and my kids find we’re going to keep track of and see what it adds up to over one year. This includes anything from pennies, to the occasional quarter to the rare dollar bill. I’m curious to see what it will all add up to over a year, and how that amount would grow over time at a compounded rate.

There’s a saying that there is no free lunch; this comes pretty close – free money. Should you decide to play along, drop us a note and tell us how you’re doing and how much you’ve acquired along the way. I’ll do the same. Keep an eye out…

Mutual Funds vs. 529 Plans

collegeSaving for college is a tough job – on par with saving for retirement, and often in direct conflict with that goal as well. Adding to the difficulty of the task is the fact that there are so many different options out there (in terms of investment vehicles) that really muddy the waters for the individual college saver.

One question that comes up very often is whether it is just as effective to utilize tax-effficient mutual funds instead of 529 plans as we save for college. The idea is that the mutual fund can generate a higher overall return than the 529 plan due to the additional costs associated with the administration of the 529 plan.

It is a fact that most 529 plans charge management fees that have a direct impact on the overall return of the account, and it is also a fact that many tax-efficient mutual funds (such as index funds) can produce higher returns at a lower cost than most other investments. But here are a few reasons why a 529 plan is nearly always the superior choice when it comes to college savings activities:

A. Taxing Matters – with a 529 plan, you pay no tax at all (when the funds are used for Qualified Higher Education Expenses, QHEE), while with any other type of account, you’ll likely pay some tax. In my book, no tax is always better than some tax, no matter how little.

In addition, while today’s tax rates on capital gains (the tax you’d pay on an indexed mutual fund) are at the lowest they’ve historically ever been, at either 0% or 15%, depending upon your tax bracket – these rates are liable to sunset soon, increasing the rates to 10% or 20% or even ordinary income tax rates. So, the question becomes: will your student be finished with college before the rise in rates?

The third taxing matter has to do with the Kiddie Tax. Recently there have been some changes made to this portion of the tax code, with detrimental effects for parents who have counted on a strategy of repositioning funds to the child’s name in order to benefit from a lower tax rate. The child’s investment income above a minimum of $1,700 can be taxed at the parent’s highest rate all the way up to age 23!

B. Financial Aid Impact – any income that is reported on your form 1040 (which includes capital gains) is considered as a part of the calculation for financial aid for the following year. As you begin drawing monies from the mutual funds, it is possible that you will be increasing your income to the detriment of available need-based financial aid. If, on the other hand, these funds were in a 529 plan and withdrawn for use in paying QHEE, there will be no taxable income reported on your 1040, thereby having no impact on the financial aid calculation.

C. Inherent Costs – with the 529 plans, there are administrative and manager fees, but, as shown with the recent changes to the BrightStart plan in Illinois, these fees are beginning to come down. Plus, most 529 plans (Illinois’ BrightStart and Bright Directions included) have very low-cost investment options available, reducing the expense ratio of the funds themselves. Analysis of 529 plans versus mutual funds has consistently shown that, when considering the tax benefits and the costs of the two options, there are very few instances where a low-cost mutual fund performs better than a 529 plan, and then only when the 529 plan in question is one where the administrative expenses are relatively high and the taxpayer is in the lowest possible tax bracket.

In addition to the internal costs of the various options, mutual funds quite often make certain investment decisions that have tax consequences, such as distributing capital gains and dividends. 529 plans do not have to make this sort of decision, and therefore decisions can be based entirely on investment considerations.

All in all, while non-529 investments may provide additional investment options over those available in the 529 plans, unless for some reason you do not have the option of choosing a 529 plan for specific college savings, the 529 plan is the better choice across the board.

What Must I Do Before April 30, 2016?

April 30 CalendarThere is a great deal of confusion surrounding the new Social Security rules that were put into place with the Bipartisan Budget Act of 2015 (BBA15). The part that is bothering folks the most right now is the deadline that is coming up, on April 30, 2016.

What’s important about April 30, 2016? What must I do before April 30, 2016?

The rule changes in BBA15 indicated that the suspension of Social Security benefits would be treated differently beginning 180 days after passage of the law. The law was passed on or about November 2, 2015, and so 180 days after that is April 30, 2016.

What’s the change?

First of all, in order to suspend your benefits, you must be at or older than Full Retirement Age (FRA). For folks who will be eligible to take advantage of the old suspend rule, that means you must be 66 before April 30, 2016, so you must have been born before April 30, 1950.

Previously, when someone suspended his or her Social Security benefits, his or her spouse or children could receive benefits based upon his or her record. This is still the case if you suspend your benefit prior to April 30, 2016.

After April 30, 2016, when someone suspends his or her Social Security benefits, all benefits based on his or her record will also be suspended. This means that his or her spouse or child cannot receive benefits based on his or her record while suspended.

Why would you want to suspend benefits in the first place?

For every month after your FRA that you delay receiving Social Security benefits, you accrue a delay credit of 2/3% – a total of 8% for every year of delay. This only happens if you are not receiving benefits, and it only happens after your FRA.

You can earn these delay credits by doing nothing – there is no requirement for you to do anything at all. The simple fact that you are not receiving benefits allows you to accrue this credit. You can accrue the delay credit up until the age of 70 – at that point your Social Security benefit is maximized.

On the other hand, if you file for your benefits, your dependents can receive benefits based on your record. Your spouse can receive up to 50% of your benefit amount, and your children under age 18 (19 if a full-time student, or any age if disabled) can also be eligible for 50% of your benefit amount.

“File & Suspend” gives you the ability to do both things – earn the delay credits AND provide benefits for your spouse or children. But this is only available if you file and suspend prior to April 30, 2016.

So what has to happen before April 30, 2016?

There is only one thing that must happen before April 30, 2016 if you want to take advantage of this rule before it changes: If you’re at or older than age 66 (your FRA) you must file and suspend your benefits at some point before April 30.

To do this, you have 4 choices:

  1. Go online to and apply online. When you do this, you fill out the application as if you will be receiving benefits, and then in the “Comment” section at the end of the application, write: I wish to immediately suspend my benefit to earn delay credits.
  2. You can file a paper application (form available online as well). Do the exact same thing as #1 above – fill it out as if you were going to receive benefits, and then indicate that you wish to suspend.
  3. Call 1-800-772-1213 to apply by phone. Tell the representative that you wish to file for benefits and immediately suspend them to earn the delay credits.
  4. Visit your local Social Security Administration office. Tell your representative that you wish to file for benefits and immediately suspend them to earn delay credits.

That’s all you have to do. Nothing else needs to be done before April 30.

Your dependent doesn’t have to start taking spousal or dependent’s benefits immediately or even before April 30. Since you have filed for benefits, your dependent (spouse or child) is eligible to take benefits based on your record, whenever they happen to file.

Why You’re Getting Form 1095

healthcare workersMany taxpayers are receiving a new form in the mail this tax season – Form 1095, either A, B, or C. This is because of the Obamacare law which requires that taxpayers have healthcare coverage. Form 1095 provides documentation of the taxpayer’s coverage by healthcare insurance. Depending upon the type of coverage you have, you will receive a certain type of form. And what should you do with this form?

Form 1095 A

If you have coverage through the Health Insurance Marketplace (established as a result of Obamacare), you’ll receive Form 1095-A. This form is used when you fill out your income tax return for the year, so that your tax credit for the healthcare premium can be reconciled, especially if you received the premium credit in advance.

Form 8962 is filled out and filed with your tax return, using the information in Form 1095 A. If your advance payments are more than what your income supports, you will owe some of these advance payments back – or the amount will reduce your refund. On the other hand, if your advance payments are less than what your income supports or if you didn’t receive advance payments, you’ll get the credit on your tax return.

Form 1095 B

If you had health insurance coverage via a self-insured employer or insurance that you purchased through some other means besides an employer or the Health Insurance Marketplace (including Medicare, Medicaid, or CHIP), you will receive Form 1095 B. This form is used to indicate that you had health insurance coverage as required throughout the tax year.

You (or your tax preparer) will use this form to show whether or not you had insurance coverage in the tax year on Form 8962. If you did not have coverage for any month of the year and you don’t meet one of the exceptions, you will owe the individual shared responsibility payment.

Form 1095 C

If you had health insurance coverage by way of your employer, you will receive Form 1095 C. Just the same as Form 1095 B, this form is used to prepare Form 8962, determining whether or not you had coverage, and subsequently whether or not a shared responsibility payment is due.

If you haven’t received a Form 1095 and you’re expecting one, you should wait until you receive it before filing your tax return. In a practical sense, as long as you definitely had coverage (Medicare, employer benefits, etc.) for the entire year, you can probably go ahead and file without receiving the form, but if you receive a form later and it indicates that you didn’t have coverage, you’ll need to file an amended return to correct the issue.

New Deemed Filing Rules

deemed filingWhen the Bipartisan Budget Act of 2015 was passed, there were a few changes made to Social Security rules. One of the rules that changed significantly is the deemed filing rule.

The old deemed filing rule

The current or old deemed filing rule works as follows:

When an individual who is under Full Retirement Age (FRA) is eligible for a spousal benefit in addition to a benefit based upon his or her own record files for either benefit, he or she is deemed to have filed for all benefits that he or she is eligible for at that time.

At any other time (other than the time of application for benefits) deemed filing does not apply.

For example, Anna and John are both nearing 62 years of age. Anna has a PIA (FRA benefit) of $800, and John has a PIA of $2,000. Anna is planning to file for her own benefit when she reaches 62. If John files for his benefit before Anna, deemed filing will require Anna to file not only for her own benefit but also for the spousal benefit, since she’s under FRA and she’s eligible for the spousal benefit.

On the other hand, if John had not already filed for his benefit, Anna can only file for her own benefit. Later, when John files for his own benefit, Anna has the option to file for spousal benefits, but is not required to. Deemed filing only applies upon the first month of entitlement, the month that your benefit first begins. If Anna wishes, she can delay filing for the spousal benefit in order to increase the amount of spousal benefits she can receive.

It may seem trivial, but in the example above where Anna has the choice to delay, it can mean a difference of $100 per month. If deemed filing applies, Anna will have $700 per month in benefits from her filing date through the rest of her life; if she delays filing for the spousal benefit, beginning at FRA she could receive $800 per month.

In addition, if Anna delayed filing for any benefit until she was at least FRA, then deemed filing would not apply to her at all, regardless of whether John had filed for his benefits. This would allow Anna to, at FRA, file an application for spousal benefits only, which is known as a Restricted Application. In doing so, she could receive spousal benefits while accruing delay credits on her own benefit.

The new deemed filing rule

The law in the Bipartisan Budget Act of 2015 (BBA15) changed the deemed filing so that it applies at any age, including after FRA. This means that the Restricted Application option is no longer available. The new deemed filing rule applies to anyone born on or after January 2, 1954.

So back to our example – assuming that Anna and John were born after January 2, 1954 – Anna can still file for her own benefit at age 62. If John has already filed, deemed filing applies as it did in the past. But if John has not filed for his benefit and then he files for his benefit, say 3 months later, Anna will be forced to take the spousal benefit at that time. This is due to the fact that she 1) has filed for benefits, and 2) she’s eligible for a spousal benefit, by virtue of the fact that John has filed for his benefit.

This takes away the planning strategy detailed earlier which would allow Anna to choose between receiving $700 now or $800 at FRA. She can only take the $700 now.

More significantly, if Anna had delayed until her FRA, under the new deemed filing rule, if she wants to file for benefits at FRA (or any age) she must file for all benefits which she is eligible for – in other words, no Restricted Application is allowed.

Exceptions to the new deemed filing rule

There are a few exceptions to the deemed filing rule, listed below:

  • If Anna (from our example above) is under FRA and is receiving a spousal benefit based upon the child-in-care rule, meaning that she and John have child who is under age 16 and John has applied for benefits. If this is the way that Anna is receiving spousal benefits, deemed filing does not apply to Anna. When she reaches FRA or the child reaches age 16, Anna is no longer eligible for the child-in-care benefit; any benefit that she applies for will be subject to deemed filing.
  • Likewise, if Anna was receiving a disability benefit (under FRA), deemed filing would not apply. Upon reaching FRA, Anna’s disability benefit will automatically switch over to a retirement benefit, and if she’s eligible for spousal benefits at that time, deemed filing will require her to receive the spousal benefit at that time.
  • Deemed filing also doesn’t apply to survivor benefits. If John had died before Anna reached age 62, Anna could still file for her own benefit at 62 and then delay receiving survivor benefits until they are maximized at her FRA.

IRS Warns of Surge in Email Scams in 2016

scamRecently the IRS issued a memo regarding the recent uptick in the occurrence of email phishing scams this year. Below is the text of the warning memo (IR-2016-28):

Consumers Warned of New Surge in IRS E-mail Schemes during 2016 Tax Season; Tax Industry Also Targeted

WASHINGTON – The Internal Revenue Service renewed a consumer alert for e-mail schemes after seeing an approximate 400 percent surge in phishing and malware incidents so far this tax season.

The emails are designed to trick taxpayers into thinking these are official communications from the IRS or others in the tax industry, including tax software companies. The phishing schemes can ask taxpayers about a wide range of topics. E-mails can seek information related to refunds, filing status, confirming personal information, ordering transcripts and verifying PIN information.

Variations of these scams can be seen via text messages, and the communications are being reported in every section of the country.

“This dramatic jump in these scams comes at the busiest time of tax season,” said IRS Commissioner John Koskinen. “Watch out for fraudsters slipping these official-looking emails into inboxes, trying to confuse people at the very time they work on their taxes. We urge people not to click on these emails.”

This tax season the IRS has observed fraudsters more frequently asking for personal tax information, which could be used to help file false tax returns.

When people click on these email links, they are taken to sites designed to imitate an official-looking website, such as The sites ask for Social Security numbers and other personal information. The sites also may carry malware, which can infect people’s computers and allow criminals to access your files or track your keystrokes to gain information.

The IRS has seen an increase in reported phishing and malware schemes, including:

  • There were 1,026 incidents reported in January, up from 254 from a year earlier.
  • The trend continued in February, nearly doubling the reported number of incidents compared to a year ago. In all, 363 incidents were reported from Feb. 1-16, compared to the 201 incidents reported for the entire month of February 2015.
  • This year’s 1,389 incidents have already topped the 2014 yearly total of 1,361, and they are halfway to matching the 2015 total of 2,748.

“While more attention has focused on the continuing IRS phone scams, we are deeply worried this increase in email schemes threatens more taxpayers,” Koskinen said. “We continue to work cooperatively with our partners on this issue, and we have taken steps to strengthen our processing systems and fraud filters to watch for scam artists trying to use stolen information to file bogus tax returns.”

As the email scams increase, the IRS is working on this issue through the Security Summit initiative with state revenue departments and the tax industry. Many software companies, tax professionals and state revenue departments have seen variations in the schemes.

For example, tax professionals are also reporting phishing scams that are seeking their online credentials to IRS services, for example the IRS Tax Professional PTIN System. Tax professionals are also reporting that many of their clients are seeing the e-mail schemes.

As part of the effort to protect taxpayers, the IRS has teamed up with state revenue departments and the tax industry to make sure taxpayers understand the dangers to their personal and financial data as part of the “Taxes. Security. Together” campaign.

If a taxpayer receives an unsolicited email that appears to be from either the IRS e-services portal or an organization closely linked to the IRS, report it by sending it to  Learn more by going to the Report Phishing and Online Scams page.

It is important to keep in mind the IRS generally does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. The IRS has information online that can help protect taxpayers from email scams.

Phishing and malware schemes again made the IRS “Dirty Dozen” tax scam list this year. Check out the last IRS Phishing Scam news release for more info.

What to look for in these scams

Taxpayers receive an official-looking email from what appears to be an official source, whether the IRS or someone in the tax industry.

The underlying messages frequently ask taxpayers to update important information by clicking on a web link. The links may be masked to appear to go to official pages, but they can go to a scam page designed to look like the official page. The IRS urges people not to click on these links but instead send the email to

Recent email examples the IRS has seen include subject lines and underlying text referencing:

  • Numerous variations about people’s tax refund.
  • Update your filing details, which can include references to W-2.
  • Confirm your personal information.
  • Get my IP Pin.
  • Get my E-file Pin.
  • Order a transcript.
  • Complete your tax return information.

Numbers provided are for phishing and malware incidents combined.

SSA Updates File & Suspend Guidance


You can listen to this article by using the podcast player below if you’re on the blog; if you’re reading this via RSS, there should be a “Play Now” link just below the title to access the audio. If you’re receiving this article via email, there should be a “Download Now” link within the text of the message to retrieve the audio file.

Recently the Social Security Administration provided some guidance regarding how the end of file & suspend will be handled, in light of the changes that were brought about by the passage of the Bipartisan Budget Act of 2015 (BBA15).

If you’ll recall, the option to suspend your Social Security benefit (part of File & Suspend) allowed one member of a couple to establish a filing date which would then provide the other member of the couple with the eligibility to file for a spousal benefit. The first member of the couple (who suspended benefits) is allowing his or her benefit to accrue the delay credits while the second member receives benefits. This provision was eliminated 180 days after the passage of BBA15.

Below is how the Social Security Administration will handle the suspension of benefits going forward:

  • For individuals who are FRA or older, if a request for suspension of benefits has been submitted before April 30, 2016:
    • The suspension will be treated as in the past (even if it has not been processed by that date, as long as it was submitted timely). This means that auxiliary benefits (such as spousal or dependent’s benefits) can continue to be paid based upon that suspended record while it is suspended.
    • In addition, the numberholder (NH) who requests a suspension prior to April 30, 2016 can in the future ask that benefits are reinstated as of any date after the suspension request, up to the present date (this is known as a lump-sum retroactive payment).
    • During the period that the NH benefit is suspended, he or she can collect excess spousal benefits based on a spouse’s record. An excess spousal benefit is the amount of spousal benefit that is “excess”, or greater, than the NH own benefit.
  • For individuals who submit a request for suspension of benefits on or after April 30, 2016:
    • No auxiliary benefits (spousal, child’s, or other, including benefits that have been received in the past) can be paid on the NH record while the benefit is suspended – EXCEPT for ex-spouse benefits. This is a significant exception, as had the rules been applied exactly as written, a NH could control benefits to an ex-spouse. With this exception, that is not going to be the case.
    • In addition, when removing the suspension, benefits will resume in the month following the month that the request was received (or later). In other words, no lump-sum retroactive benefits will be available.
    • No excess spousal benefits can be paid to the NH while the primary benefit is suspended.

The other significant item is that the date has been set at April 30, 2016 – but it’s not as significant as it seems. Anyone born on or before April 30, 1950 (actually May 1, 1950) is considered to be FRA during the entire month of April, 2016, so even if born on May 1, 1950 the NH should be in good shape if they want to use this provision.

If you would like to see the actual message from SSA, follow this link.

Ready, Set, Go! When To Start A Pension Payout?

decisionsThe question comes up often: I’m ready to retire at age 55, and I can begin collecting my pension right away. Should I? The amount of the pension increases to almost double if I wait to start collecting at age 62, and two-and-a-half times if I wait until age 65. What’s the best way to do this?

Obviously, there are a lot of factors that will go into the answer to such a question, so right off, it’s hard to say for sure, but here are the basics of making this decision:

These types of pensions are based on the employer’s assumption about your life expectancy. If you live to exactly the expected age, the cost to the employer will be roughly the same no matter which option you choose. You just need to do the math – bigger payments later are made for (expected) fewer years.

It goes without saying that if you were sure you’d die at age 60, you would be much better off starting your pension payout as early as possible. On the other hand, if you live longer than expected, starting your payout as late as possible will likely make up for the late start. But at what projected life span does this make sense?

An Example

Let’s start with an example: Say at age 55 you could begin a pension paying $1,229 per month, or at age 62, $1,990 per month, or you could begin receiving $2,263 per month if you wait to age 65 to begin collecting. For the purpose of simplicity, the example will not factor in taxes or any cost-of-living adjustments.

At age 70, your first option is still ahead of the other two. So, if you were to die before age 71, the first option, collecting at age 55, works the best, because you would have collected a total of $221,220 by that point, versus $214,920 for the age 62 option and only $162,936 with the age 65 option.

However (and isn’t there always a however in life?) – if you lived beyond that age, the other options begin to take the lead. If you lived to at least 71 but not to age 85, the age 62 option would work out the best. Anything from age 85 on up, you’re best off to wait until age 65 to get started.

What about spouse benefits?

The above example considered only a single life – what about if you have a spouse who may be dependent on your pension in retirement? In those cases, you have the option of choosing a “joint & survivor” pension option. These are often presented in terms of the original pension amount and an amount to be paid to your surviving spouse. The amounts here are based on your age as well as your spouse’s age, since the actuarial calculations have to account for two lives receiving the money instead of just one.

As we’ve discussed in other articles, for a couple who are both age 65, there is a 72% chance that one of them will live to at least age 85, and a 45% chance that one will live to age 90. These factors cause a further reduction in the pension amounts.

So here is a sample table illustrating the benefit amounts for some example options using Joint & Survivor (J&S) pension amounts, as well as a 10-year certain annuity:

Age 55 62 65
Single Life $1229 $1990 $2263
25% J&S $1202 $1921 $2174
50% J&S $1190 $1887 $2125
75% J&S $1150 $1797 $2015
100% J&S $1126 $1741 $1944
10-year Certain $1219 $1944 $2126

As you can see, the more pension that is available to the surviving spouse, the lower the overall pension payment. This is due to the fact mentioned earlier that when considering the lives of a couple the actuarial chance of one spouse living longer is increased.

The various benefit level differentials are offered in order to allow the pension recipient to provide a benefit for his or her surviving spouse, depending upon the perceived future need for benefits. The single life option provides no further benefits after the death of the pension recipient, while the 100% J&S option continues to provide the same benefit to the surviving spouse after the death of the pension recipient. The other percentages provide a benefit to the surviving spouse, but in a limited amount.

The 10-year Certain option provides a level benefit for the greater of 10 years or the life of the pension recipient. So if the pension recipient died the day after he or she started the pension, it would be paid to his surviving beneficiary or his estate for 10 years. If the recipient lived longer than 10 years after starting the pension, it will be paid to him or her until death but no surviving spouse benefits would be paid.

The title of this article is “When” to start your pension payout, so we won’t reflect on the reasons why you might choose one type of benefit over another, we’ll just run some numbers to see what timeline provides the best benefit amounts for the various payout options.

We covered the crossover points for the Single Life option above. If we look at the 100% J&S option next, we see that the outcome is very similar to the Single Life option, but delayed a bit. If the pension recipient chooses to start his or her pension at age 55, this will provide the most benefits if either member of the couple lives to age 71. This is because the benefit paid out is exactly the same before and after the death of the recipient. After age 71, the age 62 option pays the greatest amount of benefits up to the point where either member of the couple lives to at least age 89. This is a bit later than the Single Life option – and a statistically significant period of time. From that point forward the age 65 starting point pays the best.

So, according to averages, the age 62 option is an attractive choice for this payout level, since the chance of one member of the couple living beyond age 90 is (as we noted above) approximately 45%. But still, the age 65 option will provide the most benefits from age 90 onward, so it still may be the best option for your situation.

Looking at the other J&S options – at this point we need to start thinking about when the first (recipient) spouse will die, because after his or her death the benefit amounts are reduced, often dramatically. In all cases if the recipient spouse lives beyond age 90, waiting to age 65 to start is superior. But if the recipient dies earlier, the results start to favor other options.

If the recipient spouse dies at age 73 for example, the age 62 option provides the greatest benefit for all 3 of the J&S options (other than the 100% option). Any age between 75 to 85 produces (essentially) the same outcome – the crossover point is around age 100 for a death age of 85 at the 75% survivor benefit level. Any earlier death (before age 73) results in the age 55 start age being the best choice.

And The Point of This Is…?

The point of all this, well actually there are two points: First – the answer to the question of when to take the pension depends on what you’ll do with it, and whether or not you need those funds right away. Couple those factors with how long you’ll live, as well as how long your spouse will live (if you have one). If you’ll need a larger amount to live on, such as if you don’t have any other retirement savings, the longer you can wait before starting your pension payouts the better, especially if you’re in good health and expect to live beyond age 80.

The second point is that, even if you have a pension available to you, it is definitely in your best interest to develop a savings strategy in addition to the pension. And this is doubly important if your pension is fixed (no cost-of-living adjustments) as in our example.

The best way to answer this question is to gather all of these factors, along with considerations regarding investment risk tolerance, tax implications, family longevity and your own health, as well as your lifestyle costs, healthcare costs, and propensity to continue working after your official “retirement” – at whatever age that might be – and then run the calculations.

Qualified Charitable Distributions for 2016

300px-IRS.svg_Individuals needing to take their required minimum distributions (RMD) for 2016 may consider having all or part of their RMD distributed as a Qualified Charitable Contribution (QCD).

In order to qualify, the following rules must be met.

  1. The individual taking the QCD must be age 70 ½.
  2. The maximum allowed QCD is $100,000 per individual, annually.
  3. The QCD must come from an IRA. QCDs from 401(k)s, 403(b)s, 457(b)s, SEPs, SIMPLEs are not permitted. An individual may roll over an amount to their IRA and then made the QCD.
  4. The QCD is counted toward the individual’s RMD for the tax year. If the RMD was already taken, the QCD cannot be retroactively made.
  5. The QCD must be made directly to the charitable organization.
  6. Generally, the charity must be a public charity.

The Protecting Americans from Tax Hikes (PATH) Act of 2015 made allowing QCDs from IRAs permanent. The tax benefit from this distribution is that the individual is not allowed to take a charitable deduction for the gift to the charity; however, the distribution is not taxed as income to the individual.

Dependents and Exemptions

A young child

When filling out your tax return this year, you may have questions about dependents – such as who can be claimed on your return.  Claiming a dependent can have a significant impact on your return, including increasing exemptions and possibly increasing certain credits like the Earned Income Credit and various others.

The IRS recently published Tax Tip 2016-08, which lists ten facts about dependents and exemptions.  Below is the list of facts, along with some additional information that I’ve included (my comments are in italics):

Exemptions and Dependents: TopTen Tax Facts

Most people can claim an exemption on their tax return. It can lower your taxable income. In most cases, that reduces the amount of tax you owe for the year. Here are the top 10 tax facts about exemptions to help you file your tax return.

  1. E-file Your Tax Return.  Easy does it! Use IRS E-file to file a complete and accurate tax return. The software will help you determine the number of exemptions that you can claim. E-file options include free Volunteer AssistanceIRS Free File, commercial software and professional assistance.
  2. Exemptions Cut Income.  There are two types of exemptions. The first type is a personal exemption. The second type is an exemption for a dependent. You can usually deduct $4,000 for each exemption you claim on your 2015 tax return. (So a family of four can claim exemptions of up to $16,000!)
  3. Personal Exemptions.  You can usually claim an exemption for yourself. If you’re married and file a joint return, you can claim one for your spouse, too. If you file a separate return, you can claim an exemption for your spouse only if your spouse:
    • Had no gross income,
    • Is not filing a tax return, and
    • Was not the dependent of another taxpayer.
  4. Exemptions for Dependents.  You can usually claim an exemption for each of your dependents. A dependent is either your child or a relative who meets a set of tests. You can’t claim your spouse as a dependent. You must list the Social Security number of each dependent you claim on your tax return. For more on these rules, see IRS Publication 501, Exemptions, Standard Deduction, and Filing Information. Get Publication 501 on Just click on the Forms & Pubs tab on the home page.Essentially, the dependent must either be a qualifying child or a qualifying relative. To be a qualifying child, the following tests must be met:
    • The child must be your son, daughter, stepchild, foster child, brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of them.
    • The child must be (a) under age 19 at the end of the year and younger than you (or your spouse if filing jointly), (b) under age 24 at the end of the year, a student, and younger than you (or your spouse if filing jointly), or (c) any age if permanently and totally disabled.
    • The child must have lived with you for more than half of the year. There are exceptions for temporary absences, children who were born or died during the year, children of divorced or separated parents (or parents who live apart), and kidnapped children.
    • The child must not have provided more than half of his or her own support for the year.
    • The child must not be filing a joint return for the year (unless that joint return is filed only to claim a refund of withheld income tax or estimated tax paid).

    If the child meets the rules to be a qualifying child of more than one person, only one person can actually treat the child as a qualifying child. See Qualifying Child of More Than One Person to find out which person is the person entitled to claim the child as a qualifying child.

    To be a qualifying relative, the following tests must be met:

    • The person can’t be your qualifying child or the qualifying child of any other taxpayer.
    • The person either (a) must be related to you in one of the ways listed under Relatives who don’t have to live with you, or (b) must live with you all year as a member of your household (and your relationship must not violate local law). There are exceptions for temporary absences, children who were born or died during the year, children of divorced or separated parents (or parents who live apart), and kidnapped children.
    • The person’s gross income for the year must be less than $4,000. There is an exception if the person is disabled and has income from a sheltered workshop.
    • You must provide more than half of the person’s total support for the year. There are exceptions for multiple support agreements, children of divorced or separated parents (or parents who live apart), and kidnapped children.

    See Publication 501 for more details on dependents if you have additional questions.

  5. Report Health Care Coverage. The health care law requires you to report certain health insurance information for you and your family. The individual shared responsibility provision requires you and each member of your family to either:

    Visit for more on these rules.

  6. Some People Don’t Qualify. You normally may not claim married persons as dependents if they file a joint return with their spouse. There are some exceptions to this rule.
  7. Dependents May Have to File.  A person who you can claim as your dependent may have to file their own tax return. This depends on certain factors, like total income, whether they are married and if they owe certain taxes.
  8. No Exemption on Dependent’s Return.  If you can claim a person as a dependent, that person can’t claim a personal exemption on his or her own tax return. This is true even if you don’t actually claim that person on your tax return. This rule applies because you can claim that person as your dependent.
  9. Exemption Phase-Out.  The $4,000 per exemption is subject to income limits. This rule may reduce or eliminate the amount you can claim based on the amount of your income. See Publication 501 for details.
  10. Try the IRS Online Tool.  Use the Interactive Tax Assistant tool on to see if a person qualifies as your dependent.

Each and every taxpayer has a set of fundamental rights they should be aware of when dealing with the IRS. These are your Taxpayer Bill of Rights. Explore your rights and our obligations to protect them on

IRS YouTube Videos:

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What to do with an extra 1,000 dollars

One Thousand Dollars!

One Thousand Dollars! (Photo credit: The Consumerist)

I occasionally get this question – especially around the time of tax refunds.  When someone comes up with an extra $1,000, they often want to know how to best use that money wisely to help out their overall financial condition.

Of course this question has different answers for different situations.  I’ll run through several different sets of conditions that a person might find him or herself in, and some suggestions for how you might use an extra $1,000 to best improve your financial standing.  (It’s important to note that you don’t have to have an extra $1,000 lying around to use this advice – you could have an extra ten or twenty or fifty bucks a week and put it to work with the same principles.)  The point is to find money that isn’t being spent on something critical, and put it to work for you!  Even small steps amount to wonders.


If you have consumer debt, including credit card debt, auto loans, student loans and the like, it makes the most sense to use this money to bring down your overall debt balance or eliminate it if you can.

If the interest rate on your debt is greater than about 3% or 4%, you aren’t likely to find a better way to invest an extra $1,000 than to eliminate some of your interest costs.  This is because debt is a negative investment – when you have debt that carries an interest rate of 8%, year over year while the debt balance is there, you are “earning” a –8% return on that money.

Some folks recommend eliminating all debt, but that’s a bit impractical in today’s world.  Low-cost mortgage debt and auto loans can be good uses of leverage – especially mortgage debt at the rates we’ve seen of late.  I suggest that you focus on the highest rate consumer debt first and foremost, eliminating this drag on your financial state.  Once you’ve eliminated every debt except for mortgage debt, you can move on to other pursuits.  Eliminating consumer debt at high interest rates is the best move you can make to  improve your financial self.

Emergency Fund

An emergency fund is an amount of money set aside that can be used to cover all of the unexpected expenses that come up and surprise you: new tires for the car, roof replacement, or medical expenses not covered by insurance, for example.  The other thing that an emergency fund is for is to give you some “cushion” if you find yourself unemployed for an extended period of time.  It’s for this reason that an emergency fund is typically referred to as a certain number of months’ worth of expenses – such as 3-6 months’ worth of expenses.  You should have an emergency fund of an amount that would provide for your living expenses for several months should you be unexpectedly laid off.

If you don’t have an emergency fund, or if your emergency fund is smaller than you should have set aside, this is another great place to put an extra $1,000.  Typically an emergency fund is in a place that’s a bit difficult to get at – such as a bank savings account without debit card or ATM access.  This way you’re not tempted to invade this money for non-emergency purposes.  Sometimes folks use a Roth IRA as a dual-purpose account until they can establish separate accounts for retirement and emergency funds.

A Roth IRA could be used as your emergency fund, since you can withdraw your contributions to your Roth IRA at any time for any purpose without tax or penalty.  I don’t recommend this option for long-term use, because if you have to get at the funds for an emergency purpose and you’re not able to replace them in the account within 60 days, you’ll lose the Roth treatment of those contributions forever.  You can always put more into the Roth IRA at a later time, but once you’ve got the money in there, you shouldn’t take it out before retirement without a very, very good reason.


The most important tool for achieving financial success is knowledge.  For this reason, I suggest that you use some of your new-found riches to improve your financial knowledge.  There are many good books out there that will help you to better understand your finances and how you can improve things.

I wouldn’t suggest spending an extra $1,000 totally on education – maybe as much as $50 or $100 for several good books.  This will help you to make good decisions with your remaining windfall.

Retirement Savings

If you haven’t maxed out all of your retirement savings for the year, such as 401(k) plans and IRAs, this is another good place to put an extra $1,000 to work.  For an IRA or Roth IRA (if you’re eligible by your income level) it’s simply a matter of making the contribution to the account and investing it appropriately.

If on the other hand you haven’t maxed out your 401(k) plan, you can defer an extra $1,000 by your paychecks throughout the remainder of the year and earmark an extra $1,000 to make up the difference in reduced take-home pay.  If you started in July and you have 13 more pays left in the year, you’d set aside around $75 per paycheck (if paid every two weeks) and your income will be reduced by a little less than that, since the money you deferred isn’t taxed.

Charitable Donations

Consider making a donation with your extra money. There are many deserving charities (I’m sure you can come up with a list of several without much difficulty) that would LOVE to have a donation of $1,000. And you can take a deduction on your tax return for the donation (assuming that you itemize your deductions).

Who Does Each Option Work Best For?

Folks who are just starting out in improving your financial situation quite often need to focus on all of the options I mentioned above – debt reduction, emergency fund, knowledge and retirement savings.   The list was put together in priority order, so you should focus on debt reduction first, then emergency funds, and so on.

If you’re a little farther down the timeline and have eliminated all consumer debt and have established an emergency fund, improve your knowledge first, and then add more to your retirement savings.  I mentioned before that the most important tool that you have is your knowledge.  The most important action you can take to improve your financial standing is to increase your bottom line.  We did this first when we eliminated all debt.  The next step is to add to savings.  Both moves will increase your net worth – your assets (savings and possessions) minus your liabilities (loans and other debts) equals your net worth.  The key to financial success is to make moves that will have a positive impact on your net worth.

Students who don’t have any debt accumulated should focus first on the emergency fund, and then on retirement savings.  In some cases it makes good sense here to put the money into a Roth IRA, since money in a Roth IRA won’t be counted on your financial aid forms, since it’s a retirement account.

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Doing My Own Taxes Cost Me $10,000

Businessman juggling fruit

3 Lessons I Learned from My DIY Mistake

This article was provided by Devin Carroll, a financial advisor colleague who practices in Texarkana, TX at his firm Carroll Investment Management.

Doing my own taxes cost me $10,000 last year. It still stings and it has been on my mind a lot lately as tax season approaches.

I was reminded of this the other day while I was shopping with my wife at our local wholesale store. When I passed by the big display of tax software, I thought about the ad that’s been playing over the last few weeks. This ad is a humorous take on just how easy it is to do your own taxes. It’s so easy that everyone in the ad is just using their phones to file! At the conclusion of the ad, the text comes up: “You don’t have to be a genius to do your own taxes.”

Well, I’ve never considered myself a genius, but I can figure things out pretty well. When my accountant retired a few years ago, I decided to give the do-it-yourself tax software a try. The idea was pretty simple: “I’m a smart guy,” I thought. “With today’s technology, there’s no reason why I can’t do my own taxes.”

Doing My Own Taxes

At first, I only had my 1099 and my wife’s W-2. Then I became a half-owner of an insurance agency which added yet another tax form. Still, that wasn’t too bad, so I simply adjusted the version of the tax software I purchased to handle the partnership. In the next year, we bought an investment property and made an entity change for my financial planning practice. Over the next couple of years there were a few other changes that resulted in even more tax forms.

I suppose I didn’t realize just how complex my situation was getting. So, in early 2015, I made my annual pilgrimage to the wholesale store to purchase my tax software. Just like every other year, I set a Saturday aside to do my taxes. I plugged in all of the various income forms and then started working on the deductions.

My tax software showed a big counter at the top of the screen that revealed my current federal tax liability – as I would enter data, the dollar figure would update. When I started getting close to the end of my deductions spreadsheet, the number was still really big. It was so big that my heart rate increased and I was starting to feel a little sick.

A few hours later I was finished. There was nothing left to deduct and I still had an enormous tax bill! In a state of panic I called an accountant friend to get a second opinion. We set a meeting and a few days later we sat down with my nearly complete tax return to discuss options. He told me, “Devin, if you’d made a couple of simple changes at the first of the year, you could’ve saved about $10,000 in taxes.” I was dumbfounded – and really angry at myself.

The Valuable Lessons I Learned

Now, almost a year later, I can look back on this experience and remember the lessons I learned. Here are three takeaways from my do-it-yourself mistake . . . .

  1. I don’t know everything.

As much as anything, this was a lesson in humility. Before this, I didn’t think that tax advisers had anything to offer me. In fact, I’d even mentally dubbed them with titles such as “document processors.”

I should’ve already learned to be more humble and hire professionals. I can’t tell you how many projects I’ve looked at and thought, “Why would I hire someone when I can do that?” The results in many of those projects have had similar results, too. One that immediately comes to mind was my attempt to save $50 by moving my own cable line in the attic. Yep . . . I fell through the attic, ended up in the emergency room, and had to pay several hundred dollars to get the massive hole in my ceiling fixed.

In our information-rich world, you can find a how-to for everything. It’s really tempting to read about a topic for a few minutes and think we understand all the nuances. That’s not the case with the federal tax code. Consider this for a moment . . . . In 1984 the tax code was 26,300 pages. Today, it’s a monstrous 75,000 pages. That’s just too much information to fully comprehend along with everything you need to know for your “real” job.

  1. Sometimes it pays to hire early.

I can’t tell you how much I wished I would have hired a tax adviser before I thought I needed one. I was so caught up in what they would charge, I let a $10,000 surprise smack me in the face.

The same could be said about many of my prospective retirement planning clients that request information. They hear that I charge an hourly fee and simply turn to the internet for advice that’s much cheaper. The result is often a missed opportunity, missed filing deadline, or some other mistake that has consequences for the rest of their retirement.

If you think you may need someone in a few years, hire them today!

  1. Hiring a professional reduces anxiety.

When I was doing my own taxes, I was constantly worried about getting a letter from the IRS. Not because I was intentionally doing something wrong, but I was always scared that I’d missed something important that would come back to haunt me.

Today, I no longer have that fear. I feel the likelihood of getting that dreaded letter from the IRS has tremendously declined. It may not have, but I sure sleep better.

This tax season, do yourself a favor and hire a tax professional.

Like all professionals, not all tax advisers are created equal. Some are coaches and some are not. Some will help you and some will just let their assistant screen your calls. If you start looking for an accountant who meets your expectations, start before tax season. It’s just too crazy once it gets to mid-February.

As an additional resource, here’s a great article from Kelly Phillips Erb on hiring a tax preparer.

What are your thoughts? Do you plan to hire someone this year?

Devin Carroll is a financial advisor who practices in Texarkana, TX at his firm Carroll Investment Management. He writes about Social Security and retirement related issues on his blog at

5 Tax Credits You Don’t Want to Miss

3446025121_072700607f_n2As individuals begin to file their tax returns for 2015 here are some tax credits that some individuals may qualify for to help reduce, if not eliminate their tax liability.

  1. Child Tax Credit. This credit may be worth up to $1,000 per child, depending on income. The child must be under age 17 at the end of 2015, as well as be a dependent and a US citizen. Additional information can be found in Publication 972.
  1. The American Opportunity Tax Credit. This tax credit for education expenses is allowed for parents for up to the first four years of post-secondary (college) education. The benefit of this credit is that it is a “per student” credit. This means the credit can be taken for multiple children in college. The maximum credit per student is $2,500. Additional information can be found here.
  1. The Lifetime Learning Credit. Like the AOTC, this credit can be claimed for education expenses. The difference between this credit and the AOTC is that this credit is a “per family” credit. This means the maximum amount of $2,000 allowed is in total regardless of how many family members are in college. However, this credit can be used for an unlimited number of years in college. Additional information can be found
  1. The Saver’s Credit. This credit allows taxpayers with lower incomes a credit of $1,000 (single) or $2,000 (MFJ) who are saving for retirement. This credit helps individuals by allowing them to take a credit based off of money contributed to retirement accounts such as a 401(k) or IRA. This credit is also called the retirement savings contributions credit. Additional information can be found here.
  1. Child and Dependent Care Credit. This credit can be taken by individuals who pay for child care expenses in order to work or are active seeking work. The credit cannot exceed $3,000 for one qualifying individual or $6,000 for two or more individuals. The amount of the credit also depends on adjusted gross income. Additional information can be found here.

Everything You Need to Know About File & Suspend and the April 30 Deadline

suspended balloonsBy now if you’re of a certain age, you have probably heard about the end of the file & suspend option for Social Security benefits. If not, click on this link to learn more about this option and the April 30 deadline due to changes made by the Bipartisan Budget Act of 2015.

However, as my email inbox indicates, you have lots of questions about file & suspend.  This article is my effort to cover all the bases with regard to everything you need to know about file & suspend and the April 30 deadline.

For starters, if you and your spouse were born after April 30, 1950, this article does not apply to you, so you can stop reading. If one of you was born before April 30, 1950, the file & suspend option only applies to that individual, not to both of you. Of course, if both of you were born before April 30, 1950, then file & suspend could apply to either of you – but only one of you would actually file & suspend.

Ground rules

The ground rules for file & suspend are as follows:

  1. You must be at least at Full Retirement Age (66) in order to file & suspend.
  2. There is an April 30 deadline to enact this option (April 30, 2016, and never after that date).
  3. You would only file & suspend if you wish to delay filing your own benefit (or stop receiving your benefit) until some age later than FRA, and one of the following (and perhaps both):
    • You wish to enable someone else (spouse or child) to receive benefits based on your record.
    • You wish to preserve the opportunity to file for a lump sum retroactive benefit at some later age, before you reach age 70.
  4. While your benefits are suspended, you will not receive benefits based on your own record, and you will not be eligible for spousal benefits via restricted application or otherwise (*see below for a technical exception).

Practical Application

If you were born after April 30, 1950, file & suspend (under the old rules) is not for you, so you can stop reading.

Further, if you have already filed for your own benefit and you want to continue receiving your benefit, you would not want to file & suspend.

Once you have filed and suspended, your spouse can file for spousal benefits (or your eligible child can file for child’s benefits) as soon as eligible. For example, if your spouse is already (or has just reached) age 62, he or she will be eligible for spousal benefits upon filing for his or her own benefit.

If you have filed and suspended, your spouse born before 1954 will be eligible to file a restricted application for spousal benefits upon reaching FRA – as long as he or she has not already filed for benefits based on his or her own record.

How to Do It

In order to file & suspend, just the same as filing for any other benefit, you have three options for filing:

  1. Online – you file for benefits at as if you wanted to begin receiving the benefits immediately; at the end of the application there is a “Remarks” section – in this section you will enter the following: I wish to immediately suspend my benefits after filing in order to earn delay credits.
  2. Paper application – using form SSA-BK-1 you do just as described in #1 above, filing out the form as if you wish to receive the benefit immediately, then putting the following line in the Remarks section at the end: I wish to immediately suspend my benefits after filing in order to earn delay credits.
  3. On the phone – call 1-800-772-1213 and tell the representative that you wish to file for your benefit and immediately suspend the benefit in order to earn delay credits.
  4. In person – visit your local Social Security Administration office and tell your representative that you wish to file for your benefit and immediately suspend the benefit in order to earn delay credits.

*Technical Exception to the suspended benefits rule

Earlier in the Ground Rules I mentioned a technical exception to the rule about not being eligible to receive spousal benefits when you have suspended your own benefit. The exception works like this:

Joe has a benefit of $600 available to him if he files at Full Retirement Age. Joe’s wife Barbara, age 67, is already collecting her benefit of $1,500 per month. When Joe reaches Full Retirement Age, he files and suspends his benefit. Joe is still eligible for a restricted application for spousal benefits based upon his wife’s record – but the benefit he will receive is not going to be 50% of Barbara’s benefit. Joe will receive only the excess spousal benefit.

The excess spousal benefit is calculated as 50% of Barbara’s benefit minus Joe’s age 66 benefit – $1,500 / 2 = $750, minus Joe’s benefit of $600 equals $150. So Joe can receive $150 until he decides to unsuspend his benefit, at which point he will be eligible to receive the larger of either the full 50% of Barbara’s benefit or his own benefit, increased by delay credits. If Joe has delayed to age 70, his DRC-enhanced benefit would be $792.

If the above example seems a bit odd, it’s because there are very few plausible situations where this exception might be applied.

5 Ways to Handle a Falling Market

Photo courtesy of Thomas Lefebvre on

Photo courtesy of Thomas Lefebvre on

Given the recent market volatility and the uncertainty that comes with it here are a few things to consider to reduce potential stress. Some individuals can perhaps make the best of a rocky situation.

  1. Do nothing. Before reacting or making a decision that could affect your returns and income in the future, take a moment to think about the situation. Is it as bad as it seems? Is it just like the previous market dips? What happened afterwards? If you’ve decided on the correct asset allocation for your portfolio then expecting market dips should be the norm, not the exception.
  1. Revisit your goals. Remember the reason why you’re investing in the first place. Is it for retirement and you’re in your 30s? Is it for a college education and you have a 6 month old? Is it for retirement income and you have a family history of longevity? This point is similar to the first, if you have specific goals in mind for the money and generally a long time horizon, then short term decreases shouldn’t bother you. In fact…
  1. Take advantage of the reduced prices! The Chinese word for crisis is made up of two characters – one meaning danger and the other meaning opportunity. While others may see danger in a falling market and rush to sell their assets (selling low) you may consider taking advantage of the opportunity of reduced prices and buying more (buying low). Rhetorically, why to individuals feel good about buying when the market is high? Take advantage of the sale price.
  1. Have an emergency fund. Consider setting aside an amount of money that you can live off of should an emergency arise (losing a job, car repair, etc.). Generally, the rule of thumb is anywhere from 3 to 6 months of non-discretionary living expenses. Some individuals are comfortable with 9 to 12 months. The reason this is important is this reduces the temptation or the need to dip into retirement or college savings in a down market to pay for an unexpected expense. Having the cushion of the emergency fund to fall back on reduces the danger of realizing losses in your portfolio.
  1. Talk with a professional, fiduciary financial planner. Similar to point number 3, there are individuals that will try to take a crisis and seize this opportunity to exploit an individual’s fears. This means trying to sell someone a product they don’t need and or locking them into a product with heavy fees, poor returns but the promise of “downside protection”. Talk with a fee-only planner that is legally obligated to put the client’s best interest first. While some products may be beneficial, they are often sold with commission on the brain.

Additionally, many individuals become concerned that their portfolio is experiencing volatility and lower returns. They may have a friend whose portfolio is going up. Be wary. As a friend of mine told me a long time ago, “If all the assets in your portfolio go in one direction, you’re not diversified.”

Maintaining Confidence in an Uncertain World

confidence wonder womanAll around us, every day, we see signs of an unstable financial world. The stock market has been all over the place, instability continues in the Middle East (like it will ever change?); at home we’re confronted by a presidential election that offers little choice other than to hold your nose and vote for the one that you believe is likely to do the least damage. Add to this the rising cost of “getting by” and there’s little wonder many folks are very concerned  and have little confidence about the future.

What Can You Do?

I don’t suggest hiding under your bed – this has never worked for me, and sometimes you find things there that you would rather not! On the other hand, there are few things that you can do to help get through this uncertainty, and maybe you’ll decide that it’s not so scary after all.

For starters, all of the headlines we see, especially the financial ones, must be taken with a grain of salt. For example, back in early 2001, CNN reported that seven cows, born and raised in Germany, had been diagnosed with mad cow disease. Within six weeks, beef consumption in Germany dropped in half. Yet, throughout the 30+ years since mad cow disease was discovered, a total of 150 deaths have been attributed to this disease. On the other hand, we are told that salmonella poisoning kills more than 600 people in the US every year, along with making an additional 1.4 million of us sick. But the popularity of chicken, the primary food source that hosts salmonella poisoning, continues to increase.

This odd behavior comes about because of how we perceive and interpret information. Obviously, our personal experiences have the greatest weight, followed by experiences related to us by friends and family. The next most believable source of information is mass media, including the largely undocumented internet, while last in line is documented, statistical evidence. So, while most folks have had enough experience with food poisoning to put the salmonella statistics in their proper context, Mad Cow disease, with its sensational name and (at the time) largely unknown characteristics, made us sit up and take notice. And, more importantly from the perspective of the media provider, the sensational SELLS!

So What Does This Mean For My Finances?

Consider how this phenomena impacts your financial confidence. For several years, the watch-word has been to stay out of medium- and long-term bonds as investments, because the long-term rates are going up. This talk began in 2009 – and just lately short-term rates went up a bit, but not enough to make an appreciable difference in using medium- and long-term bonds in your portfolio.

This is not to say that you should ignore the news – but rather, you should keep your trusty grain of salt handy as you do follow the news. And ask your trusted advisor to help you interpret the news that you find particularly troubling. In addition, it doesn’t add value to check your portfolio’s value every day and wring your hands over every headline in the various financial news outlets. Generally speaking, these headlines provide no value to the average investor, and more often than not they serve to distract you from the aim of your long-term plans.

Understand Why You Choose Investments

One of the more difficult things for most folks to understand is that it is near impossible to always choose a “big winner” mutual fund. Consider this: if, over the past five years, a mutual fund manager has had a better-than-average result from his mutual fund (meaning, he’s beating the indexes over that period), he’s one of approximately 3% of all mutual fund managers. When you consider that new funds are introduced every year, replacing old “losers”, you begin to realize that this 3% is actually a smaller number, since the losing funds have disappeared from the list (this is known as survivor bias – meaning those funds that survive look better because the losers have dropped out of sight).

Add to this mix the fact that “past performance doesn’t guarantee future results”. In other words, just because a particular fund manager has beaten the average in the past doesn’t mean that he will do so in the future. What I’m driving at is this: There is no point in chasing the “best” managed mutual fund, especially when the index is likely to beat or equal any given manager 97% of the time, at a cost of far less than half (in terms of internal expense ratios). Our experience shows that you can find a broad-index portfolio for literally pennies versus the dollar many funds change for internal expenses. You’re much better off spending time making sure that your portfolio is well diversified and matches your risk tolerance, and then maintaining solid discipline to not run for the exits when a headline looks scary to you.

Have a Trusted Advisor to Lean On

This goes for all facets of your life, obviously – and of course it’s a bit self-serving when coming from me. The point is, while it’s human nature to believe we can “do it on our own”, we eventually come to realize that we need some additional expertise to help us plan. And once we’ve made those plans, having someone to help us review and consider options is a must – because simply having a plan isn’t enough, we must execute and review results. Once we’ve seen those results, we can then determine how to make minor adjustments for the future, and then again, execute the plans. Especially when the environment has been volatile, it’s important to review our results and make sure we’re still on track.

You might think that the work a financial planner does is based primarily in the future, but the present is at least as important – especially when things haven’t gone the way we’d hoped. In other words, while we’re aiming for a particular goal in the future, it is where we are “today” that gives us our starting point. Confucius said “A journey of a thousand miles begins with a single step”. But if you never stopped during that thousand miles to consider where your destination is relative to where you are right now, you’d likely end up somewhere else.

The Point of All This (FINALLY!)

I know I’ve rambled a bit, but I think you get the gist of my message – Lay out careful plans, don’t allow the “pundits” and headlines to distract you, use the market averages to your advantage, diversify to match your risk tolerance, and check your progress regularly. The author Michael Pollan presented a seven-word mantra in his best-selling book “In Defense of Food” that provides clarity when making choices there:

“Eat food. Not too much. Mostly plants.”

From this idea, I’ve built the following mantra for confidence in investing and planning:

“Plan ahead. Don’t be distracted. Save lots.”

I hope this will help you as you go forward in your financial life. In these uncertain times, having a sound foundation to guide you is your most important tool.