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The Remarriage Rule (Possibly the Dumbest Social Security Rule)

remarriageIf you’re familiar with the remarriage rule for Social Security survivor benefits, you likely know what I’m talking about. This is, in my opinion, quite possibly the dumbest rule that we have in the whole Social Security system. There are several really dumb rules, but this one takes the cake.

Briefly, here’s the remarriage rule: If you are a widow or widower who is otherwise eligible for survivor’s benefits from your late spouse, you must be unmarried as of reaching age 60 to actually receive the benefit. If you remarried even one day before reaching age 60 (and remain married) you are not eligible for survivor benefits. If you remarried the day after your 60th birthday, you’re still eligible to receive the survivor benefits based on your late spouse’s record.

Example of remarriage rule

Joan and Richard were married for 27 years when Richard died. Joan was 57 years old at the time of Richard’s passing. Upon reaching age 60, Joan will be eligible to receive a survivor’s benefit based on Richard’s record.

Joan met David when she was 59 years old, and the two plan to marry soon. The timing of this marriage is critical to Joan, as explained above. If Joan remarries before she reaches age 60, she loses her eligibility to receive the survivor’s benefit while she’s married to David. If she waits until some time after her 60th birthday, Joan will retain eligibility for the survivor benefit.

Likewise, if Joan’s (early) marriage to David ends, either through divorce or David’s death, Joan’s eligibility for the survivor benefit based on Richard’s record will be restored. In fact, if David has died, as long as he and Joan were married for at least 1 year (and still currently married upon David’s passing), Joan will be eligible for survivor benefits on either Richard’s or David’s record, whichever is more advantageous to her.

What does this rule protect?

What exactly are we trying to resolve with this rule? I can’t for the life of me figure that one out – except that apparently we want to provide disincentive for widow(er)s to remarry prior to age 60. If anyone in readerland has other ideas for the value of this rule, I’d love to hear them!

I doubt seriously if this particular rule results in much benefit to the bottom line for Social Security as a system. But what it does is to cause much confusion for individuals who could be affected by it. I’ve heard from more than one individual who made changes to their remarriage plans because of the rule.

Plus, I’ve also heard from multiple individuals who were planning a quiet divorce in order to get around the rule. This could be done, restoring eligibility, and then after at least 12 months has passed the two could be remarried again (as long as the widow(er) is over age 60).

In a system that’s fraught with much confusion and complexity, it’s my opinion that this is a rule we could definitely do without, and no one would be harmed for the lack of it. What do you think?

Axioms for Graduates

As the spring semester comes to end for high school and college graduates, I wanted to perhaps give some unsolicited advice as these newly christened adults start out on their own and begin making life choices and financial decisions that will impact their future.

  1. Resist the temptation to spend everything you make. Instead, do your best to save as much as you can. In fact, it’s possible for a recent college grad to go from making hardly anything during their college years to a decent starting salary. Pay yourself first. Establish an emergency fund of 3 to 6 months of living expenses and save to your 401k and IRA. It’s absolutely possible to save $23,500 annually ($18,000 to the 401k and $5,500 to the IRA). In ten years, without interest or compounding, you’ll have saved close to a quarter-million dollars. All by the time you’re between the ages of 28 and 31. It’s simply a matter of what you prioritize.
  2. You don’t need a new car. Throwing money away with a car payment or worse, a lease payment isn’t necessary. Save up and buy a nice used car with cash, or simply keep driving the vehicle you have. Depending on where you live, you may not need a car at all. Public transportation, riding a bike, or carpooling are other ways to forgo making a payment on a depreciating asset.
  3. Live below your means. Simply put, this means living on less than you make. Scrutinize every expense. Ask yourself if it’s necessary to live, or if it’s just a want. Do you need to go out for dinner or would you be better off grocery shopping and making a cheaper meal at home? Is cable TV necessary or will an inexpensive HDTV antenna fit the bill? Do you  that smartphone or phone plan? Spending less than you make and living below your means puts you at a huge financial advantage both now and later in life.
  4. Avoid debt. Debt can get you into trouble – and fast. Should you acquire and use a credit card, pay it off immediately. Having consumer debt is just another way of saying you couldn’t afford it in the first place. The only debt that you should realistically have is your home – and even then, don’t buy more than you can afford. Consumer debt compounds and works against you. Before buying anything with a credit card, ask yourself if you really need it, and if you can pay it off immediately. If the answer is no to either question, don’t buy it.
  5. Ignore the Joneses. You may have heard of the phrase “keeping up with the Joneses”. Whatever the last name of your friends, colleagues, or acquaintances, try your best not to keep up with their lifestyle. Often you will see these people with new cars, new houses, and all sorts of new “stuff”. On the outside, all of this “stuff” may give the impression of success. In reality it’s often masking what they are keeping up with – debt payments. The Joneses have the appearance of success, wealth, and freedom when in fact they are slaves to their debt and living paycheck to paycheck. Find friends that share your view on finances and frugality. You’ll enjoy their company more and find it less stressful to associate with them.
  6. Invest wisely. When you save to your 401k and IRA, choose low-cost, well-diversified index funds. You can’t control markets and you can’t control the economy. You can control your expenses. Low-cost index funds or ETFs provide excellent diversification among asset classes while keeping your expenses low. Once your portfolios are set up, leave them alone! Check them once a year at most. Time is on your side. Your human capital is huge (why you went to college) but your financial assets are scarce (why you can afford to save so much). Save as much as you can and let time do the rest.
  7. Focus on experiences, not stuff. Much of what you buy loses its luster after a short period of time (a new car, for example). Focus on enriching yourself with experiences. Take time to read that book you’ve always wanted to read. Learn that new hobby or leisure activity you’ve been interested in. Explore new places that don’t cost a lot to experience.
  8. Be grateful. Make it a habit to be grateful for what you have, where you are, and what you’ve been given. The more appreciative you are of what you have, the more likely you’ll be happy with your life and what you have. The simple please and thank you your parents taught you is just as important when you’re an adult.
  9. Give back. Chances are, you didn’t get to where you are on your own. A parent, friend, colleague, or someone you don’t even know was beneficial to your success. Give back. Pay it forward. This could be through service work, volunteering, or making charitable donations to a local charity or someone in need. Donate “stuff” you no longer need or use. It will benefit someone else. And when you give, give without expectation of receiving something back and try to give in secret.

Good luck!

IRS’ Offer in Compromise

compromiseYou’ve heard the ads on radio and TV:

Settle your debt with the IRS for pennies on the dollar! Our staff of former IRS employees will work with you and make your problems go away!

They’re talking about an Offer in Compromise. It’s a real thing, and it is possible to settle your debt with the IRS for less than you owe. But it’s nowhere near that simple. And it’s certainly not automatic, nor is it available to everyone. Recent information from the IRS indicates that approximately 60% of all requests for an Offer in Compromise (OIC) are not successful in reducing the amount of the tax owed. The good news is that 40% have been accepted, and the taxpayer was allowed to compromise on the tax they owe.

If you are successful with an Offer in Compromise, you’re truly in dire straits, financially speaking. You need to prove to the IRS that you have no (or severely diminished) capacity to pay, either from your wages or assets (such as your retirement plans, bank accounts, or other assets). This review of your wherewithal is rigorous. The IRS will impose its will on how you budget – no paying off other debts in advance of the IRS debt, for example. And you may have to give up certain lifestyle items that you have become accustomed to as part of this budgeting process. If it turns out that you have the capacity to pay the debt, instead of compromising you’ll wind up with a payment plan to pay the full amount.

It’s not a fair system; it’s based on how collectible the debt is, not on whether it’s applied fairly to all taxpayers. These factors aren’t divulged in those ads – odd how that works.

Recently the IRS issued a Special Edition Tax Tip 2017-07 that details some information you need to know about how the Offer in Compromise works, in addition to several resources to help you decide if this is something that can help in your situation. The text of the Tip follows:

IRS Explains How Offer in Compromise Works

Taxpayers who have a tax debt they cannot pay may have heard that they can settle their tax debt for less than the full amount owed. It’s called an Offer in Compromise.

Before applying for an Offer in Compromise, here are some things to know:

  • In general, the IRS cannot accept a settlement offer if the taxpayer can afford to pay what they owe. Taxpayers should first explore other payment options. A payment plan is one possibility. Visit for information on Payment Plans – Installment Agreements.
  • A taxpayer must file all required tax returns first before the IRS can consider a settlement offer. When applying for a settlement offer, taxpayers may need to make an initial payment. The IRS will apply submitted payments to reduce taxes owed.
  • The IRS has an Offer in Compromise Pre-Qualifier tool on Taxpayers can find out if they meet the basic qualifying requirements. The tool also provides an estimate of an acceptable offer amount. The IRS makes a final decision on whether to accept the offer based on the submitted application.
  • Taxpayers wishing to file for an Offer in Compromise should visit IRS website’s Offer in Compromise page for more information. There taxpayers can find step-by-step instructions as well as the required forms. Taxpayers can download forms anytime at or call 800-TAX-FORM (800-829-3676) and ask for Form 656-B, Offer in Compromise booklet.

Additional IRS Resources:

IRS YouTube Videos:

Book Review: Financial Advice for Blue Collar America

blue collarRecently I had the privilege to read my colleague Kathryn B. Hauer’s book, Financial Advice for Blue Collar America. Kathryn comes from a blue collar family herself. Her father was a steelworker, and her mother a nurse in the days when nursing didn’t require a college education. With this experience, Kathryn has always had a passion for helping folks with similar backgrounds. This book is an outgrowth of that passion.

“Blue collar” used to mean difficult life and circumstances for the worker and his family.  These careers have transitioned in the past several decades, however. These days blue collar careers include highly-trained, very well paid positions. These careers range from carpenters, ironworkers and pipefitters to police officers, other safety workers and enlisted military personnel. The pay ranges for many of these careers can be higher than many white collar workers, without the drag of student loans.

Kathryn Hauer wrote this book in response to the opportunities that folks in blue collar careers have these days. Throughout the book, she points out how the standard of “college is necessary to succeed” no longer applies across the board. Opportunities for new entrants into these careers have never been more abundant nor promising than they are today. With these opportunities comes the need for financial advice to folks who haven’t traditionally sought advice.

The problem with the traditional delivery of financial advice is that many (most?) financial advisors do not have an understanding of the culture. Without this upbringing seasoning their experience, many financial advisors have difficulties relating to this group in a meaningful way. Hauer demonstrates her deep understanding of the issues facing blue collar workers throughout her book. She has blue collar experience in her own personal background, having served in the military, as well as a stint building concrete nuclear waste storage facilities prior to her current work as a financial advisor.

Financial Advice for Blue Collar America answers the call for this advice, providing sound recommendations in context with the worker’s background. Examples fit in with the common financial wants and needs of the blue collar worker. The advice given is a good place for anyone, in any career, to start, but the context really makes it come to life for someone in a blue collar job. The appendices provide a wealth of useful references to continue the educational experience.

If you are currently working in or considering a blue collar career, you can definitely benefit from Hauer’s book. You’ll find the material that can get you started toward financial success, as well as provide yourself and your family with a great foundation of knowledge as you plan for future financial needs. Kathryn Hauer does a great service to America’s blue collar workers with this book, bridging the gap to give wonderful advice in a style that meets their needs.

As an advisor I learned quite a lot about issues that I hadn’t considered that are paramount for blue collar workers. I never realized how this group’s needs weren’t being met with our traditional delivery of advice. I’ll use this knowledge in the future as I attempt to provide similar service to blue collar America in our practice. This is an important component of our society that has been left to fend for themselves (largely) by the traditional financial planning community. I hope I can help – as I know Kathryn does, every day. Thank you, Kathryn!

Index Mutual Fund or ETF?

Over the last few years exchange-traded funds (ETFs) have greatly increased in popularity. As of 2016, there was approximately $2.9 trillion held in ETFs globally. Because of their growing popularity with financial advisers and individual investors alike, understanding the nuances of ETFs is critical in order for advisers to be better equipped to meet the ever-changing needs of their customers.

ETFs are comprised of a portfolio securities designed to replicate a particular index. Common examples of indices that ETFs replicate are the Dow Jones Industrial Average, the Standard & Poor’s 500 index, the Wilshire 5000 Total Market Index, and Barclays Capital US Aggregate Bond Index. Like many stocks, bonds, and mutual funds, ETFs can also be tracked daily in many financial publications and online.

Due to the lack of trading in the portfolio there are very little capital gains distributions in which investors must pay taxes. Because of this low turnover, investors rarely need to worry about the tax implications of security fluctuations in the portfolio.

Index Mutual Fund or ETF?

Although there are some similarities between index mutual funds and ETFs, there are some subtle differences to be noted.

  • ETFs can be traded throughout the trading day just like individual stocks. Index mutual funds are purchased or redeemed at the end of the trading day.
  • ETFs can be purchased on margin and sold short. Index mutual funds do not allow this.
  • Generally, ETFs are inexpensive to own. Since most ETFs are passively managed (they track an underlying index) there is little management once the portfolio is established. Expense ratios are generally lower than mutual funds, although some index mutual funds will have similarly low expense ratios as well.
  • Because of the low turnover an “in kind” exchanges in the portfolio, ETFs are extremely tax efficient. This can be advantageous for non-qualified (non-401k, non-IRA) accounts. Index mutual funds to have some tax efficiency, however they may not be as efficient due to transaction costs, index composition changes (a company leaving/joining the index), and fund cash flows.
  • In qualified accounts, there is little difference in tax efficiency between ETFs and index mutual funds. In non-qualified accounts, ETFs provide more tax efficiency.
  • Since ETFs trade like stocks, they may have trading commissions when they are bought and sold. Generally, index mutual funds are no load. However, some custodians offer commission-free ETFs.
  • ETFs may trade at a discount to the portfolio’s net asset value (NAV) while index mutual funds will trade at NAV.

If you’re considering an index mutual fund or an ETF and need some clarity, don’t hesitate to contact us.


Calculating your Required Minimum Distribution

minimum distributionRecently I wrote about how the first Required Minimum Distribution (RMD) has a due date of April 1 of the year following the year that you reach age 70½. Today we’ll review the method of calculating that RMD, and provide you with a tool to actually do the calculation.

The discussion that follows (as well as the link to the calculator) illustrates the procedure for calculating Required Minimum Distributions (RMDs) for an IRA, 401k, or other qualified retirement plan that you own. Inherited IRAs and other accounts follow a different procedure which we’ll cover in another article. These RMDs for your own, non-inherited accounts are required when you reach age 70½.

Calculating the Required Minimum Distribution

Determine your age in years at the end of the previous year. For example, if you were born on July 10, 1943, your age in years on December 31, 2016 was 73.

Next, get the balance of your IRA account (or accounts) as of the same date, December 31 of the previous year. Continuing our example, let’s say your balance on your year-end statement for your IRA was $104,804.

With your age in years (from the first step), go to IRS Table III, and look up the distribution period for your age in years. This number is an actuarially-calculated expected distribution period for your age.

IRS Table III is specifically for IRA owners who are either single, are married and their spouse is less than 10 years younger, or are married and their spouse who is more than 10 years younger is not the sole beneficiary of the IRA. If your spouse is more than 10 years younger and not the sole beneficiary of the IRA, you must use IRS Table II (find this at in Publication 590, Appendix B).

Looking at Table III, we find that the distribution period for age 73 is 24.7 years.

Now, take the balance from last year’s year-end statement ($104,804) and divide by the distribution period (24.7):

$104,804 / 24.7 = $4,243.08

This amount, $4,243.08, is required to be distributed from your IRA by December 31 of the current year. The only time that April 1 of the following year is your RMD deadline is for the year that you reached age 70½.

You must go through this procedure each year that you have an IRA (or other plan, such as a 401k) after you reach age 70½. With IRAs, you’re allowed to combine all plans together and take a single RMD based on the total balance if you wish; with 401k, 403b and other employer plans you must calculate and take the RMD separately for each account.


The Calculator

In the page with Table III, you’ll find an RMD Calculator that you can use to determine your RMDs. Just scroll down past the table, and you’ll find the calculator.

Read the Fine Print

As I was reading the paper the other day I came across an ad for a pretty prominent mutual fund broker-dealer. The ad was touting the investment acumen and performance of its mutual funds and fund managers. It mentioned how many of its funds had outperformed category medians over a certain span of years.

Then I read the fine print.

The fine print stated the following:

  • Rankings are based on total return and do not include the effects of sales charges
  • The rankings were based on the funds’ Class Z shares.
  • Past performance does not guarantee future results.
  • In providing these materials the company is not acting as your fiduciary as defined by the Department of Labor.

Let me summarize what these fine print statements mean. First, sales charges reduce returns. In other words, their rankings didn’t include the expenses associated with commissions earned by the salespeople that sell the funds. This would inevitably lower performance and I would argue, drop their rankings considerably.

Second, Class Z shares are generally offered only to the fund company’s employees, large institutional investors, or they may not be available altogether (the fund’s share class is closed to new investors). In other words, a typical investor has little chance of getting them.

Third, past performance is not a guarantee of future results. This statement I can agree with – and kudos to the company for mentioning it. However, the company also said most of their funds beat the category median – the midpoint of all fund returns in that category. Notice the company did not say their funds beat the benchmark – which is generally an index.

Fourth – their comment on not being fiduciaries is self-explanatory. In other words, keep your best interests in mind – because this company won’t. Their words, not mine.

What is interesting about this ad is that it was simply an ad. There is other, more nuanced fine print in company prospectuses. Read carefully, and do your due diligence when investing. If that seems too daunting, work with a fiduciary that will be comfortable explaining things simply, and in bold print.

The Sharing Economy and Taxes

sharing economyIf you rent out a room to others using airbnb or a similar site, if you drive your car for Uber (or an alternative), or if you otherwise take part in the sharing economy, the money you earn may be taxable. (Psst: Even if you get paid in cash without any record of the transaction, you still may be liable for income tax on the earnings.) This is true whether this is a one-time thing or if you treat it like a side-gig. Plus, if you don’t earn cash but rather get something else of value in exchange (such as a barter transaction), there is likely taxable income on the transaction.

Recently the IRS issued a Tax Tip 2017-39 which addresses the sharing economy and taxes. Given that these transactions are often a minor side action for a lot of participants, some folks may not realize that this income is taxable.

Any time you take monetary value in exchange for goods and services, the value you’ve received is gross income. There may be deductions allowable depending on what is provided, which would potentially reduce the taxable income on the transaction. Deductibility of expenses related to renting your personal home can be complicated, so you might want to bone up on those rules. See below for the actual text of the Tip from the IRS on taxes in the sharing economy:

Keep in Mind These Basic Tax Tips for the Sharing Economy

If taxpayers use one of the many online platforms to rent a spare bedroom, provide car rides or a number of other goods or services, they may be involved in the sharing economy. The IRS now offers a Sharing Economy Tax Center. This site helps taxpayers find the resources they need to help them meet their tax obligations.

Here are a few key points on the sharing economy:

  1. Taxes. Sharing economy activity is generally taxable. It does not matter whether it is only part time or a sideline business, if payments are in cash or if an information return like a Form 1099 or Form W2 is issued. The activity is taxable.
  2. Deductions. There are some simplified options available for deducting many business expenses for those who qualify. For example, a taxpayer who uses his or her car for business often qualifies to claim the standard mileage rate, which was 54 cents per mile for 2016.
  3. Rentals. If a taxpayer rents out his home, apartment or other dwelling but also lives in it during the year, special rules generally apply. For more about these rules, see Publication 527, Residential Rental Property (Including Rental of Vacation Homes). Taxpayers can use the Interactive Tax Assistant Tool, Is My Residential Rental Income Taxable and/or Are My Expenses Deductible? to determine if their residential rental income is taxable.
  4. Estimated Payments. The U.S. tax system is pay-as-you-go. This means that taxpayers involved in the sharing economy often need to make estimated tax payments during the year to cover their tax obligation. These payments are due on April 15, June 15, Sept. 15and Jan. 15. Use Form 1040-ES to figure these payments.
  5. Payment Options. The fastest and easiest way to make estimated tax payments is through IRS Direct Pay. Or use the Treasury Department’s Electronic Federal Tax Payment System (EFTPS). 98005
  6. Withholding. Taxpayers involved in the sharing economy who are employees at another job can often avoid making estimated tax payments by having more tax withheld from their paychecks. File Form W-4 with the employer to request additional withholding. Use the Withholding Calculator on

Taxpayers should keep a copy of their tax return. Beginning in 2017, taxpayers using a software product for the first time may need their Adjusted Gross Income (AGI) amount from their prior-year tax return to verify their identity. Taxpayers can learn more about how to verify their identity and electronically sign tax returns at Validating Your Electronically Filed Tax Return.

IRS YouTube Videos:

Your Taxes in the Sharing Economy – English | ASL

Tax Bill Too High? Try This Trick

loanSome individuals get the nice surprise of a big tax refund every tax year (if this is you, don’t be too happy – you’ve been lending Uncle Sam money interest free). Other folks get the unpleasant surprise of having to write a big check to Uncle Sam. For the latter individuals, there may be a way to lower their tax bill and save more for retirement.

Let’s look at an example. Assume an individual has a tax bill of $4,000 and they want to reduce this. Naturally, there are other deductions they may qualify for, but in this case, they’ve exhausted all other options except this one: saving to their 401k. Let’s also assume this individual’s marginal tax rate is 25%. The individual can take their tax rate and divide it into their tax liability for the year – in this case $4,000 divided by 25%. This comes to $16,000. Thus, if the individual wants to lower their tax liability effectively to zero, they can save $16,000 to their 401k on a pre-tax basis. This gives the effect of reducing tax liability and saving for retirement.

In another example, let’s say a couple has a liability of $9,500 and is in the 28% bracket. To reduce their liability to near zero (all else being equal) they can save $33,928 to a pre-tax 401k. Now you may be thinking that amount is way over the annual contribution limit. That’s true – on a per person basis. In other words, a married couple could split this in half and save $16,964 each to their 401ks.

This is an excellent way of having your money do double duty for you. You can reduce your tax bill and still save for retirement. In many cases, it may turn out that an individual or couple will pay less tax overall on the money deferred to the 401k since they are deferring it from a higher bracket today to a potentially lower one in retirement.

Naturally, should you have questions on this strategy, consult a competent tax professional.

April 1 is the deadline for first RMD

photo taken april 1If you have reached age 70½ in 2016 and you have an IRA or other retirement plan (such as a 401k) you must take a distribution from the account by April 1, 2017. This special deadline is applicable only for your first year of required distributions. Every subsequent year you must withdraw your required distribution by the end of the calendar year.

Recently the IRS issued a Newswire (IR-2017-63) which provides more information about this upcoming deadline. The complete text of the Newswire follows below.

IRS Reminds Taxpayers of April 1 Deadline to Take Required Retirement Plan Distributions

The Internal Revenue Service today reminded taxpayers who turned age 70½ during 2016 that, in most cases, they must start receiving required minimum distributions (RMDs) from Individual Retirement Accounts (IRAs) and workplace retirement plans by Saturday, April 1, 2017.

The April 1 deadline applies to owners of traditional (including SEP and SIMPLE) IRAs but not Roth IRAs. It also typically applies to participants in various workplace retirement plans, including 401(k), 403(b) and 457(b) plans.

The April 1 deadline only applies to the required distribution for the first year. For all subsequent years, the RMD must be made by Dec. 31. A taxpayer who turned 70½ in 2016 (born after June 30, 1945 and before July 1, 1946) and receives the first required distribution (for 2016) on April 1, 2017, for example, must still receive the second RMD by Dec. 31, 2017.

Affected taxpayers who turned 70½ during 2016 must figure the RMD for the first year using the life expectancy as of their birthday in 2016 and their account balance on Dec. 31, 2015. The trustee reports the year-end account value to the IRA owner on Form 5498 in Box 5. Worksheets and life expectancy tables for making this computation can be found in the appendices to Publication 590-B.

Most taxpayers use Table III  (Uniform Lifetime) to figure their RMD. For a taxpayer who reached age 70½ in 2016 and turned 71 before the end of the year, for example, the first required distribution would be based on a distribution period of 26.5 years. A separate table, Table II, applies to a taxpayer married to a spouse who is more than 10 years younger and is the taxpayer’s only beneficiary. Both tables can be found in the appendices to Publication 590-B.

Though the April 1 deadline is mandatory for all owners of traditional IRAs and most participants in workplace retirement plans, some people with workplace plans can wait longer to receive their RMD. Employees who are still working usually can, if their plan allows, wait until April 1 of the year after they retire to start receiving these distributions. See Tax on Excess Accumulation  in Publication 575. Employees of public schools and certain tax-exempt organizations with 403(b) plan accruals before 1987 should check with their employer, plan administrator or provider to see how to treat these accruals.

The IRS encourages taxpayers to begin planning now for any distributions required during 2017. An IRA trustee must either report the amount of the RMD to the IRA owner or offer to calculate it for the owner. Often, the trustee shows the RMD amount in Box 12b on Form 5498. For a 2017 RMD, this amount would be on the 2016 Form 5498 that is normally issued in January 2017.

IRA owners can use a qualified charitable distribution (QCD) paid directly from an IRA to an eligible charity to meet part or all of their RMD obligation. Available only to IRA owners age 70½ or older, the maximum annual exclusion for QCDs is $100,000. For details, see the QCD discussion in Publication 590-B.

A 50 percent tax normally applies to any required amounts not received by the April 1 deadline. Report this tax on Form 5329 Part IX. For details, see the instructions for Part IX of this form.

More information on RMDs, including answers to frequently asked questions, can be found on


Taxability of Social Security

taxation of social securityIn a comment on the article last week (Adjusting Withholding Saved 44% of the Tax Bill), a question came up about the taxability of Social Security benefits. It can be complicated, hopefully this explanation will help you understand taxability of Social Security a bit better.

Social Security is taxable at three different levels, based upon how much other income you have and your income tax filing status.

First, you need to calculate your Provisional Income – which is 50% of your household Social Security benefits plus all of your other taxable income, plus any tax-free income.

Next, there are two breakpoints in the taxation – if your filing status is Married Filing Jointly, the breakpoints are $32,000 and $44,000. If your filing status is Single or Head of Household the breakpoints are $25,000 and $34,000. These breakpoints are the same if your filing status is Married Filing Separately and the couple does not live together during the tax year. If your filing status is Married Filing Separately and the couple lives together, there are no breakpoints; in this case your Social Security is always 85% taxable.

The Calculation

Now it gets complicated – if your Provisional Income (defined above) is less than the first breakpoint based on your filing status, then none of your Social Security is taxable.

If your Provisional Income is greater than the first breakpoint but less than the second breakpoint, the amount greater than the breakpoint is 50% taxable. The amount under the first breakpoint is not taxed.

If your Provisional Income is greater than the second breakpoint, the amount above the second breakpoint is 85% taxable. This amount is added to the part that is 50% taxable (between the two breakpoints). The maximum amount that is taxable is 85%.

So for certain income levels, there is a sliding scale of the rate of taxability, ranging from 0% up to 85%. The chart below shows the taxation rates for a few levels of Social Security benefits with various income ranges. The chart shows only Married Filing Jointly status.

taxability of Social Security

As you can see, as the amount of your Social Security benefit increases, the window of taxation between 0% and 85% widens.

Taxability of Social Security Calculator

Below is a calculator I’ve developed to show you the amount of taxable Social Security benefits depending on your filing status and your other income amounts. Let me know if you have questions about this.


How we think and the way that we perceive information can have a powerful impact on our decisions. Often, the first piece of information we receive is what we will use for future reference when making decisions – and whether we feel those decisions are good or bad. This is referred to anchoring or anchoring bias and is very well described in Daniel Kahneman’s book, Thinking, Fast and Slow.

Let’s look at an example. Recently, I had a student ask me regarding his benefit package and starting salary he was offered from a potential employer. This student will finish a master’s degree in May and this will be the first “real” job the student will have out of school. Initially, the employer was talking to the student about project management and leadership opportunities. When it got down to brass tacks, the company was talking about a potential starting salary of approximately $140,000 annually. During this time another company was interviewing the student and was expecting to make an offer to him as well.

About a week later, the first company called the student and said they would like to offer him an entry level position starting at $90,000 annually. Initially, the student was dismayed and disappointed. How could they be talking just a week ago about $140,000 and then come back with an offer for $50,000 less? Needless to say his disappointment was evident when he was discussing his options with me. I told him that it can be tough to entertain an offer for $50,000 less than he was expecting when he was anchored to $140,000. In my head I was thinking, “Are you kidding me? You’re disappointed at ninety grand?”

Along with some other things, I mentioned to the student to think about job location, advancement and ultimately what would make him happy. He also mentioned that he was waiting to hear from the second company and that may impact his decision as well. It did.

A few days later I asked how thing were progressing and he said he had some wonderful news. He was smiling and couldn’t wait to talk until after class. When the time came, he said he had made a decision. He had chosen the first company. I was surprised. I was thinking surely the second company had come in with something bigger and better. As it turns out, the second company offered $20,000 lower than the first company. His anchoring point had changed.

What was once dismay at an offer $50,000 less than what he was expecting turned out to be $20,000 more than what he could get elsewhere. He was elated! Additionally, it also meant he could still live at home, save a ton of money, and get out of debt in no time. He left class that day happy with his first offer and excited to be a part of the company – even though they had cut his starting salary by $50,000! Since his anchoring point had changed (he was now anchored to $90,000) when another offer that came in was less, he was happy with the first offer.

Anchoring affects us in other ways as well. We can get anchored to stock returns, salaries, and many other financial and non-financial aspects. What may help in our decisions is to understand that we are susceptible to this cognitive bias and try to understand where our reference point is – the original thing to which we’re anchored. From there, we can try to consider other factors, such as what will make us happy, how the decision will affect our future, our family, and goals.

Adjusting Withholding Saved 44% of the Tax Bill

adjusting withholdingAdjusting withholding can sometimes produce a surprise.

While preparing a client’s tax return the other day, the result was that he had nearly a $5,000 refund coming. Often when we have a large refund coming we think “Nice! It’s like an unexpected gift!” But as you’ll see below, this is not a gift – it’s actually costing quite a lot in taxes in this particular case.

Naturally, as in most cases like this, I reviewed his income sources and withholding to see if there was anything obvious that we could change for him that would make his withholding more efficient.

You see, it’s most efficient to have no refund at all from the IRS when your taxes are prepared. In fact, owing an amount up to just south of $1,000 is  the most efficient outcome. This is because you’re getting the use of that grand of income tax throughout the year with no cost. In other words, through the year the IRS has loaned you nearly $1,000 and charged no interest.

The $1,000 amount is important here – because if you have more than $1,000 owed in taxes two or more years in a row, the IRS begins to get annoyed about it. As a result, they assess a penalty for underpayment of tax when you owe too much year after year. But if you keep the amount owed down to $1,000 or less, no harm.

So anyhow, I started reviewing my client’s sources of income and withholding, and here’s what I found (income amounts adjusted for annual increase where applicable):

Source Income Withholding
Interest $550 $0
Dividends $550 $0
IRA Distributions $28,000 $4,000
Pension $13,000 $2,000
Social Security $39,000 $4,000
Totals $81,100 $10,000

Projecting income tax for 2017, we found the following:

Interest & dividends $1,100
IRA Distributions $28,000
Pension $13,000
Taxable Social Security* $20,960
Adjusted Gross Income (AGI) $63,060
Standard Deduction** $15,200
Personal Exemptions $8,100
Taxable Income
(AGI minus Std Ded & Exemptions)
Tax $5,031.50
Withholding $10,000
Refund or (payment) $4,968.50

Now, reviewing the withholding amounts, it’s obvious that there are three places to reduce excess withholding to rectify this situation. One could stop the withholding altogether from the Social Security benefits, for example, and the result would be a refund of $968.50 – giving him access to $4,000 of his refund throughout the year. In other words, instead of $2,916.67 each month, his and his wife’s SS benefits could be $3,250.

Likewise, he could eliminate the $2,000 of withholding from his pension. This single move would bring down his refund to $2,968.50, bumping up his pension payments to $1,083 per month instead of $916.67.

Lastly, he could reduce his withdrawal from the IRA by $4,000, which would begin to make other changes in his overall tax situation. He’s making the withdrawal in that amount by choice in order to cover his income needs. So truly what he needs from the IRA is $2,000 per month, since he needs income of approximately $5,800 a month for his living expenses. Below is the outcome if he reduces his overall IRA withdrawal by the amount of the withholding, $4,000 (since it’s all excess withholding).

Interest & dividends $1,100
IRA Distributions $24,000
Pension $13,000
Taxable Social Security* $17,560
Adjusted Gross Income (AGI) $55,660
Standard Deduction** $15,200
Personal Exemptions $8,100
Taxable Income
(AGI minus Std Ded & Exemptions)
Tax $3,921.50
Withholding $6,000
Refund or (payment) $2,078.50

When we reduce his IRA distribution by $4,000 ($333.33/month, all of which was being withheld unnecessarily), his taxable Social Security income adjusts*. Now his taxable SS is only $17,560. So reducing his IRA withdrawal by $4,000 and thereby reducing his withholding by $4,000 results in a total tax of $3,921.50 – and he still has a refund coming in the amount of $2,078.50!

Keeping in mind that he has an income requirement of $5,800 per month, we make another adjustment to his withholding – we eliminate the $2,000 of withholding from his Pension payments. By doing this we can reduce his IRA withdrawals by an additional $2,000 per year.

Interest & dividends $1,100
IRA Distributions $22,000
Pension $13,000
Taxable Social Security* $15,860
Adjusted Gross Income (AGI) $51,960
Standard Deduction** $15,200
Personal Exemptions $8,100
Taxable Income
(AGI minus Std Ded & Exemptions)
Tax $3,366.50
Withholding $4,000
Refund or (payment) $633.50

You guessed it, this drops his taxable Social Security again. Only $15,860 is now taxed, and his total tax is down to $3,366.50 – and he still has a refund of $633.50 coming!

Taking it a step further, we can reduce the withholding on his Social Security payments by $1,000 – so that now he has only $3,000 being withheld. Covering his income need only requires a withdrawal of $21,000 from his IRA – which adjusts his taxable Social Security down, so that only $15,010 is taxed. His resulting tax bill is now only $3,089. When he files his return, he’ll owe a total of $89.

Interest & dividends $1,100
IRA Distributions $21,000
Pension $13,000
Taxable Social Security* $15,010
Adjusted Gross Income (AGI) $50,110
Standard Deduction** $15,200
Personal Exemptions $8,100
Taxable Income
(AGI minus Std Ded & Exemptions)
Tax $3,089
Withholding $3,000
Refund or (payment) ($89)

Let’s try one more step: drop the withholding on Social Security benefits to $2,000. Or easier, leave the pension withholding as it is and eliminate withholding on the SS payments. Because of this, we can reduce the IRA withdrawal to a total of $20,000. This drops the taxable Social Security down to $14,160 and his tax down to $2,811.50! After his withholding of $2,000, he will owe $811.50 in tax.

Interest & dividends $1,100
IRA Distributions $20,000
Pension $13,000
Taxable Social Security* $14,160
Adjusted Gross Income (AGI) $48,260
Standard Deduction** $15,200
Personal Exemptions $8,100
Taxable Income (AGI minus Std Ded & Exemptions) $24,960
Tax $2,811.50
Withholding $2,000
Refund or (payment) ($811.50)

Throughout this example, the net amount of income received each month remains roughly the same. In every instance there is approximately $5,800 per month to live on. In the end though, he’s paying $2,220 less in taxes and the IRS is loaning him $811.50 interest free through the year. That’s a reduction of 44% in taxes!

So – when you see a high refund on your tax return, don’t look at it as a “gift”. It’s a pretty expensive gift if that $4,968.50 has cost you an extra $2,220 in taxes!

* Taxation of Social Security is very complicated. See the article How Taxation of Social Security Benefits Works for more details.

** The client in question and his spouse are both over age 65, so their Standard Deduction is increased to a total of $15,200.

Sorry to Rain on your Parade

I wanted to take a brief moment to remind our readers of a fundamental investing truth that tends to get overlooked, forgotten, or deliberately disregarded during times of market euphoria.

Think about this. If you had a million dollars at the beginning of 2016 to invest and I said that over the year that there would be a Supreme Court vacancy, the Cubs would win the World Series, interest rates would rise, and Donald Trump would become president – would you invest that million dollars in the market? I would bet that many people would not. They would guess that 2016 would be a dismal year for market returns. Yet, in 2016 the Dow returns 13.4% and the S&P 500 returned 9.5%!

With all of that uncertainty and the improbable happening, the market still had a great year of returns. Those who stayed invested were rewarded. Those who sold (say, in early November) missed out.

Now, allow me to rain on your parade.

Expect to lose. The truth we have to remember is that with all of the good years of returns will come the years of losses. It can be easy to get caught up in the excitement and euphoria of a booming and rising market. Real discipline comes when markets go down. Investors must remember their goals, their time horizon and most importantly – that their portfolio returns are a functions of good asset allocation, diversification and time.

I would argue that anyone can stay invested and adhere to their goals when markets are rising. It becomes extremely important to stick to your plan and just as important, keep investing, when markets are falling during times of abysmal performance.

This is where a qualified, professional fiduciary planner can help. He or she can help with the behavioral aspect of your plan and provide objective advice and reasoning when you may want to act irrational. For many investors, this is worth above and beyond the fee they pay to the advisor (as it should be).

So when markets are high and your portfolio looks amazing it’s ok to enjoy it. Just remember to expect that there will be lean times as well. If you expect rain, you’re better prepared to weather the storm.

How Taxation of Social Security Benefits Works

taxation of social securityYou probably are aware that a portion of your Social Security retirement benefit may be taxable.  Do you know how the tax is calculated?  Or how the taxable portion of your benefit is determined?

The Rules

There are a couple of different levels of income that determine how much of your Social Security Benefit is taxed.

But first we must define Modified Adjusted Gross Income (MAGI). This is your Adjusted Gross Income (line 37 of Form 1040) plus all of your tax-exempt income.

Next is to define Provisional Income (PI). This is your MAGI plus 50% of your Social Security benefits.

Now to the taxation levels: The first taxation level is $32,000 of Provisional Income for a married couple filing jointly (MFJ) or $25,000 for single, head of household and qualifying widow(er) filing statuses.  If your Provisional Income is less than this first level for your filing status, none of your Social Security benefit is taxable.

The second taxation level is $44,000 for MFJ or $34,000 for the single filing statuses.  If your Provisional Income is greater than the first taxation level but less than the second taxation level, then as much as 50% of your Social Security benefit may be included as taxable income.

If your Provisional Income is above the second taxation level, then up to a maximum 85% of your Social Security benefit may be included as taxable income.

Like most calculations in the tax code or where Social Security is involved, it’s a mess to understand.  I’ll give you some examples below to illustrate how this works.


Here are a few examples:

Example 1. Married Filing Jointly, MAGI = $15,000; SS = $15,000; therefore Provisional Income (PI) = $22,500

1. MAGI $15,000
2. Half of SS Benefit $7,500
3. Provisional Income (PI) line 1 plus line 2 $22,500
4. First Taxation Level $32,000
5. Subtract line 4 from 3 – if less than zero, enter zero $0
6. Multiply 50% Level by .5 $0
7. Second Taxation Level $44,000
8. Subtract line 7 from line 3 – if less than zero, enter zero. $0
9. Multiply line 8 by .85 $0
10. Add line 6 and line 9 $0
11. Multiply line 2 by 1.70 $12,750
12. Lesser of line 10 or line 11 is added to your income as taxable $0

Since the PI is less than the First Taxation Level, none of the SS benefit is taxed.

Example 2. Married Filing Jointly, MAGI = $25,000; SS = $20,000; PI = $35,000

1. MAGI $25,000
2. Half of SS Benefit $10,000
3. Provisional Income (PI) line 1 plus line 2 $35,000
4. First Taxation Level $32,000
5. Subtract line 4 from line 3 $3,000
6. Multiply 50% Level by .5 $1,500
7. Second Taxation Level $44,000
8. Subtract line 7 from line 3 – if less than zero, enter zero. $0
9. Multiply line 8 by .85 $0
10. Add line 6 and line 9 $1,500
11. Multiply line 2 by 1.70 $17,000
12. Lesser of line 10 or line 11 is added to your income as taxable $1,500

Since the 50% taxation level amount is greater than zero, half of the amount above the 50% taxation level will be added to the taxable income for the couple.  None of the benefit is included at the 85% taxation rate.

Example 3. Married Filing Jointly; MAGI = $45,000; SS = $20,000; PI = $55,000

1. MAGI $45,000
2. Half of SS Benefit $10,000
3. Provisional Income (PI) line 1 plus line 2 $55,000
4. First Taxation Level $32,000
5. Subtract 1st from PI (50% level) $23,000
6. Multiply 50% Level by .5 – if more than $6,000, enter $6,000 $6,000
7. Second Taxation Level $44,000
8. Subtract line 7 from line 3 $11,000
9. Multiply line 8 by .85 $9,350
10. Add line 6 and line 9 $15,350
11. Multiply line 2 by 1.70 $17,000
12. Lesser of line 10 or line 11 is added to your income as taxable $15,350

Since the SS benefit is greater than the upper taxation limit, a portion of the benefit is included at the 50% rate, and another portion is included at the 85% rate, for a total addition of $15,350 to taxable income for the couple.

Example 4. Married Filing Jointly; MAGI = $55,000; SS = $20,000; PI = $65,000

1. MAGI $55,000
2. Half of SS Benefit $10,000
3. Provisional Income (PI) line 1 plus line 2 $65,000
4. First Taxation Level $32,000
5. Subtract 1st from PI (50% level) $33,000
6. Multiply 50% Level by .5 – if more than $6,000, enter $6,000 $6,000
7. Second Taxation Level $44,000
8. Subtract line 7 from line 3 $21,000
9. Multiply line 8 by .85 $17,850
10. Add line 6 and line 9 $23,850
11. Multiply line 2 by 1.70 $17,000
12. Lesser of line 10 or line 11 is added to your income as taxable $17,000

Since the PI is greater than the 85% level, we did the same type of calculation as in Example 3, except that this time the total of the 50% taxed amount and the 85% taxed amount was greater than 85% of the overall SS benefit, so only that amount ($17,000) is added to the taxable income for the couple.

Hopefully these examples will help you to better understand how the amount of taxable Social Security benefit is calculated for various situations.

Tax Impacts of Early Withdrawals from Your IRA

early withdrawalsA common situation that we run across is when someone would like to make early withdrawals from an IRA or 401k plan. As you might expect, there is taxation of the money withdrawn in most cases. There can be other taxes, and certain early withdrawals can be tax-free. The nature of the taxation depends on the circumstances around your early withdrawals.

The IRS recently published Tax Tip 2017-09, which lists some important facts about early withdrawals from retirement plans. The complete text of the Tip follows below.

Early Withdrawals from Retirement Plans

Many people find it necessary to take out money early from their IRA or retirement plan. Doing so, however, can trigger an additional tax on top of income tax taxpayers may have to pay. Here are a few key points to know about taking an early distribution:

  1. Early Withdrawals. An early withdrawal normally is taking cash out of a retirement plan before the taxpayer is 59½ years old.
  2. Additional Tax. If a taxpayer took an early withdrawal from a plan last year, they must report it to the IRS. They may have to pay income tax on the amount taken out. If it was an early withdrawal, they may have to pay an additional 10 percent tax.
  3. Nontaxable Withdrawals. The additional 10 percent tax does not apply to nontaxable withdrawals. These include withdrawals of contributions that taxpayers paid tax on before they put them into the plan. A rollover is a form of nontaxable withdrawal. A rollover occurs when people take cash or other assets from one plan and put the money in another plan. They normally have 60 days to complete a rollover to make it tax-free.
  4. Check Exceptions. There are many exceptions to the additional 10 percent tax. Some of the rules for retirement plans are different from the rules for IRAs.
  5. File Form 5329. If someone took an early withdrawal last year, they may have to file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, with their federal tax return. Form 5329 has more details.
  6. Use IRS e-file. Early withdrawal rules can be complex. IRS e-file is the easiest and most accurate way to file a tax return. The tax software that taxpayers use to e-file will pick the right tax forms, do the math and help get the tax benefits they are due. Seven out of 10 taxpayers qualify to use IRS Free File tax software. Free File is only available through the IRS website at

More information on this topic is available on

Taxpayers should keep a copy of their tax return. Beginning in 2017, taxpayers using a software product for the first time may need their Adjusted Gross Income (AGI) amount from their prior-year tax return to verify their identity. Taxpayers can learn more about how to verify their identity and electronically sign tax returns at Validating Your Electronically Filed Tax Return.

Additional IRS Resources:

Ruminations on Market Direction

A few weeks ago a prospective client called our office and was looking for help in a few different areas. One of those areas was advice on investment selection and asset allocation. Initially, the individual seemed like they may be a good fit. The individual was mentioning long-term time frames, buy and hold, value, and other terminology that seemed in-line with our firm’s investment philosophy.

Then just a few minutes after exclaiming all of that, the individual then mentioned that they were looking for someone who could tell them “what kind of a market we were in” on an ongoing basis. I paused briefly and asked what the individual meant. They told me that they were looking for someone to tell them if we were currently in a growth market, value market, etc.

Immediately I knew that this potential relationship would not be coming to fruition. Politely, I told the individual that if they ever found someone who could accurately tell what kind of market we were in to let me know. I wanted in on that too!

The reality of the situation and what the individual wanted is that it’s nearly impossible to tell what kind of market we’re in. There may be lucky guesses from time to time – but they are just that – guesses. And, if anyone could accurately and repeatedly guess what kind of market we were in, where it was headed, etc., they would be one wealthy individual and would certainly not be sharing that skill with anyone else.

My best guess is that we’re currently and will always be in a stock market, a volatile market, and an uncertain market. Can I say that over long periods of time that the market generally goes up? Yes. Is it without risk, uncertainty, and turmoil? No. Will there be times (and certainly long time frames) of downs and suboptimal outcomes? Yes.

They key to stomaching all of the uncertainty and volatility is to determine what your time frame is, what the goals for your investing are, and then choose an asset allocation that provides the best fit. Generally, this means buying and allocating among low-cost index funds. With index funds individuals can buy and hold the index in many different markets such as stocks, bonds, international, real estate, etc.

Individuals that are more conservative don’t have to invest aggressively, but they may need to invest more to make up for expected lower returns from the conservative portfolio. Additionally, investors that are aggressive need to understand that they must remain aggressively invested even when times look or are bad. As during down times their portfolios will lose more than conservative investors.

And when markets are going down and fear and panic are starting to take hold of investors, individuals need to remain calm, remember their goals and time frame, and do everything in their power to resist the urge to sell. In fact, they should consider buying more – since prices are dropping and have fallen. Easy in theory, extremely difficult in reality (see our “Hot Stove” post).

It is impossible to tell where markets are going. So making predictions on their direction is frivolous. Instead, investors can focus on what they can control – their emotions, their asset allocation, their expenses and their goals. Markets will be markets and will continue to provide volatility and uncertainty. Perhaps that is the only thing we can predict.

Answers to Common DIY Income Tax Questions

DIY income tax questionsDo-It-Yourself or DIY Income tax filing software is very common, pervasive and easy-to-use these days. Many folks are taking advantage of this option for filing their taxes each year – but it’s not infallible. There is only so much that can be automated with the software. Certain things you’ll need to know for yourself. If you don’t know these things ahead of time you’ll need to know how to fix them later.

Over the course of many years of questions from DIY income tax preparers, we’ve noticed a few patterns of common questions. Below are listed some of the most common questions and answers to those questions.

Answers to the Most Common DIY Income Tax Questions

1. Question: I’ve already filed my income tax return and I just received another W2 (or 1099, or whatever additional form). Should I file an amendment right now?

Answer: You should wait until your original return has completely processed before you file your amendment. You should then file your amended return (see the article at this link for more information about filing an amended tax return) as soon as possible. Delays in filing your amended tax return can result in penalties and interest charges.

2. Question: I’ve already filed my income tax return and I just received another W2 – but it’s only for a small amount. When I completed the amendment return there was no (or only a very small) difference in my tax owed or refunded. Will the IRS just adjust my return, or should I file the amendment?

Answer: Under-reporting of income can result in penalties and interest to you. You should file an amendment to ensure that all of your income has been properly reported, even though the result is no (or a very small) change to your tax. This way the IRS has record that you have reported all of your income.

Properly reporting all income when you are aware of it can be helpful to your case when you have mistakenly under-reported. If you disregard the additional income reported to you, it can be misconstrued as income tax evasion (strong word, I know). The IRS views minor infractions like this in a more positive light if you self-report your overlooked income as soon as possible.

3. Question: How can I find out if my tax return has been completely processed?

Answer: You can use the Where’s My Refund? tool on the IRS website to check the status of your return.

4. Question: I mistakenly claimed my child on my tax return as a dependent and I’ve already filed my return. The child’s father was supposed to claim the child. How can I fix this so that the father can file and claim the child as a dependent? A variation on this question is where a child has claimed him or herself as a dependent on his or her own tax return and it’s preferred to have the parent claim the child as a dependent.

Answer: In order for someone else to claim a dependent that someone else has already claimed, the original return must be amended, removing the dependent from the return. This amendment must be completely processed before the dependent can be claimed on another return.

5. Question: I have filed an amended return to remove a dependent from the return (we’ll call this Return #1) so that someone else can claim the dependent on their return (we’ll call this Return #2). The amendment has not processed completely yet, and the filing date is very near. How do we handle this situation?

Answer: There are a couple of different ways to handle this situation:

a) You can file an original return (Return #2) without claiming the dependent. Then, once the amendment (Return #1) has processed completely, an amendment can be filed on Return #2 to include the dependent. This has the benefit of providing some refund (if a refund is due) while waiting for the amendments to process.

b) You can file a request for extension (see this link for information about filing an extension) on Return #2. Then once the amendment has completely processed, assuming that it is processed before October 15, you can go forward with the filing of Return #2. The downside to this method is that you must pay any tax anticipated upon filing the request for extension, but that would be the case if you were able to file the original return on time.

6. Question: I filed my original tax return and have received my refund already. I’ve discovered that I need to file an amendment to my return. Can I cash the check, or do I need to send it back and wait for my amendment to process?

Answer: You are free to do what you wish with your original refund. However, if your amendment results in a negative difference in your refund – that is, if it results in a payment required – you should send along the payment required with your amended return. If your amendment results in additional refund, you’ll receive an another check.

7. Question: My husband and I are in the process of getting a divorce, but it was not finalized before the end of the year. I filed my tax return with the status of Married Filing Separately, and he filed his return with the status of Married Filing Jointly. His return was rejected – what do we do?

Answer: While you are married, either you both file your returns with the filing status of Married Filing Separately or you file one return together with the status of Married Filing Jointly. You can resolve this by amending your (accepted) return to change to Married Filing Jointly and include your husband on the return. Otherwise, your husband can file a return with Married Filing Separately as the status.

In most cases the status of Married Filing Separately (MFS) is a disadvantage over the status of Married Filing Jointly (MFJ). Many credits and deductions are not allowed when using the MFS status.

8. Question: I didn’t use my tuition payment (1098T) on my 2015 tax return. Can I just claim this payment when I file my 2016 income tax return?

Answer: Tax years are separate units for most every item. Income, credits, and deductions are specific to the tax year that they were earned or paid out. So if you want to claim credit for tuition payment made in 2015, you will need to amend your 2015 income tax return. It is not allowed to claim a 2015 credit or deduction on your 2016 return.

Do you have questions? Leave your questions in the comments below and we’ll do our best to answer them where we can!

IRS Warns of Phishing Scam

fishingThis tax season the IRS has been tracking a scam that targets certain employers. It’s a particularly nasty one, hitting where the email targets clerical employees, impersonating someone higher in the organization, asking for W-2 information. With this information the scammer can steal identities.

The scam started out targeting corporations, but now it has evolved to start hitting schools, restaurants, and other organizations. It’s possible that some of these organizations’ less formal management structure may introduce gaps in the process which might provide exploitation opportunities for the scammers.

The complete text of the IRS’s most recent notice about this scam follows below:

Dangerous W-2 Phishing Scam Evolving;
Targeting Schools, Restaurants, Hospitals, Tribal Groups and Others


IR-2017-20, Feb. 2, 2017

WASHINGTON – The Internal Revenue Service, state tax agencies and the tax industry issued an urgent alert today to all employers that the Form W-2 email phishing scam has evolved beyond the corporate world and is spreading to other sectors, including school districts, tribal organizations and nonprofits.

In a related development, the W-2 scammers are coupling their efforts to steal employee W-2 information with an older scheme on wire transfers that is victimizing some organizations twice.

“This is one of the most dangerous email phishing scams we’ve seen in a long time. It can result in the large-scale theft of sensitive data that criminals can use to commit various crimes, including filing fraudulent tax returns. We need everyone’s help to turn the tide against this scheme,’’ said IRS Commissioner John Koskinen.

When employers report W-2 thefts immediately to the IRS, the agency can take steps to help protect employees from tax-related identity theft. The IRS, state tax agencies and the tax industry, working together as the Security Summit, have enacted numerous safeguards in 2016 and 2017 to identify fraudulent returns filed through scams like this. As the Summit partners make progress, cybercriminals need more data to mimic real tax returns.

Here’s how the scam works: Cybercriminals use various spoofing techniques to disguise an email to make it appear as if it is from an organization executive. The email is sent to an employee in the payroll or human resources departments, requesting a list of all employees and their Forms W-2.  This scam is sometimes referred to as business email compromise (BEC) or business email spoofing (BES).

The Security Summit partners urge all employers to be vigilant. The W-2 scam, which first appeared last year, is circulating earlier in the tax season and to a broader cross-section of organizations, including school districts, tribal casinos, chain restaurants, temporary staffing agencies, healthcare and shipping and freight. Those businesses that received the scam email last year also are reportedly receiving it again this year.

Security Summit partners warned of this scam’s reappearance last week but have seen an upswing in reports in recent days.

New Twist to W-2 Scam: Companies Also Being Asked to Wire Money

In the latest twist, the cybercriminal follows up with an “executive” email to the payroll or comptroller and asks that a wire transfer also be made to a certain account. Although not tax related, the wire transfer scam is being coupled with the W-2 scam email, and some companies have lost both employees’ W-2s and thousands of dollars due to wire transfers.

The IRS, states and tax industry urge all employers to share information with their payroll, finance and human resources employees about this W-2 and wire transfer scam. Employers should consider creating an internal policy, if one is lacking, on the distribution of employee W-2 information and conducting wire transfers.


Steps Employers Can Take If They See the W-2 Scam

Organizations receiving a W-2 scam email should forward it to and place “W2 Scam” in the subject line. Organizations that receive the scams or fall victim to them should file a complaint with the Internet Crime Complaint Center (IC3,) operated by the Federal Bureau of Investigation.

Employees whose Forms W-2 have been stolen should review the recommended actions by the Federal Trade Commission at or the IRS at

Employees should file a Form 14039, Identity Theft Affidavit, if the employee’s own tax return gets rejected because of a duplicate Social Security number or if instructed to do so by the IRS.

The W-2 scam is just one of several new variations that have appeared in the past year that focus on the large-scale thefts of sensitive tax information from tax preparers, businesses and payroll companies. Individual taxpayers also can be targets of phishing scams, but cybercriminals seem to have evolved their tactics to focus on mass data thefts.

Be Safe Online

In addition to avoiding email scams during the tax season, taxpayers and tax preparers should be leery of using search engines to find technical help with taxes or tax software. Selecting the wrong “tech support” link could lead to a loss of data or an infected computer. Also, software “tech support” will not call users randomly. This is a scam.

Taxpayers searching for a paid tax professional for tax help can use the IRS Choosing a Tax Professional lookup tool or if taxpayers need free help they can review the Free Tax Return Preparation Programs. Taxpayers searching for tax software can use Free File, which offers 12 brand-name products for free, at Taxpayer or tax preparers looking for tech support for their software products should go directly to the provider’s web page.

Tax professionals also should beware of ongoing scams related to IRS e-Services. Thieves are trying to use IRS efforts to make e-Services more secure to send emails asking e-Services users to update their accounts. Their objective is to steal e-Services users’ credentials to access these important services.

Tax Refund Myths Debunked

Recently the IRS published a Special Edition Tax Tip which debunks some very common myths about your income tax refund. You may find some of these surprising. These myths are pervasive and can lead you astray if you believe them. In my experience the information in the Tip below is great advice for finding information about your tax refund.

The complete text of the Tip (IRS Special Edition Tax Tip 2017-02) follows below:

IRS Debunks Myths Surrounding Your Tax Refund

As millions of people begin filing their tax returns, the Internal Revenue Service reminds taxpayers about some basic tips to keep in mind about refunds.

During the early parts of the tax season, taxpayers are anxious to get details about their refunds. In some social media, this can lead to misunderstandings and speculation about refunds. The IRS offers these tips to keep in mind.

Myth 1: All Refunds Are Delayed

While the IRS issues more than 90 percent of federal tax refunds in less than 21 days, some refunds take longer. Recent legislation requires the IRS to hold refunds for tax returns claiming the Earned Income Tax Credit (EITC) or the Additional Child Tax Credit (ACTC) until mid-February. Other returns may require additional review for a variety of reasons and take longer. For example, the IRS, along with its partners in the states and the nation’s tax industry, continue to strengthen security reviews to help protect against identity theft and refund fraud. The IRS encourages taxpayers to file as they normally would.

Myth 2: Calling the IRS or My Tax Professional Will Provide a Better Refund Date

Many people mistakenly think that talking to the IRS or calling their tax professional is the best way to find out when they will get their refund. In reality, the best way to check the status of a refund is online through the “Where’s My Refund?” tool at or via the IRS2Go mobile app.

Taxpayers eager to know when their refund will be arriving should use the “Where’s My Refund?” tool rather than calling and waiting on hold or ordering a tax transcript. The IRS updates the status of refunds once a day, usually overnight, so checking more than once a day will not produce new information. “Where’s My Refund?” has the same information available to IRS telephone assistors so there is no need to call unless requested to do so by the refund tool.

Myth 3: Ordering a Tax Transcript a “Secret Way” to Get a Refund Date

Ordering a tax transcript will not help taxpayers find out when they will get their refund. The IRS notes that the information on a transcript does not necessarily reflect the amount or timing of a refund. While taxpayers can use a transcript to validate past income and tax filing status for mortgage, student and small business loan applications and to help with tax preparation, they should use “Where’s My Refund?” to check the status of their refund.

Myth 4: “Where’s My Refund?” Must be Wrong Because There’s No Deposit Date Yet

The IRS will update “Where’s My Refund?” ‎on both and the IRS2Go mobile app with projected deposit dates for early EITC and ACTC refund filers a few days after Feb. 15. Taxpayers claiming EITC or ACTC will not see a refund date on “Where’s My Refund?” ‎or through their software package until then. The IRS, tax preparers and tax software will not have additional information on refund dates.

The IRS cautions taxpayers that these refunds likely will not start arriving in bank accounts or on debit cards until the week of Feb. 27 – if there are no processing issues with the tax return and the taxpayer chose direct deposit. This additional period is due to several factors, including banking and financial systems needing time to process deposits. Taxpayers who have filed early in the filing season, but are claiming EITC or ACTC, should not expect their refund until the week of Feb. 27. The IRS reminds taxpayers that President’s Day weekend may impact when they get their refund since many financial institutions do not process payments on weekends or holidays.

Myth 5: Delayed Refunds, those Claiming EITC and/or ACTC, will be Delivered on Feb. 15

By law, the IRS cannot issue refunds before Feb. 15 for any tax return claiming the Earned Income Tax Credit (EITC) or Additional Child Tax Credit (ACTC). The IRS must hold the entire refund, not just the part related to the EITC or ACTC. The IRS will begin to release these refunds starting Feb. 15.

These refunds likely won’t arrive in bank accounts or on debit cards until the week of Feb. 27. This is true as long as there is no additional review of the tax return required and the taxpayer chose direct deposit. Banking and financial systems need time to process deposits, which can take several days.

See the What to Expect for Refunds in 2017 page and the Refunds FAQs page for more information.

Taxpayers should keep a copy of their tax return. Beginning in 2017, taxpayers using a software product for the first time may need their Adjusted Gross Income (AGI) amount from their prior-year tax return to verify their identity. Taxpayers can learn more about how to verify their identity and electronically sign tax returns at Validating Your Electronically Filed Tax Return.

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