MONEY Taxes

You Just Got a Break If You Messed Up Your Obamacare Tax Credit

The IRS will give you more time to pay back any excess premium subsidies when you file your taxes.

Consumers who received too much in federal tax credits when buying insurance on the health law’s marketplaces last year got a reprieve of sorts from the Internal Revenue Service this week. Although they still have to repay some or all of the excess subsidies, the IRS won’t ding them with a late payment penalty if they don’t repay it by the April 15 tax deadline.

“They’re trying to make this work,” says Timothy Jost, a law professor at Washington and Lee University who’s an expert on the health law.

Under the law, people with incomes between 100% and 400% of the federal poverty level ($11,670 to $46,680 for an individual in 2014) who did not have insurance through their job could qualify for tax credits to make premiums more affordable. They could elect to have these subsidies paid in advance directly to the insurance company, and many did. A typical tax credit was about $3,000 annually.

The amount people received was based on an estimate of their 2014 income. At tax time, that amount has to be reconciled against consumers’ actual income on IRS Form 8962. If consumers or the marketplace underestimated their 2014 income, they may have received too much in tax credits and have to pay back some or all of it.

How much people have to repay is based on their income and is capped at $2,500. People with incomes over 400 percent of the poverty line have to repay the entire amount, however.

This penalty reprieve only applies to the 2014 tax year. The IRS will allow people to repay what they owe on an installment basis. But be forewarned: Interest will continue to accrue until the balance is paid off.

MONEY Taxes

Where to Get Free Tax-Prep Help

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Pgiam—Getty Images

Use a free program from the IRS to get a jump on tax season.

The IRS Free File program is now open, giving the 70% of Americans with adjusted gross incomes of $60,000 or less free access to federal tax preparation and e-filing software from 14 different tax-prep companies.

Available on irs.gov, Free File provides links to software that can help guide you through preparing and filing the most commonly used tax forms. The site also has an online tool to help you determine which software is the best fit for you and a guide for filing new forms required by the Affordable Care Act. Some of the programs also offer assistance for filing state taxes, but fees may apply.

The IRS will begin accepting electronically filed returns on January 20, but you may not be ready that soon. By law your employer has until the end of January to send your W-2 form, which spells out how much you earned and how much you had withheld in taxes.

If you make more than $60,000 and feel comfortable doing your own taxes, you can use Free File fillable forms starting on January 20.

When combined with direct deposit, electronic filing is the fastest way to get your refund. Considering this year’s tax season is expected to be exceptionally frustrating for taxpayers, with long wait times when calling the IRS, getting a jump on the process might not be a bad idea. If you tend to be a procrastinator, remember the filing deadline for federal taxes is, as usual, April 15. That’s a Wednesday this year.

 

MONEY tax planning

Don’t Expect the IRS to Answer Your Tax Questions This Year

sea of office phones that are off the hook
Nicholas Rigg—Getty Images

But it's not entirely their fault.

National Taxpayer Advocate Nina E. Olson delivered her 2014 annual report to Congress, and expectations for the level of service you will receive in 2015 are looking pretty grim.

According to the report, taxpayers can expect the worst levels of taxpayer service since at least 2001, when the IRS implemented its current performance measures. This filing season, the IRS is unlikely to answer half the telephone calls it receives, and those that do get through can expect average wait times of 30 minutes. By comparison, in fiscal year 2004 the IRS answered 87% of calls from taxpayers wishing to speak with a tax assistor and had an average hold time of 2.5 minutes.

Additionally, the IRS will only answer “basic” tax law questions in the upcoming filing season, and if you’re one of the 15 million taxpayers who file later in the year, you might not get any answers at all.

The report highlights an increased workload and a shrinking budget as some of the reasons for the expected service upheaval. Through fiscal year 2013, the agency has received 11% more individual returns, 18% more business returns, and 70% more phone calls than it did a decade ago. The implementation of the Affordable Care Act and the Foreign Account Tax Compliance Act are also expected to add to the workload. Overall, the IRS interacts with nearly 200 million Americans each year, more than three times as many as any other federal agency.

Top it off with the elimination of nearly 12,000 employees and about 17% of the budget (after adjusting for inflation) since 2010, and it’s no wonder you’ll be enjoying some elevator music while on hold this filing season.

MONEY Taxes

Tax Filing Season Starts Jan. 20

This year, the IRS is running on time, but your employer might not be.

This year, you can file your tax return as early as January 20, the Internal Revenue Service announced Tuesday. That’s the day the government will begin accepting electronic returns and begin processing any paper returns it has received. The filing deadline for federal taxes is Wednesday, April 15.

The IRS will not delay the start of the tax filing season, even though Congress extended 50 tax breaks on December 19. Historically, similar last-second legislative changes have forced the IRS to postpone the beginning of tax filing season, the Associated Press reports. IRS Commissioner John Koskinen says that’s not necessary this year.

“We have reviewed the late tax law changes and determined there was nothing preventing us from continuing our updating and testing of our systems,” Koskinen said in a statement.

You probably missed out on most of the last-minute tax breaks Congress approved, which were only effective for the 2014 year. But before the clock strikes midnight on New Year’s Eve, you may still be able to get a tax break on your boat, tuition, commuting costs, and charitable contributions from your IRA. (See our last-minute tax tips for other moves you must make by year end.)

Keep in mind: Even if you want to file on January 20, you might not be ready. Employers have until the end of January to mail out W-2s to employees.

Still, if you can get your paperwork sooner, there are some big benefits to filing as early as possible. First, the IRS tries to get you your refund three weeks after receiving your return. Second, filing early reduces the risk of identity theft, wherein a criminal files a fraudulent tax return in your name and collects your refund.

Need more tax help? Check Money 101 and Ask the Expert:

MONEY IRAs

The Best Way to Tap Your IRA In Retirement

Ask the Expert Retirement illustration
Robert A. Di Ieso, Jr.

Q: I am 72 years old and subject to mandatory IRA withdrawals. I don’t need all the money for my expenses. What should I do with the leftover money? Jay Kahn, Vienna, VA.

A: You’re in a fortunate position. While there is a real retirement savings crisis for many Americans, there are also people with individual retirement accounts (IRAs) like you who don’t need to tap their nest egg—at least not yet.

Nearly four out of every 10 U.S. households own an IRA, holding more than $5.7 trillion in these accounts, according to a study by the Investment Company Institute. At Vanguard, 20% of investors with an IRA who take a distribution after age 70 ½ put it into another taxable investment account with the company.

The government forces you to start withdrawing your IRA money when you turn 70½ because the IRS wants to collect the income taxes you’ve deferred on the contributions. You must take your first required minimum distribution (RMD) by April of the year after you turn 70½ and by December 31 for subsequent withdrawals.

But there’s no requirement to spend it, and many people like you want to continue to keep growing your money for the future. In that case you have several options, says Tom Mingone, founder and managing partner of Capital Management Group of New York.

First, look at your overall asset allocation and risk tolerance. Add the money to investments where you are underweight, Mingone advises. “You’ll get the most bang for your buck doing that with mutual funds or an exchange traded fund.“

For wealthier investors who are charitably inclined, Mingone recommends doing a direct rollover to a charity. The tax provision would allow you to avoid paying taxes on your RMD by moving it directly from your IRA to a charity. The tax provision expired last year but Congress has extended the rule through 2014 and President Obama is expected to sign it.

You can also gift the money. Putting it into a 529 plan for your grandchildren’s education allows it to grow tax free for many years. Another option is to establish an irrevocable life insurance trust and use the money to pay the premiums. With such a trust, the insurance proceeds won’t be considered part of your estate so your heirs don’t pay taxes on it. “It’s a tax-free, efficient way to leave more to your family,” Mingone says.

Stay away from immediate annuities though. “It’s not that I don’t believe in them, but when you’re already into your 70s, the risk you’ll outlive your capital is diminished,” says Mingone. You’ll be locking in a chunk of money at today’s low interest rates and there’s a shorter period of time to collect. “It’s not a good tradeoff for guaranteed income,” says Mingone.

Beyond investing the extra cash, consider just spending it. Some retirees are reluctant to spend the money they’ve saved for retirement out of fear of running out later on. With retirements that can last 30 years or more, it’s a legitimate worry. “Believe it or not, some people have a hard time spending it down,” says Mingone. But failure to enjoy your hard-earned savings, especially while you are still young enough and in good health to use it, can be a sad outcome too.

If you’ve met all your other financial goals, have some fun. “There’s something to be said for knocking things off the bucket list and enjoying spending your money,” says Mingone.

Update: This story was changed to reflect the Senate passing a bill to extend the IRS rule allowing the direct rollover of an IRA’s required minimum distribution to a charity through 2014.

Do you have a personal finance question for our experts? Write to AskTheExpert@moneymail.com

Read next: How Your Earnings Record Affects Your Social Security

MONEY Taxes

7 Tax Credits You Shouldn’t Overlook

Woman learning to use computer in library
Alina Solovyova-Vincent—Getty Images

Pay all the taxes you owe—but not a penny more.

The IRS provides multiple tax credits for low- to moderate-income taxpayers to lower what they owe the government. Unlike tax deductions, which lower your taxable income, tax credits directly lower the amount of money you owe the government.

Let’s go over seven tax credits you may be able to claim to lower your tax bill this year. But first, a quick primer on tax credits and the difference between refundable and nonrefundable credits.

Tax credits: The basics

A tax credit allows you to directly subtract the amount of the credit from your taxes due. Say you are single and had $50,000 in income. Based on the 2014 tax brackets, with the standard deduction and one personal exemption, you would owe a little over $5,819 in taxes. A $5,000 tax credit would cancel out all but $819 of your taxes owed.

There are two types of tax credits: refundable tax credits and nonrefundable tax credits. You can get money back for a refundable tax credit even if you didn’t earn any income or pay any taxes. A nonrefundable tax credit is only applied to your taxes owed.

Let’s say you owe $1,000 in taxes from income during the year, and at the end of the year you claimed a $2,500 tax credit. If the tax credit is refundable, you’ll get $1,500 back from the government. If the tax credit is nonrefundable, then it is deducted from the taxes you owe — so in this example, you don’t owe the government anything, but you can only zero out your taxes, meaning you miss out on the remaining $1,500 of the tax credit.

The IRS provides multiple tax credits to lower what you owe the government; see if you can take advantage of any of them.

1. Lifetime Learning Credit (nonrefundable)

The Lifetime Learning Credit allows taxpayers who take postsecondary school classes, or whose dependents take postsecondary school classes, to claim as a tax credit 20% of qualified education expenses up to a maximum $2,000 tax credit. The advantage of this tax credit is that it is open to anyone at any point in his or her life, unlike the American Opportunity Tax Credit, which I will detail next.

The full Lifetime Learning Credit is only available to individual taxpayers who make $52,000 or less, or $104,000 for a married couple filing jointly. The credit phases out for individual taxpayers with income between $52,000 and $62,000 and married couples filing jointly with income between $104,000 and $124,000. Those who earn more than the upper threshold are ineligible for the Lifetime Learning Credit.

2. American Opportunity Tax Credit (partially refundable)

The American Opportunity Tax Credit differs from the Lifetime Learning Credit in that it is only available for eligible students for their first four years of higher education. The credit allows you to claim up to $2,500 per eligible student. Forty percent of the credit is refundable, so there is a maximum refund of $1,000. You cannot claim both this credit and the Lifetime Learning Credit for the same student in one tax year. The full American Opportunity Tax Credit is available to individuals with incomes less than $80,000 ($160,000 for married couples filing jointly), and the credit phases out for individuals with incomes of more than $90,000 ($180,000 for married couples filing jointly).

3. Retirement Saver’s Tax Credit (nonrefundable)

For low-income taxpayers who are not full-time students, the government provides a tax credit for contributing to a retirement savings plan such as an IRA, 401(k), etc. The credit is anywhere from 10% to 50% of up to $2,000 of your retirement plan contributions (or $4,000 for married couples filing jointly).

Source: IRS

4. Earned Income Tax Credit (refundable)

The Earned Income Tax Credit is a refundable tax credit for low- to moderate-income working taxpayers to raise their incomes without discouraging work. The income limit for an individual is $14,590 but rises significantly for each child you can claim as a dependent. You can read more about the earned income tax credit here.

5. Child Tax Credit (depends)

The Child Tax Credit provides up to $1,000 per qualifying child for individual taxpayers with income less than $75,000 (or $110,000 for married filing jointly). The child tax credit is nonrefundable, however, for taxpayers whose child tax credit is less than $1,000 per child there is an additional child tax credit that is refundable that can raise the two tax credits to a total of $1,000 per qualifying child. You can read more about the child tax credit here.

6. Premium Tax Credit (refundable)

The Premium Tax Credit is for low- to moderate-income taxpayers who get health insurance through the health insurance exchanges, i.e., Obamacare. To be eligible for the credit, you must buy health insurance through the exchange, be ineligible for coverage through an employer or government plan, not be married filing separately, and meet certain income limits. The Premium Tax Credit has both minimum and maximum income limits, because if your income falls below a certain level, you are eligible for Medicaid. Your household income must be between 100% and 400% of the federal poverty line — the current dollar amounts of these limits, which change with family size, are shown below:

Poverty Level Individual Family of 2 Family of 4
100% $11,490 $15,510 $23,550
400% $45,960 $62,040 $94,200

Source: IRS.

To estimate your premium tax credit, it is best to use an online calculator. Note that Obamacare contains a penalty for not having insurance unless you meet certain exemptions. Motley Fool contributor Todd Campbell recently examined how much Obamacare penalizes you for not having health insurance.

7. Elderly and Disabled Tax Credit (nonrefundable)

The Elderly and Disabled Tax Credit is for low-income taxpayers over age 65 or those who are retired on permanent and total disability and received taxable disability income during the tax year. Eligibility is rather strict. To qualify for the elderly and disabled tax credit, individual taxpayers must have income less than $17,500 ($25,000 for married filing jointly) and nontaxable income (nontaxable Social Security, pension, annuities, or disability income) of less than $5,000 ($7,500 for married filing jointly). The tax credit can theoretically be as high as $500, but the calculations for the credit are complicated enough that the IRS will do them for you if you ask. You can read more about the Elderly and Disabled Tax Credit Here.

More ways to reduce your taxes

As Mitt Romney famously (or infamously, depending on whom you ask) said: “I pay all the taxes owed. And not a penny more.” Whatever your political leanings, those are wise words to live by. The U.S. tax code contains multiple ways to lower what you owe the government. Be sure you don’t end up paying more than what you should really owe.

MONEY retirement income

Retirees Risk Blowing IRA Deadline and Paying Huge Penalties

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Esben Emborg—Getty Images

With just seven weeks left in the year, most IRA owners required to pull money out have not yet done so.

Two-thirds of IRA owners required to take money out of their account by Dec. 31 have yet to fulfill the obligation, new research by Fidelity shows. Now, with the year-end in sight, and thoughts pivoting to holiday shopping and get-togethers, legions of senior savers risk getting distracted–and socked with a punishing tax penalty.

IRA owners often wait until late in the year to pull out their required minimum distributions. Especially at a time when interest rates are low and the stock market has been rising, leaving your money in an IRA as long as possible makes sense. Some retirees may also be reluctant to take distributions for fear of spending the money and running short over time.

But blowing the annual deadline can be costly. The IRS sets a schedule of required minimum distributions, or RMDs, to keep savers from deferring taxes indefinitely. After reaching age 70 1/2, IRA owners must begin to take money out of their account each year and pay income tax on the amount. Failure to pull money out triggers a hefty penalty equal to 50% of the amount you were supposed to take out of the account.

Among 750,000 IRA accounts where distributions are required, 68% have yet to take the full amount and 56% have yet to take anything at all, Fidelity found. These IRA owners should begin the process now to avoid end-of-year distractions and potential mistakes like using the wrong form or providing the wrong mailing address, which can take weeks to find and correct.

A report by the Treasury Inspector General estimated that as many as 250,000 IRA owners each year miss the deadline, failing to take required minimum distributions totaling about $350 million. That generates potential tax penalties totaling $175 million. The vast majority of those who fail to take their minimum distributions are thought to do so as part of an honest mistake, and previously the IRS hasn’t always been eager to sock seniors with a penalty. But the IRS began a crackdown on missed distributions a few years ago. Don’t look for leniency if you miss the deadline without a good reason, like protracted illness or a natural disaster.

Early each year, your financial institution should notify you of any required distributions you must take by year-end. If this is the first year you are taking a required distribution, you have until April 1 to do so, but then only until Dec. 31 every subsequent year. Once notified, you still need to initiate a distribution. A lot of people simply do not read their mail and fail to initiate action in time.

Among other reasons IRA owners miss the deadline:

  • Switching their account Institutions that open an account during the year are not required to notify new account holders of required minimum distributions until the following year.
  • Death Often there is confusion about inherited IRAs. The beneficiary must complete the deceased IRA owner’s distributions in the year of death. Non-spousal beneficiaries of any age must begin taking distributions in the year following the year that the IRA owner died—and no notice of this is required.

With the penalties so stiff and the IRS cracking down on missed mandatory distributions, this is a subject that seniors and their adult children should talk about. In general, financial talk between the generations makes seniors feel less anxious and more prepared anyway. Required distributions can be especially confusing, and the penalties may have the effect of taking away money that heirs stand to receive. So it’s in everyone’s interest to get it right. Consider putting mandatory distributions on autopilot with a firm that will make the calculation and send you the money on a schedule you choose.

Related:

How will my IRAs be taxed in retirement?

Are there any exceptions to the traditional IRA withdrawal rules?

When can I take money out of my IRA without penalty?

MONEY Ask the Expert

Here’s a Smart Way To Boost Your Tax-Free Retirement Savings

140605_AskExpert_illo
Robert A. Di Ieso, Jr.

Q: I am maxing out my 401(k). I understand there’s a new way to make after-tax contributions to a Roth IRA. How does that work?

A: You can thank the IRS for what is essentially a huge tax break for higher-income retirement savers, especially folks like yourself who are already maxing out contributions to tax-sheltered retirement plans.

A recent ruling by the IRS allows eligible workers to easily move after-tax contributions from their 401(k) or 403(b) plan to Roth IRAs when they exit their company plan. “With this new ruling, retirement savers are getting a huge increase in their ability contribute to a Roth IRA,” says Brian Holmes, president and CEO of investment advisory firm Signature Estate and Investment Advisors.

The Roth is a valuable income stream in retirement because contributions are after-tax, which means you don’t owe Uncle Sam anything on the money you withdraw. Unlike traditional IRAs which require you to start withdrawing money once you turn 70 ½, Roths have no mandatory distribution requirements, so your investments can continue to grow tax-free. And if you need to take a chunk out for a sudden big expense, such as medical bills, the withdrawal won’t bump you up into a higher tax bracket.

For high-income earners, the IRS ruling is especially good news. Singles with an adjusted gross income of $129,000 or more can’t directly contribute to a Roth IRA; for married couples, the income cap is $191,000. If you are are eligible to contribute to a Roth IRA, you can’t contribute more than $5,500 this year or next ($6,500 for people over 50). The IRS does allow people to convert traditional IRAs to Roth IRAs but you must pay income tax on your gains.

Now, with this new IRS ruling, you can put a lot more into a Roth by diverting your 401(k) assets into one. The annual limit on pre-tax contributions to 401(k) plans is $17,500 and $23,000 for people over 50; those limits rise to $18,000 and $24,000 next year. Including your pre-tax and post-tax contributions, as well as pre-tax employer matches, the total amount a worker can save in 401(k) and 403(b) plans is $52,000 and $57,500 for those 50 and older. (That amount will rise to $53,000 and $59,000 respectively in 2015.) When you leave your employer, you can separate the after-tax money and send it directly to a Roth, which can boost your tax-free savings by tens of thousands of dollars.

To take advantage of the new rule, your employer plan must allow after-tax contributions to your 401(k). About 53% of 401(k) plans allow both pre-tax and after- tax contributions, according to Rick Meigs, president of the 401(k) Help Center. You must also first max out your pre-tax contributions. The transfer to a Roth must be done at the same time you roll your existing 401(k)’s pre-tax savings into a traditional IRA.

The ability to put away more in a Roth is also good for people who want to leave money to heirs. Inherited Roth IRAs are free of tax, and because they don’t have taxable minimum required distributions, they can give your heirs decades of tax-free growth. “It’s absolutely the best asset to die with if you want to leave money behind,” says Holmes.

Do you have a personal finance question for our experts? Write to AskTheExpert@moneymail.com.

Read next: 4 Disastrous Retirement Mistakes and How to Avoid Them

MONEY capital gains

How the IRS Taxes Stock You Didn’t Buy

Investing illustration
Robert A. Di Ieso, Jr.

Q: I received some shares of stock some years ago that were given to me as part of an agreement through a class-action lawsuit. Do I have to pay taxes on these shares when I sell? — Bob from Livingston, Tex.

A: In most instances, you would, says Michael Eisenberg, a certified public accountant in Los Angeles.

When you receive stock in lieu of cash for payment for services rendered or, in this case, a settlement, you’ll first owe income tax based on the value of the stock at that time. “Compensation is compensation, whether it’s cash or stock,” says Eisenberg. “It’s considered ordinary income.”

If you later sell the stock for a profit, you’ll also owe capital gains tax. How much you owe is based on the difference in value from the time you received the stock and the time you sold it, after accounting for such things as dividends, stock splits or capital distributions. This is called “basis.”

If you own the stock for less than 366 days – one year plus a day – your capital gains rate will be based on your income tax rate. If you own it longer, you’ll pay a lower rate.

Taxpayers in most brackets are taxed at 15% for long-term gains. Those in the 10% or 15% bracket may owe no long-term capital gains tax, while those in the 39.6% rate will need to pay up at 20%.

Are there any exceptions?

If for some reason this stock was given to you as a result of a class-action related to your retirement account, you may not owe tax. “If the stock settlement was applied to your IRA, it wouldn’t be taxable,” says Eisenberg, though such an example is pretty rare.

What if you receive stock as a gift or an inheritance?

In this case, you won’t owe income tax on that gift. You will, however, still owe capital gains tax when you sell.

If the stock is part of an inheritance, your capital gains rate will be based on the value of the stock at the time the original owner passed away. If your Granny gifts you stock while she’s still alive, however, your basis is based on when she bought the stock.

MONEY Taxes

IRS Eases Rules on Ebola Donations

The Internal Revenue Service has cut taxes on Ebola relief and simplified making contributions to fight the outbreak.

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