Three Things You May Need In Order to E-File Your Tax Return

This post originally appeared on Forbes.

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The IRS and certain states are putting safeguards in place to combat tax-related identity theft and refund fraud for the 2016 tax filing season, which opened yesterday. These safeguards may mean supplying more information in order to verify your identity and delays in processing refunds, but are necessary in order to curb fraudulent refunds, which totaled $5.8 Billion from 2011 through October 2014. If you intend to e-file your federal or state income tax return, here are a few things to keep in mind.

The IRS has partnered with certain large payroll service providers, such as ADP and Paychex,  to include a 16-digit verification code on some Form W-2s. The code will appear in a separate, labeled box. If the field is populated, the IRS is asking preparers to enter the code. The code is not needed for paper filed returns.

For this filing season, the code is being used only to test the capability of verifying the authenticity of W-2 data. The IRS has stated that omitted and incorrect W-2 verification codes will not delay the processing of the return, as they are just being used to see whether the codes are useful in evaluating the integrity if W-2 information.

 You May Need Your Driver’s License Number to File in Some States

You do not currently need a driver’s license number to file your federal return but certain states request driver’s license numbers or state ID numbers on electronically filed state income tax returns.

In most states, providing a driver’s license number is voluntary. Returns can be e-filed for taxpayers without either a driver’s license number or a non-driver ID (such as a child or invalid) without being rejected for e-filing, but all e-filed individual returns that lack a number may be manually reviewed to determine if more information is needed to verify the taxpayer’s identity before a refund is issued (i.e. it will take longer to receive your refund if you don’t provide a driver’s license or ID number).

However, some tax preparers are reporting that tax software companies are requiring driver’s license numbers in order to e-file in certain states. There may be some kinks until the IRS, states, and tax software providers get these new requirements worked out.

If You Were a Victim of Identity Theft Last Year, You May Receive a PIN From the IRS

The IRS mails an Identity Protection PIN (IP PIN) to taxpayers who were victims of tax-related identity theft. The IP PIN is a six digit number that must be input in order to e-file returns with an identity theft indicator on the account. Unfortunately, taxpayers received IP PIN letters with an incorrect year listed. If you received an IP PIN on a CP01A notice dated January 4, 2016, the IP PIN is valid for use on individual tax returns filed in 2016.

Many taxpayers ask about proactively requesting an IP PIN from the IRS to avoid issues with refund fraud. Currently, the IP PIN program is only available to taxpayers who were victims of tax-related identity theft, taxpayers who filed federal returns last year as residents of Florida, Georgia, or the District of Columbia, or taxpayers who received an IRS letter inviting them to “opt-in” to get an IP PIN.


Health Insurance for The Self Employed

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With the deadline for enrolling in a 2016 insurance plan through the Health Insurance Marketplace looming, I’ve heard from many of my self-employed clients and friends that are facing huge rate increases this year. A study by the Henry J Kaiser Family Foundation Many noted that 48% of uninsured adults cite cost as the main reason they are still uninsured. Some self-employed people are choosing to go without health insurance because the penalty going without coverage is still less than annual premiums.

Foregoing health insurance coverage is not a decision I endorse. For 2016, the penalty for not having health insurance is the higher of 2.5% of your household income (with a maximum of the total yearly premium for the national average price of a Bronze plan sold through the Marketplace) or $695 per adult plus $347.50 per child under 18 (with a maximum of $2,085 per year). For 2017 and beyond, the percentage option will remain at 2.5%, but the flat fee will be adjusted for inflation. There are certain exemptions that may help you avoid the penalty.

According to the same Kaiser study, nearly 36% of low- and middle-income uninsured adults said they had problems paying medical bills. At some point, almost everyone is going to need some sort of medical care and medical bills are the single largest cause of consumer bankruptcy. If you are under 30 years old OR are granted a hardship exemption, you can purchase a catastrophic health plan through the Marketplace, no matter your income level. A catastrophic health plan doesn’t cover any benefits other than three primary care visits per year before the plan’s deductible is met. The monthly premium is lower than standard plans, but the out-of-pocket costs for deductibles, copayments, and coinsurance is higher. These types of plans can protect you in the event of some major medical calamity.

Self-employed people have an advantage over employed people who are not covered by an employer group plan. Employees who aren’t covered by their employer’s group plan and have to purchase their own insurance may be able to receive an itemized deduction on Schedule A if their total out-of-pocket medical premiums exceed 10% of their Adjusted Gross Income (AGI) and they have enough other itemized deductions to exceed the standard deduction. Few people are able to meet both of those hurdles.

Self-employed people, however, may be able to deduct health insurance premiums on Line 29 of Form 1040, an “above-the-line” deduction. In order to get an above-the-line deduction, you must report a profit from your business on Schedule C (or have self-employment income from a passthrough entity or farm). If you have some self-employment income, but not enough to cover your health insurance premiums, you can deduct enough premiums to bring your income on Sch C to zero, then report the remainder as an itemized deduction on Schedule A, where you may or may not get a benefit.

If you are married and have the option of getting coverage under your spouse’s employer subsidized health plan, you won’t be able to take your health insurance premiums as an above-the-line deduction. You’ll only be able to claim them on Schedule A.

Some people are still not convinced. Why pay several hundred dollars per year for health insurance coverage with such large deductibles that they wind up paying all of their medical bills out-of-pocket anyway? Because you may be able to save on your taxes AND stash away more money for retirement if you purchase a health insurance plan that is eligible for a Health Savings Account (HSA). An HSA allows you to set aside set aside money to pay for current health care expenses and save for those in the future. For 2016, you can contribute $3,350 per year to an HSA for an individual or $6,750 for a family. If you’re over age 55, you can contribute an extra $1,000 per year. HSA contributions are another above-the-line deduction, reported on Line 25 of Form 1040. Interest earned on the account is tax-free and you can make tax-free withdrawals for qualified medical expenses.

Many people confuse HSAs with health care flexible spending accounts (FSAs), which have use-it-or-lose-it rules. HSAs have no limits on carryovers or when the funds may be used. If you need to use your HSA funds to reimburse yourself for out-of-pocket medical expenses, you can do so. If you don’t need the money, you can leave it there and it can act as another vehicle for retirement savings.

Think of your HSA like a Roth IRA, but better. You can enjoy the benefits of tax-free growth, but you also get the benefit of a current tax deduction. Chances are your medical expenses are going to be higher in retirement than they are right now. Even if you are enrolled in Medicare after age 65, there are still out-of-pocket medical expenses as well as premiums for Medicare Part B.

Before age 65, you’ll face a 20% penalty for withdrawal of HSA funds for nonqualified medical expenses. Starting at age 65, you can make penalty-free distributions for any reason, though you’ll still pay tax on the account’s earnings for any withdrawals that aren’t for qualified medical expenses.

It’s worth noting that the Marketplace is not the only option for shopping for health insurance. You’ll have to use the Marketplace if you want to qualify for premium tax credits, but if your income is too high to qualify for subsidies, you may be able to shop around online or with the help of a broker.

The deadline to enroll in a 2016 insurance plan through the Marketplace is January 31, 2016 for coverage to take effect March 1, 2016.

4 Ways to Simplify Your Finances

This post originally appeared on Forbes.

If your goals for the new year include getting a better handle on your finances, your first step should be simplification. Simplifying your finances will make sticking to a budget, paying off debt, buying a home, saving for retirement or any other financial goal easier to accomplish. Focus on these four areas to get your finances under control and on track.


Pink Piggy Bank
Photo credit: www.SeniorLiving.Org



When my husband and I bought our first home together, I realized just how many bank accounts we’d collected. Our list included a joint checking account at one bank, and from before we were married, individual savings and checking accounts two other banks. Needless to say, gathering copies of our bank statements for the mortgage application was more time consuming than it should have been. If you have accounts spread across several banks, consolidate to one checking and one savings account. If you use separate savings accounts for different objectives, your bank may offer sub-accounts that let you allocate savings into different buckets while retaining the convenience of a single bank.

Many people change employers several times over the course of their career and leave a trail of 401(k) plans as they go. Roll all of your old 401(k) balances into one IRA. There are so many reasons to roll your retirement accounts out of your former employer’s plan, not the least of which is simplicity. At some point, you may need to provide quarterly statements for a mortgage application or start thinking about taking Required Minimum Distributions. I’ve heard stories of people reaching age 70½ with retirement accounts spread over a dozen or more old 401(k) and IRA accounts. Maintain a 401(k) plan with your current employer to take advantage of matching contributions but have one IRA account to act as a holding tank, rolling in funds as you switch jobs.

Pay Off Debt

If you’re carrying balances on more than a couple credit cards, consolidate to just one or two cards with the lowest rates and best rewards. I used to be guilty of signing up for a store card at every store I visited just to get an occasional discount. Not only do store cards often come with higher interest rates that will negate any discounts if you carry a balance from month-to-month, but having more cards means more due dates, interest rates, annual fees, and reward to keep track of.

I’m a big fan of the debt snowball method for paying off credit card balances. To preserve your credit score, don’t close the accounts as soon as they are paid off. Instead, cut the card up but keep the account open. If you really want to close accounts, close one, then wait six months before closing another. Spreading out the decrease of your total available credit over the course of several months won’t do as much damage as a sudden, significant reduction.

Automate Payments

Automate everything you can: credit card payments, loan payments, monthly utilities, etc. Having everything automated will help you avoid penalties – as long as you have enough in the bank to cover the payment. Although the Credit CARD Act of 2009 capped credit card late fees for a first offense to $27 (down from an average of $39 prior to the Act), a late payment can still earn you a higher penalty interest rate and penalties are only capped at $27 if the borrower has not “engaged in repeat violations.”

If you are concerned that automating payments will result in less oversight, consider that most monthly expenses are similar from month to month. Many banks will also send you an email whenever an automated draft is requested from your account. If suddenly a credit card or utility payment is larger than normal, you can investigate.

While you’re at it, automate your savings as well. Set up monthly transfers to savings or your retirement accounts on pay day. With the money going out before you have a chance to see it, you won’t miss it and there’s less chance you’ll forget to save.

Take Advantage of Technology

For better control over your finances, use free online tools such as Mint or Personal Capital. Both services gather all of your financial information in one place and allow you to securely log in from a desktop, tablet, or mobile device to set a budget, track your cash, and access customized calculators and tips for reaching your financial goals.

Use Outlook, iCal, or Google Calendar to set up reminders for things that aren’t automated, such as quarterly estimated tax payments or when discounts and promotional rates expire so you can continue to get good deals or shop around.

While you’re at it, go paperless whenever possible for monthly bills. Nowadays, it’s easy to access account statements online. Paperless statements are not only better for the environment, they reduce the risk of identity theft and save you time sorting or shredding statements that you’ll likely never look at again.