Monday, January 18, 2016

TurboTax Admits That Easy Is Better Than Accurate

Okay, so before TurboTax sues me, they haven't actually SAID that, but that's the impression I get from their latest commercials.  While we're on the subject of getting sued, let me be clear that this post represents my OPINION, which I BELIEVE to be true based on what I've seen, read and experienced as a Tax Professional and by using their software and watching their commercials.  Also, this applies to pretty much all tax software, but TurboTax is the one embarrassing themselves on TV right now.

That said, how else can you interpret what the commercials are saying?  Any idiot can use our software.  Got it.  It actually makes sense, as I've been arguing for a while.  Tax preparation software has competing interests: ease of use, cost, and accuracy.  It doesn't take a rocket scientist to figure out that nobody's going to buy tax software unless it's easy to use, and price matters for everyone.  So obviously the software developers are going to make SURE that it's easy to use, and not too expensive.  Problem is, those two criteria are in direct conflict with Accuracy. 

Taxes are COMPLEX!  4 million words in the Tax Code alone.  Then there are revenue rulings, publications, tax court results and tons more.  Even the simplest of topics: owning a home, having kids, going to college are not as cut and dried as TurboTax would like you to think.  I believe it is literally impossible to write a software program that both asks enough questions to be accurate, and still is easy to use.  Not possible - and my experience fixing TurboTax returns bears this out.

Sure, if you work hard, answer every question, read every pop-up, and refer to the instructions, you might do okay, but you also might not.  I know some really smart people (REALLY SMART) who have gotten their taxes wrong with TurboTax.  In addition, as far as TurboTax is concerned, this is YOUR fault, not theirs.  Their software did the math right - you just put the wrong stuff in.  Don't believe me?  Here's their words: "100% Accurate Calculations Guarantee
If you pay an IRS or state penalty or interest because of a TurboTax calculation error, we'll pay you the penalty and interest."

So what do you do?  Do you have to use a professional?  Not exactly.  But if you do, make sure they know what they're doing.  Use an Enrolled Agent or a CPA experienced with YOUR tax situation. 

If you still want to do it your self, here's what you need to do:

1.  Download the Publication 17 and the 1040 instructions from the IRS and browse through them.  The 1040 line by line instructions can help you think of things to look for in the software.
2.  Buy my book: Everyday Taxes 2015.1 and read the sections that apply to your life.  Yes, this entire post was a thinly veiled advertisement for my book.  Not really.  Yeah kinda, but it is a good book.  The sections are based on life events and it's written in ENGLISH.
3.  Click on the more information buttons and carefully read everything.  If you have questions, refer to the Pub 17 or download the specific publication for the topic.
4.  Don't use their values for Goodwill type donations.  These are a perfect example of the "ease of use" vs. "accuracy" issue.  They have to use low, average values for this, to make sure they don't over-estimate your values.  that means the $400 designer shoes you donated will be GROSSLY undervalued.  Spend a little time on ebay, amazon, bookfinder, and in second hand stores (for profit - not Goodwill) to get an idea of the value.
5.  When done, pay for your return and don't file it until you've printed it out and reviewed it, line by line, using the 1040 instructions.  You can also have it checked by a professional.  Many will do it for free (I know I will) hoping to find a big error, and then convince you that you should be paying them to do your taxes.
6.  E-file your tax return.  Print a copy and keep it with the documents you used to file it.  Save for at least 4 years (I have a file box that holds about 7 years worth - when I can't stuff a new year in it, I shred the oldest)

If you don't want to have a professional review before you file, at least have them reviewed every 4 years.  Bring the whole package for the current year and the previous 3 years to a professional and drop them off for review.  This way, if you left any money on the table, you can still get it back.  After 4 years - it's gone forever.

Master Index of Posts

I've compiled a Master List of my posts for easy reference. Not every post is included, and I have changed the order to put the most important or timely ones on top, and to group some based on categories (Military, Obamacare, Tax Software). I will try to keep this updated and just below the latest post. Please let me know in the comments if I screw up a link :) Some of the posts are OLD so be careful assuming the information is current. 

2015 Everyday Taxes Book is here!

Important or Time Sensitive Posts

Tax Identity Theft - How Your State is Screwing You to Protect You
Need a Copy of Your Tax Return? Get a Transcript Online! NOT! Updated advice...
The IRS did NOT Call You!
I Got an E-mail from the IRS!
I Want to Lower my Taxes!
Last Chance for 2012 Refunds
10 Simple Pieces of Tax Advice


Military Spouses Residency Relief Act Details and Matrix
Retiring from the Military? Tax Warnings!
Reenlistment Bonus, Social Security, Compensation Repayment and Taxes
2015 Military State Tax Guide
2015 Boomer Deduction Worksheet
2014 Boomer Deduction Instructions for TurboTax Online
2014 Boomer Deduction Instructions for H&R Block at Home (store bought or downloaded)
2014 Boomer Deduction Instructions for TaxSlayer
2014 Boomer Deduction Instructions for TurboTax (Store bought or downloaded)
Boomer Deduction - History and References
More Boomer Deduction Information
Good Military Tax Reference
Minnesota Combat Zone Credit

Tax Software

TurboTax Admits That Easy Is Better Than Accurate
Tax Preparation Software Sucks - An Open Letter to H&R Block

General Posts

Investing and Taxes - A Primer
How Much does it Cost to File Taxes?
Reenlistment Bonus, Social Security, Compensation Repayment and Taxes
Open a Roth IRA Today! And Not For the Reason You Think
Foreign Earned Income Exclusion Warnings - Update
Charity Made Simple
How Fast Can I Get my Refund?
Make Estimated Tax Payments the Easy Way
Depreciation Recapture - an inaccurate description
Avon, Pampered Chef, Party Lites, Amway, etc. MLM Tax Guide
Don't Touch that 401K or IRA!!
What do you do with that Big Tax Refund?
It's Okay to Get a Big Refund - Really...
Common Tax Return Errors - Updated
Common Tax Return Errors
I Have a Blog and I Want to Bitch!
Sole Proprietorships are Bad
Mortgage Tax Credit Information
Lesson from the Government Shutdown - Emergency Fund
Don't Pay Capital Gains Taxes if You Don't Have To!
I got a 1099C - Now What?
Cancelled Debt and Insolvency
Tax Guide for Contractors - or - 1099MISC WTF?
Real Estate Agent Tax Guide
The IRS, email and privacy...
IRS Checking Facebook?
>$250 Donation Acknowledgement
Drop Box Donations - US Marines
Tax Scams
Rental Property Guide for Homeowners
Taxes and Divorce
Random Thought about Books
Taking Care of the Client
Warning - Tax Resolution Scams
Foreign Earned Income Exclusion - WARNINGS!

Affordable Care Act (Obamacare) Posts

The Affordable Care Act (Obamacare) and People with Health Insurance
Affordable Care Act (Obamacare) for the 2014 Tax Filing Season
Obamacare, Affordable Care Act and Married Filing Separately - Warning
Affordable Care Act, Obamacare update and advice
Healthcare Law, Obamacare, Affordable Care Act Info
Weird Obamacare Strategies and Incentives - 1
Weird Obamacare Incentives and Strategies - 2
Weird Obamacare Incentives and Strategies - 3
Weird Obamacare Incentives and Strategies - 4
Weird Obamacare Strategies and Incentives - 5
Weird Obamacare Strategies and Incentives - 6

Sunday, January 17, 2016

Tax Identity Theft - How Your State is Screwing You to Protect You

Tax Identity Theft is a BIG DEAL!  The federal government is paying out BILLIONS in fraudulent refunds and MILLIONS of people are affected.  In this relatively long post, I'm going to tell you how the fraud usually works, how it affects you, what the Feds are doing about it, and State by State what the states are doing and how it affects you.  Then I'm going to tell you what you can do about it.

The way this usually works is that identity thieves get your (and possibly your children's) names, Social Security Numbers and birthdays through some form of data breach.  A lot of big retail companies, insurance companies, federal and state agencies, and even the IRS have had data breaches that have probably affected you, whether you know it or not.  The identity thieves use this information to electronically file fake tax returns.  They are not technically stealing YOUR refund, but they are basically inventing a refund out of thin air.  They make up a W-2 and file a tax return in your name, having the refund deposited on a prepaid debit card like some stores offer.  The IRS doesn't get W-2 data until later in the tax season, so they have no good way of knowing the W-2 was made up.

If this happens to you, when you e-file a tax return, it will reject because you (or your kid's) data has already been used on a tax return.  This will now require you to mail your tax return in.  You would usually file an identity theft affidavit with it (possibly requiring a police report), and include proof of your identity such as a copy of your driver's license or birth certificates.  It can take a while for this to get sorted out and for you to get your refund (weeks or months) but you will eventually get it.

The easiest way for the IRS to combat this would be to delay refunds until they have the W-2 data and can safely issue refunds.  They could also disallow prepaid debit cards, or send checks when there is potential identity theft involved.  None of these options are politically palatable, so the IRS is relying on some techno stuff and working with the big tax prep companies to try to stop this.  They also have some long term plans to add codes to W-2's (This is being tested this year, so some W-2's will have codes, but using or not using these will not impact your filing).  None of this is likely to put a big dent in things.

The States face a lot less political pressure and are doing a lot of things to prevent ID fraud.  Last year one state blocked Turbo Tax filed returns for a while until more security measures were put in place.  I'm going to go state by state to tell you what they're doing.  Since a lot of it's similar, I'm going to list the more common things below, with a letter code and advice on what to do, and then just use the codes for each state, with more details if necessary.

Before I get to the details, here's some general advice: Don't share your families Social Security numbers with anyone you don't have to.  Keep this information safe and secure in your home.  Don't use fly by night tax prep services.  File early if possible.  Use an address on your return that you will definitely be able to get mail at.  Keep this address updated with the IRS and your State.  Also, buy the best tax book nobody's buying: Everyday Taxes.

Here are the State's ID Theft measures (I am relying on information from State DOR websites and other sources - the information may not be completely accurate or may become outdated):

A: Requiring or requesting driver's license information on a tax return.  For most states this is optional, but your refund might be delayed if you don't provide it.  Alabama won't let you e-file without it.  Some states require extra processing without it.  My advice is to provide this to your preparer or put it in the tax software you used when asked.  Make sure to enter it accurately.

B: Flipping suspicious tax return refunds from direct deposit or debit card to paper check.  The idea here is that an identity thief won't have the picture ID needed to cash the check.  Not much you can do here except make sure you use a good mailing address, and keep it updated with the state if you move.  Also be aware if your mail is at risk by thieves and take action if it is.

C: Online or phone security questions for random or computer selected people.  These will generally be letters sent to the mailing address on the return requesting you (and your spouse possibly) to answer security questions to verify your identity.  This is usually done online or over the phone.  Failing to get the answers right will result in having to take some onerous actions to prove that you are YOU.  Ohio did this a couple years ago and it was a nightmare!  Make sure you use a good address on the return, and update it with the state tax department if it changes.  Have your tax return and the letter handy when responding.  (If I have a phone number for assistance with this I will put it in parentheses after the 'C' code.)

D: State may request additional documentation of identity by mail.  Make sure you use a good address on the return, and update it with the state tax department if it changes.

E: State will not process refunds until March 1st.  This is to allow verification of income documents.  You can still file earlier, but you won't get you refund until mid March at the earliest.

Here's the state rundown:

Alabama:  A (DL info required for e-file), B , C (800-535-9410)

Arizona:  Arizona's site indicates that they are taking efforts, and that these efforts may delay refunds, but don't specify what they are.

Arkansas:  None I can find

California:  A, C

Colorado:  A (returns will require special processing actions if DL not provided)
Connecticut:  B, C (855-842-1441)

Delaware:  A

Washington DC:  A, B (If 1st time Direct Deposit (DD), DD info changed, or gap in filing will not get DD), C (202-727-4829)

Georgia:  C

Hawaii:  They have not specified specific actions they are taking but say that SOME refunds may be delayed for up to 16 weeks. They advise filing early for the best chance of not having a delay.

Idaho:  A, C, D

Illinois:  A, B (all first time filers will get refund as a check), E

Indiana:  C (317-233-1642)

Iowa:  A, B

Kansas:  None I can find

Kentucky:  A

Louisiana:  A, C (225-219-0102)

Maine:  None I can find

Maryland:  A

Massachusetts: A, C (800-771-7144)

Michigan: A, City of Detroit refunds will all be checks

Minnesota:  Does NOT want Driver's License submitted

Mississippi:  A (Special processing will be required if Driver's License not provided)

Missouri:  None I can find

Montana:  A, C

Nebraska:  A

New Jersey:  They have not specified any specific security measures but do identify that they are watching for it and may delay some refunds to prevent it.

New Mexico:  A (Special processing will be required if Driver's License not provided)

New York:  A

North Carolina:  None I can find

North Dakota:  A, In addition, they have stated that they are taking steps to prevent ID theft and that these steps may delay refunds.

Ohio:  A, C (855-855-7579)

Oklahoma:  A, C, D

Oregon: A, C

Pennsylvania:  A, C

Rhode Island:  A

South Carolina:  A, B, E

Utah:  A, C (801-297-2200), E (If Utah DOR gets all documents from employer and employee refund might be processed faster than March)

Vermont:  A

Virginia:  A (Special processing will be required if Driver's License not provided), B (If name on account doesn't match tax return the refund will be sent via check), C (804-404-4185)

West Virginia:  None I can find

Wisconsin:  A, C (608-264-4598)

Tuesday, December 22, 2015

Need a Copy of Your Tax Return? Get a Transcript Online! NOT! Updated advice...

If you like the blog, buy my book: Everyday Taxes

As I've said before, one of my most frequent requests from clients and friends is how to get a copy of a tax return quickly.  This is usually because they are trying to get a loan.

The IRS has suspended the ability to get a transcript online due to security issues, so I'm reposting my original information from before they made transcripts available:

One of my most frequent off-season question is how to get a copy of a current or prior year tax return.  Usually this involves buying a house, so time is of the essence, and, of course, everything's in storage because there's a move in progress.  I'll be honest that this post is primarily to give me a quick link to provide to my customers when I'm traveling and my phone is my internet, but everyone should find it useful.  Many of these methods will only get a Federal copy, but that's usually all you need.

The first lesson here is that the last two year's tax returns should be accessible, even during a move, either in paper or electronic format.  Think of them in the category of passports, wills, insurance documents and car titles.  That being said, if you're reading this, then it's probably too late for that advice.

So here's my list of ways to get a tax return, with cost, time and ease included.  I'll give details on how to do most methods by number below the list:

1. Online via your tax preparer or software site, free, same day, ease varies widely based on who and how you file, but I would try this first
2. Local IRS office, free, same day, somewhat inconvenient (latest tax return may not be available until after tax season)
3. Your tax preparer, may be a small fee, usually same day, may be less inconvenient than the IRS, depending on where you live
4. The IRS website for a transcript, free, 5-10 days, easy, if the address to be mailed to is not the address on the tax return, you cannot do this (see 5) if you need an actual copy of your return (you probably don't need a copy, if the person asking for a copy insists, push back, they're being stupid - see 6).
5. Form 4506-T for a transcript, free, 7-21 days, easy
6. Form 4506 for a copy of your return, $57 per year requested, 60 days, easy

1. If you e-filed with a service, or filed online, they usually have a way to get a copy of your return.  I'll list the big ones with what I know below:  (No promises on accuracy or detail)
H&R Block: Go to and click on the orange "My Account" button in the upper right.  If you have an account already, login and there will be a button for "View Tax Returns".  They will ask a few questions from your tax returns (addresses, employers, etc.) and then you will have access to the returns.  If you don't have an account setup, just click on create new account, and do the above once you are logged in.  If you used approve online, you can go to and login with the information you used to approve your tax return and get a copy there.
Liberty Tax: This is the link, but it's been down for a while: Tax Return Downloader
Jackson Hewitt: Go to and follow basically the same instructions for H&R Block (they pretty much copy everything Block does)
Turbo Tax: I haven't used them in a long time, but this link says you can get a copy:

2. Believe it or not, this is often the fastest (days-wise, not your time-wise) and cheapest way to get a transcript of your tax return, as well as W-2 transcripts.  A transcript is a line by line detail of the information on your tax return, and is acceptable for 99% of the things you would need a copy for.  You may have to wait a while in the office (it's first come, first served), but once it's your turn, it takes no time at all.  Just make sure you have ID!  This link has a bit more info, as well as a way to find your local office:

3. Call your tax guy!  This is what you pay him for.  Depending on their document storage system, or their corporate penny pinchers, they may charge 10 or twenty bucks (more if you need W-2 copies).  They should be able to print you a copy of your federal and state return right away.  You may need to go to a different office than your original, and the hours may be more limited, but the number on their business card should get answered and have the information you need to get to an open office.  Always call ahead after April 15th!!!

4. If you live or get mail at the address on the tax return, this is the easiest (though not the fastest).  You don't even need to leave the house!  Just go right here:, follow the instructions, and you're done!  There's even a phone number if you want.  Just to be clear, this gets you a transcript, which should be good for anything you need a tax return for.  It also takes 5 to 10 days.

5. If you're not at the address on your tax return, this is the way to get a transcript.  Takes a bit longer, but almost as easy:

6. If you absolutely must have a copy of the return (you really don't - you're just dealing with a jerk) this is the way to do it.  Takes 60 days and costs $57 per year requested!

Monday, December 21, 2015

Investing and Taxes - A Primer

This is going to be a LOOOOOOONG post, covering a ton of information about investments.  It is directly out of my book - Everyday Taxes 2015.1 - which you should buy!  As usual, I will try to cover the more common situations early, so that you don't have to read the whole section if you don't need to.  To be clear, this section is not about investments through your job, or investments in tax advantaged accounts such as IRAs.  Even with this post being quite long, I can't cover every detail of every investment.  One last thing before I go too far, I am not a financial adviser.  None of the information in this chapter is meant as investment advice or advocacy of any particular strategy, except to the extent that it impacts your taxes.  Investing should be done with thorough research on your part or the assistance of a reputable financial adviser—and that is not me.

A note for everyone: Your tax information will be reported to you on various forms of 1099s, many of which will be different from each other.  Be very careful that you get all the data from your 1099s into your tax software or onto your tax return.  If you have any doubts, have it checked by a professional, especially if you are new to investing.

Mutual Fund Investor:

If you have an account where all you do is put money in mutual funds and generally leave it there long-term (even if you shuffle it around once or twice a year) you really don't have a lot to worry about here.  If you don't already know, mutual funds are one of the most common ways that we ordinary people invest our money.  They pool our money with millions of other people's money and then invest it based on the criteria disclosed to us in the prospectus (you did read that, right).  Generally, you pay taxes on the dividends and capital gains that the mutual fund makes on your behalf, even if the money gets reinvested.  Dividends are the income that the mutual fund gets when the stocks they hold distribute some of their profits to their shareholders as cash.  Capital Gains distributions are the gains the mutual fund has when it sells some stock it owns at a profit (these are netted with stocks they sell at a loss, but if the net is negative there's no money to be distributed).  Both Dividends and Capital Gains Distributions are yours.  You can have the money sent to you on a quarterly basis, though most people simply have the money reinvested automatically in new shares of the mutual fund.  Either way, you have to report and pay taxes on these on your return.  Your investment company will send you a 1099-DIV (though they may send you a combined 1099 if you have other investments besides mutual funds, or you sell or exchange funds, but it will have the same information).  The 1099 will report your dividends, qualified dividends (dividends that get a lower tax rate), and capital gain distributions.  These are all reported directly into your software or directly on your Form 1040, Schedule B and/or Schedule D, and are fairly straightforward and easy to handle.

If you sold one mutual fund, even if just to move the money into a different mutual fund, they will send you a 1099‑B.  This will list your "proceeds from broker or barter transactions."  This is a complicated way of saying, "how much you got for selling something."  The key is that you need to report this, even if you sold it for EXACTLY (or less) than what you paid for it.  Many times, the IRS gets just the amount you sold it for, not the amount you paid for it.  You only pay taxes on what you made (difference between price paid and price sold), but the IRS may not know what you paid for it, so if you don't report it, they'll send a letter demanding an amount of taxes based on the full proceeds.  This wrinkle is the source of many a jaw-droppingly scary letter from the IRS.  The biggest problem for some people is figuring out just what you paid for it, especially if you only sold a portion.  The good news is that many brokers are providing this information (it's required to be on the form they send you if you purchased it in the last couple years, so this is getting easier every year).  If the information is not on the 1099, you can either get it by reviewing the statements from when you purchased it (and every statement between then and the sale, since you add dividends and capital gain distributions to basis), contact your broker for help, or bring your records to your tax professional.  I will add that if you are paying a full service broker, they should be doing this for you.  They may need records from a previous broker, but I would demand this from them.

The last couple of things you might see on your 1099 are "Non-dividend Distributions" and "Foreign Taxes Paid."  Non-dividend distributions are essentially a return of the money you invested in a company.  They are tax neutral, but they reduce the amount you "paid" for a mutual fund, and will increase your gain when you sell.  Hopefully your investment company is tracking this for you.  You will generally see Foreign Taxes Paid when you invest in a fund that invests outside of the United States.  This represents your portion of the taxes the mutual fund paid to foreign governments.  You can get these taxes back on your tax return as a Foreign Tax Credit.  If they are from mainstream mutual funds, you generally file a simplified version of Form 1116 and the taxes come back to you.

Individual Stock Investor:

The first warning I'll give you is to either make sure the companies you are buying are actually corporations, or be prepared for the craziness that ensues from investing in non-corporations.  What I'm talking about are Real Estate Investment Trusts, Limited Liability Partnerships and the like.  Thanks to technology, you can pop onto an investment web site and buy these just like a regular stock from a corporation.  The old classic example would be Kinder Morgan Energy Partnership.  You could buy a share in the partnership just like it was a stock, but late in the tax season (sometimes after filing your taxes) you get a Schedule K-1 representing your share of the various items from the partnership's tax return.  This quite complicated form can drive you crazy and almost certainly requires a tax professional to file.  This is not to say that these aren't great investments, many are, but you need to know what you are getting into.  For the record, I believe Kinder Morgan has converted itself to a traditional corporation. 

Having said that, the main differences between a mutual fund investor and an individual stock investor is that you won't have capital gain distributions, and you might get 1099-DIVs and 1099-Bs individually for your stocks, or combined depending upon your investment company.  When you invest in individual stocks, you only pay capital gains when you sell the individual stocks.  It's also a lot easier to track basis since you don't have to track capital gain distributions.  The separate or combined forms for 1099-DIV and 1099-B don't significantly impact how they're reported, other than using more lines on Schedule B, Schedule D or form 8949.  Do be aware that anytime you sell an individual stock, you will have to report it on your tax return and pay taxes on the gain (or deduct some or all of the loss—capital loss deduction is discussed below).


I'm not really interested in going into a huge amount of details on this, but the big thing to point out is that usually, EVERY single stock transaction needs to be reported on your Form 8949.  As a guy whose done tax returns for day traders with thousands of transactions, this sucks.  What you can do now is, if the investment company reports the basis to the IRS, you can do one line for combined short-term sales (less than one year from purchase to sale) and one line for long-term sales.  You can tell the basis has been reported to the IRS because those transactions will be separated from the other transactions on the 1099-B.  The form will specifically say that the transaction’s basis is reported to the IRS.  You will need to send a copy of the 1099-B to the IRS, either with your mailed-in tax return, or attached to Form 8453 if you are electronically filing.

Read if you sold ANYTHING (or you get a 1099-B)

I kind of talked about this already, but it's important enough to reinforce.  If you sell or exchange a mutual fund or stock, you should get a 1099-B.  If you get a 1099-B, you absolutely MUST report it on your tax return, even if you broke even or lost money.  Tons of terrifying IRS letters are generated from people not reporting transactions because "I didn't make any money."  The problem is that the IRS may not know you didn't make any money.  You need to TELL them you didn't make any money, by reporting the transaction on your tax return.

Capital Gains and Losses:

As discussed above, when you sell a stock or a mutual fund, you may have a gain or a loss.  On tax returns, you need to separate these gains and losses based on "holding period."  Basically, if you bought the stock or fund more than a year before selling it, it's long-term.  Less than a year ago, it’s short-term.  The capital gain distributions we talked about from mutual funds are assumed to be long-term.  Later I will clarify holding periods for weird situations.  So now what you do is net your long-term gains and losses and your short-term gains and losses.  If you have short-term gains that exceed your losses, you pay taxes at your normal rate.  If you have long-term gains that exceed your losses, you pay taxes at a lower rate, depending on your income.  If they net to a loss, you can deduct some of that loss, and carry over the rest to your future tax returns. It will then be your starting point for long-term or short-term capital gains or losses.  The amount of loss you can deduct in the current year is $3,000 ($1,500 if you are MFS).  If your gains are long-term, they are taxed at a maximum rate of 23.8%.  The great news is that if you are in the 10% or 15% tax bracket, they are taxed at ZERO!  Keep in mind that your tax bracket is based on your income including your capital gain, so don't go overboard selling stock because you think you will be in the 15% tax bracket.

Wash Sales:

A wash sale is an IRS term that is specifically designed to prevent you from selling a stock that is currently losing money, solely for the purpose of generating a taxable loss.  As long as you sell the stock and don't re-buy it, you're good.  If you buy it back within 30 days of selling it, you essentially ignore the sale for tax purposes.  You report it, but don't take the loss; your basis (purchase price) remains the amount you originally paid for it.  This only applies to assets sold at a LOSS.

Reverse wash sale (not a real term):

A reverse wash is my made-up term for selling and buying stock back to eliminate gains from potential taxation. First and foremost, if you are not in the 15% tax bracket or below, stop reading.  This won't work for you.

If you are, then you can cash in appreciated stock or mutual funds at a 0% tax rate so long as the gains do not put your taxable income above the 15% tax bracket.  You can then immediately buy the same stock back (if you want) and the new price will be what is later used to figure gain when you sell it again.  You can do this every year and effectively eliminate gains from potential taxation!  This is why I call it the reverse wash sale.  Wash sales only apply to losses, not gains.

Here is a list of things to consider when determining if it's worth contacting your tax professional for help on this:

                1. For 2015, your taxable income should be several thousand dollars below: $37,450 if filing Single, $74,900 if filing MFJ, $50,200 if filing HH (taxable income is basically your income after all adjustments for deductions and exemptions).
                2. You have unrealized gains in taxable brokerage accounts or mutual funds that you have held for more than a year (in most cases this means you have stocks or mutual funds that are worth more than you originally paid for them)
                3. You're not under age 19 (24 if in school).
                4. You're not receiving Earned Income Credit on your tax return.
                5. You're not receiving Social Security payments (if this is most of your income you might still benefit).
                6. You don’t have a capital loss that you are carrying over.
                7. Buying and selling stocks or mutual funds in your taxable accounts doesn't cost too much in commissions

Much of the above involves over-simplifications, but it gives you a starting point to see if you might be close.

If the above apply to you, wait until mid-November, and contact your tax professional.  Provide them with copies of your recent pay-stubs from all your jobs, as well as amounts of any other taxable income you have or expect to receive before the end of the year (interest, dividends, capital gains, etc.)  They should be able to calculate how much gain you can have and still pay 0 taxes on it.  Don't worry if it's not perfect, even if you go over a little, only the portion above the 15% tax rate gets taxed, and this at a favorable rate.  Once you have this number, review your unrealized gains and losses information from your brokerage account and determine what to sell to stay below the number they provided.

You can do this every year you are in the 15% tax bracket!

The rest of the details:

Municipal Bonds:  When you buy bonds from states, cities or other municipalities, they are exempt from federal taxation. Most states exempt their own bonds from taxes, but tax other states.

Schedule K-1:  These look very complicated, but the principal is that everything from a Schedule K-1 has a place on a regular tax return.  They come with instructions that tell you where to put them. The most confusing part is that the information can carry to some incredibly complex tax returns, which means that often the most confusing part is realizing that some of the information doesn't actually carry to your tax return.

Original Issue Discount (1099-OID): As long as you don't buy bonds on the secondary market, OID (original issue discount) interest is just interest.  What makes it weird is that you buy a bond at a discount to its ultimate price, and the difference between what you paid and the final price is interest, or OID.  You pay taxes on the interest as it accrues, not when you finally cash in the bond.  The 1099-OID gives you the right amount of interest to report on your return.

United States Savings Bonds: These differ from normal bonds in that you are allowed to wait to pay taxes on the interest until you cash the bonds in.  There are also exclusions on taxability of interest if you use the proceeds for education (see the I’m Going to College section for details).  Also, all US Treasury bonds and bills are exempt from taxation by the states.

Inherited and Gifted Investments: The only real change between inherited or gifted assets is how we determine your basis (cost) in the investment for gain purposes.  For inherited assets, your basis is the basis on the date of death (and the assets are assumed to be held long-term).  For gifted assets, the person who gave them to you has a basis, and that basis transfers to you.  The long-term or short-term determination begins on the date it is given to you.

Puts and Calls: These are advanced investment vehicles where you’re buying the right to buy or sell a given security at a later date at a specified price.  The main effect of these instruments is on basis and proceeds amounts. If your investment company doesn't provide this information, you should seek help in determining it until you fully understand its effects.

Short Sales: Short sales are investments where you are betting that an asset's price is going to decrease.  You borrow the asset from your broker and sell it, hoping to buy it back at a lower price to return it.  If you buy it back at a lower price, the difference between the borrowed price and bought back price is a gain.  If you are forced to pay more money for it than the price you sold it for, the difference is a loss.

Specified Private Activity Bonds: These are strange bonds that straddle the line between private and government.  They are specifically identified and are generally tax free.  If you are subject to Alternative Minimum Tax (see that section) they are taxable.

You receive income that's not really yours (nominee dividends):  If for some reason you receive a 1099 reporting interest or dividends as your income, but it's really someone else's, seek professional help to unravel this.

Affordable Care Act Net Investment Income Tax: If you make above certain income thresholds, your total net investment income (income = gains – losses) is subject to an extra 3.8% tax above and beyond income and capital gains taxes.  The thresholds are: $250,000 for MFJ and QW, $200,000 for HH and Single, $125,000 for MFS.  The 23.8% maximum rate discussed previously in this section includes this potential 3.8% addition.

Thursday, December 10, 2015

Military Spouses Residency Relief Act Details and Matrix

I want to simplify the MSRRA for most active duty personnel.  States have taken this incredibly simple Act, and made it sound about as complicated as it can be.  I expect they are also going to fight to twist its words to try to maximize their tax revenues.

I've already seen some states use the Act in an attempt to say that a spouse has an OBLIGATION to retain their original state of residence, which couldn't be further from the truth.  The plain language states that the spouse of an active duty military service member neither gains nor loses their state of residency as a result of leaving that state to be with their spouse (my words - not exact from the statute).  States have become fairly uniform in their interpretation, and I will sum it up here:

The spouse of a military member has two choices for state of residency: the state they are physically residing in, or the active military service member's state.  In order to claim the service members state, they have to have previously established residency in that state, usually by living there and doing the usual resident things (driver's license, job, home, registering to vote, etc.)  It should be easy to determine if you qualify for this choice, with one little exception...

Applying common sense, this decision should normally be made at the time the spouse first marries the service member, or when one half of the already married couple joins the military.  In this case, it's simple and easy.  The fact that the military couple buys a home, has kids, lives for an extended period of time in the new state should have no impact on this election (assuming the spouse doesn't register to vote or take other positive action to indicate they want to become a resident of the state they're stationed in.)  Where this becomes interesting is when a couple stays in the military for many years, over many duty stations.  Most states will have issues if you (the spouse) change your state of residency back and forth based on the relative tax advantages of the various states you move between over the course of a career.  They would assume that once you make your election, that's it.  I could make arguments either way, but, be aware that if you keep changing states, you might have to fight over it.

The best plan is, once you've made the election, do as many things as possible to cement your election to the new (or old) state of residence.  Always register to vote in the state you want as your residence.  If possible, have a driver's license from that state.  Try to register cars there.  I'm sure you can think of other things.  The idea is to maintain the things that show an interest in returning there after military service is over.

I have discussed repeatedly how important it is to understand exactly where each state stands with regard to taxation before making your decision, since the state you decide to be a resident of will expect you to file a tax return and pay taxes, even though you work in the state you are stationed in.  Just because Ohio doesn't tax the active military member's income doesn't mean the spouse gets off scott free.

For that reason, I have made an excel spreadsheet matrix of all possible state combinations with my opinion as to which state you should choose.  The matrix is based ONLY on taxes, so there may be other reasons you might choose to not follow the recommendation.

To use the matrix, look up the military members state of residency in the left hand column, and then follow across until you find the state you are stationed in.  That box will have my recommended state.  An "X" means there is no significant advantage to either state.  The states in the left hand column that are bold are states that have a system whereby a resident can be treated as a non-resident for tax purposes, usually by maintaining a home out of state and spending less than thirty days in the state.  For the active duty member this easily avoids taxes from that state.  For the spouse, it is my (and many other's) interpretation that this applies to the spouse as well.  Be aware that the state may have different ideas, and the MSRRA hasn't been around long enough to be sure who's right.

As an idea about my methodology, I obviously prioritized states with no income tax, then states with no income tax but some other tax (NH and TN), then states with generous tax provisions for spouses or the above discussed non-residency issues.  Alaska always wins because not only does it have no state income tax, but it also cuts a check every year for its residents (though you may have to meet other requirements to get it.)

Again, this is a table based on TAXES and nothing else.  I would highly recommend looking into the specifics of your decision and desires, especially your long term plans post military.  Also, as the active duty member planning on a long career, if you get stationed in a tax free state, and you like it enough to consider it as your post career destination, change your residency to that state while living there.  If you are or get married there, both you and your spouse won't pay state taxes for your entire career.

Here's a link to the matrix.  Once there, click the big blue button, and the excel spreadsheet will open or download, depending on your computer:

MSRRA Matrix Link

If you choose the state you are not stationed in, each state will have its own rules for avoiding tax withholding on your job.  Look these up and follow them (your employer will probably be no help with this).  Be aware that they will not withhold for the state you want to be a resident of, so, if that state has an income tax, you will probably owe them money each year.  Either save the money, or make estimated payments.

My tax book has over sixty life situations with the tax consequences explained.  Each chapter has military details included.  It's the most useful tax book out there, and is relatively inexpensive.  Please check it out:

Everyday Taxes 2015.1

Wednesday, December 9, 2015

2015 Military State Tax Guide

State Guidelines for Military (2015 values)

The latest edition of my book: Everyday Taxes 2015.1 contains dozens of life events like getting married, moving and having children.  In each chapter I have included specific information for military members.  Please check it out: Everyday Taxes 2015.1 (it's also inexpensive)

The information here is subject to change as states update their information.  I will update at least weekly until mid January, so please check back just before you file.

States with changes for 2015: CO,   
States with no changes but I added information: IN

Military Spouses Residency Relief Act (MSRRA)
Most states have begun to treat this in a similar manner to each other. In general, the spouse of a service member has two choices for state of residency: the state they are stationed in, or the military member's state of residency. In order to claim the military members state, they must have established a domicile in that state at some time before moving to the current state. For those qualified to make the election to claim the military members state, it is important to weigh the benefits properly, for example, a spouse who works in SC married to a military resident of MI might assume that since MI does not tax the military member that they should choose this state. This would be wrong because MI will tax the non-military income of the spouse. SC is far more generous to the spouse of a service member stationed in SC. Expert assistance may be required making this determination. It can also be difficult to get the current state to stop withholding from the spouses wages. Each state Dept of Revenue has different procedures for handling this.

An added twist to this is that some states, like Maine, New Jersey and New York, have a way for residents not living in the state to claim non-residency for tax purposes.  Our best minds conclude that this would allow a military spouse claiming one of these states as their state of residency could claim non-resident status and not have to pay taxes to the state.  This has not been fought or litigated to my knowledge, so it would be wise to be aware that some states might fight it.  My advice is always to go the aggressive route, but see what the difference is going the other way, and be prepared if the state fights this later.  I personally set aside the excess refund for three years, and then spend it :)
A military member normally retains residency in the state they resided in when they joined the military unless action is taken to change this. The W-2 can generally be relied upon as to the state of residence of the military member. The states in which a service member are stationed will not tax the members military income unless they are residents. They will tax any income earned from other employment or business activities conducted in the state by the member and their spouses (subject to the MSRRA discussed above.) The discussions below talk about the taxation of military income for residents of the respective state.
Filing Requirements:
Not having to file discussed below assumes there is no withholding from the given state. A member may file even if not required and should do so if they have withholding from the given state so they can get the money back. If a member would not be required to file except for the existence of withholding, they should adjust their state withholding through MyPay so no taxes are withheld from that state. They may also consider stopping withholding even if they are required to file, for states that do not tax their income (MI for example.) Many people do not file required tax returns when there is no refund or balance due. This could result in a letter from the state requesting a return but rarely any penalties – but there can be!
Death Benefits:
Many states exclude death benefits and military pay for service members killed in a combat zone or while on active duty. The specifics are not discussed here. Survivors of service members killed on active duty can obtain assistance for this from CACO personnel.

States with Blue names either require a tax return or other document to be filed by military residents, or a tax return should be prepared to determine if any refundable benefits are available from that state. 
Alabama treats military residents the same as all other residents.  Alabama does not tax military retirement.
Alaska does not have an income tax. Alaska Permanent Funds Dividends are taxable on the Federal Return.
Arizona does not tax active duty military pay, and does not require filing if the only AZ source income is active duty pay.
Beginning in 2014, Arkansas no longer taxes active duty military pay.  A tax return is still required.
California does not tax military pay of CA residents stationed outside of the state of CA. They do tax military income of their residents when stationed in CA. They also treat military spouses generously, similar to SC. Form 540NR is used to account for this. You write “MPA” to the left of column A for non-resident military income and enter the military income in column B but exclude it from column E.
Beginning in 2015, CO does not tax active military income (not sure if a tax return is required - but you probably have withholding to get back).  Prior to 2015, Colorado taxed military residents the same as other residents unless the member was stationed outside the US for >305 days in the year.
Connecticut allows resident military personnel stationed outside of CT to be treated as non-residents for tax purposes. This can be confusing but the point is that they are still a resident, just not treated that way for tax purposes. In order to be treated as a non-resident they must meet all three of the following requirements: 1) Not maintain a permanent place of abode in CT for the entire year (a parents house is not a permanent place of abode.) 2) Maintain a permanent place of abode outside of CT for the entire year. 3) Spend no more than 30 days in CT for any reason during the year. If they meet these requirements they can file as a non-resident and exclude any military wages from gross income and need not file unless they have other CT source income.
Starting in 2015, military pensions are not taxed by CT.
DE taxes military residents the same as all other residents.
Washington DC:
DC taxes resident military personnel the same as all other residents.
Florida does not have an income tax, however they do have an intangibles tax. Most military members will not have any filing requirement.
GA taxes military residents the same as all other residents however Reserves or National Guard called to active duty for more than 90 days may be able to take a credit against their individual income tax based on their income from the National Guard or Reserves.
Hawaii taxes military residents the same as all other residents except that they do not tax the first $6076 of reserve pay or HI national guard pay.
ID residents stationed in ID pay taxes on all military income; however, if the member was on active duty >120 days and stationed outside of Idaho they can exclude any military income earned while stationed outside of ID. If they are stationed outside of Idaho the entire year they do not need to file an ID tax return, however Idaho has a Grocery Credit that a military member is eligible for that is refundable so it is possible to get a refund from Idaho even though their was no tax withheld.  This makes Idaho one of the States that a military member should file even when not required to. 
IL does not tax military pay; however, the member must file a tax return if they file a Federal return. Military members with children who get Federal Earned Income Credit may get up to 10% of the Federal amount even if they have no taxes due to IL.
Indiana taxes military income but allows a deduction of the first $5000 of military income for the taxpayer and/or the spouse ($10000 for military couple.) If a military member changes state of residency to another state they must submit the DD Form 2058 with the tax return for the year they changed state of residency.  If you were active military and you and your spouse did not live in Indiana the entire year you do not owe county tax.  Use "00" as your county.  If your spouse remained in Indiana you BOTH owe county tax to the county he/she lives in.
IA does not tax military income and military income is not used in determining filing requirements (if the only significant sources of income are military income, a tax return is not required.) Starting in 2014, Iowa no longer taxes military retirement.
Kansas taxes military income but allows a deduction for recruitment, sign-up and retention bonuses paid that are included in Federal taxable income (if the bonus was tax free to federal do not deduct it from KS. Kansas starts with Federal AGI so it is already excluded.)  The subtraction is made on Adjustments line A21.
Beginning with 2010, KY does not tax military income and does not require a tax return if the only KY source income is military pay.
Louisiana requires a tax return from military personnel the same as any other resident; however, LA gives an exclusion of up to $30000 of military pay if the person has been on active duty outside of Louisiana for at least 120 days during the tax year. The subtraction is taken as a Schedule E subtraction, Code 10E, by entering military pay up to $30000 on the schedule.
Maine allows resident military personnel stationed outside of ME to be treated as non-residents for tax purposes. This can be confusing but the point is that they are still a resident, just not treated that way for tax purposes. In order to be treated as a non-resident they must meet all three of the following requirements: 1) Not maintain a permanent place of abode in ME for the entire year (a parents house is not a permanent place of abode.) 2) Maintain a permanent place of abode outside of ME for the entire year. 3) Spend no more than 30 days in ME for any reason during the year. If they meet these requirements they can file as a non-resident and exclude any military wages from gross income and need not file unless they have other ME source income. Maine calls this the General Safe Harbor Rule. 

Maryland taxes military residents just like other residents; however, they allow a subtraction for up to $15000 of military pay earned outside of the U.S. (Military Overseas Income.) The deduction phases out dollar for dollar as ALL military income goes above $15000 and there is no exclusion if the total military income exceeds $30000. The subtraction is taken on Form 502SU and the Military Overseas Income Worksheet is used to calculate the deduction.
There are no special tax benefits for military, however, the Massachusetts Dept of Veterans Affairs will give a one time payment of $500 to any resident after they served at least 6 months active duty in the military. They also have a $1000 benefit for personnel who serve in Iraq or Afghanistan.
Michigan requires military members to file a tax return; however, they subtract active duty pay from income (Schedule 1, Line 11). Military members with children who receive Earned Income Credit on their Federal return may collect 6% of the federal amount, even if they pay no taxes to MI. (This was 20% for 2011 and prior years.)
Minnesota subtracts Active Duty Military pay from income of MN residents. If Gross Income on Federal return other than military is less than $10000, no MN return is required.
Minnesota pays $120 per month a military resident spends in a combat zone. This is paid separately from the tax return and is claimed on Minnesota form M99 (no link for 2015 yet as the form is not out yet)
Mississippi taxes military residents the same as other residents except that they do not tax National Guard and Reserve pay up to $15000.
MO allows resident military personnel stationed outside of MO to be treated as non-residents for tax purposes. This can be confusing but the point is that they are still a resident, just not treated that way for tax purposes. In order to be treated as a non-resident they must meet all three of the following requirements: 1) Not maintain a permanent place of abode in MO for the entire year (a parent's house is not a permanent place of abode.) 2) Maintain a permanent place of abode outside of MO for the entire year. 3) Spend no more than 30 days in MO for any reason during the year. If they meet these requirements they can file as a non-resident and exclude any military wages from gross income and need not file unless they have other MO source income. If your spouse works but claims MO as your state of residency through the MSRRA their income is taxable to MO and must file a tax return if they earn more than $1200. As of 2014, Missouri exempts 75% of military retirement income from tax and starting in 2016 all military retirement income will be tax exempt.
Montana requires military residents to file a tax return but exempts active military pay from taxation on Schedule 2, Line 8. Verification of active duty status must be attached to the return.
Nebraska taxes military residents just like other residents.Nebraska has implemented an incredibly complicated option to exclude certain amounts of military retirement income for some years.  It's too stupid to attempt to explain, but if you are retiring or retired from the military in Nebraska you should read this immediately: 
Nevada does not have an income tax.
New Hampshire:
NH does not have an income tax but they do tax interest and dividends. Generally these would need to exceed $2400 for an individual and $4800 for a couple.
New Jersey:
NJ allows resident military personnel stationed outside of NJ to be treated as non-residents for tax purposes. This can be confusing but the point is that they are still a resident, just not treated that way for tax purposes. In order to be treated as a non-resident they must meet all three of the following requirements: 1) Not maintain a permanent place of abode in NJ for the entire year (a parent's house is not a permanent place of abode.) 2) Maintain a permanent place of abode outside of NJ for the entire year. 3) Spend no more than 30 days in NJ for any reason during the year. If they meet these requirements they can file as a non-resident and exclude any military wages from gross income and need not file unless they have other NJ source income.(NJ does not consider barracks maintaining a permanent place of abode outside NJ)
New Mexico:
New Mexico does not tax active duty military pay however; NM residents are required to file a NM return if they were required to file a Federal return.
New York:
NY allows resident military personnel stationed outside of NY to be treated as non-residents for tax purposes. This can be confusing but the point is that they are still a resident, just not treated that way for tax purposes. In order to be treated as a non-resident they must meet all three of the following requirements: 1) Not maintain a permanent place of abode in NY for the entire year (a parents house is not a permanent place of abode.) 2) Maintain a permanent place of abode outside of NY for the entire year. 3) Spend no more than 30 days in NY for any reason during the year. If they meet these requirements they can file as a non-resident and exclude any military wages from gross income and need not file unless they have other NY source income. NY specifically excludes barracks as an abode outside of NY for the purpose of this rule. Also, if a NY return is required to be filed to get back state taxes withheld and this exemption results in zero income (as it usually does) the return may have to be mailed in vice electronically filed.  NY does not tax military pensions.
North Carolina:
NC taxes military residents the same as other residents.
North Dakota:
ND taxes military residents the same as other residents, however, National Guard and reserve members called to active duty can exclude their active duty pay form ND income.
Ohio does not tax military pay of OH residents stationed outside of the state of OH. They do tax military income of their residents when stationed in OH. Ohio does not tax military retirement pay.
Oklahoma allows military members to exclude active duty pay. This exclusion is accomplished using Schedule 511-C. Military members are required to file an OK tax return if they were required to file a federal return.

Oregon allows a subtraction of all military pay earned while stationed outside of OR and up to $6000 earned while stationed in Oregon (Subtraction Code 319). OR also allows military residents to be treated as non residence if they spent less than 31 days in OR, did not have an abode in OR and had a permanent abode outside OR the entire year.
Pennsylvania does not tax Active Duty Military Income of residents stationed outside of PA and does not require a tax return; however, they do require the service member to mail or fax a copy of their orders stationing them outside of PA and their W-2. If filing a tax return a copy of the orders must be included when mailing the return, or sent separately to the address below.
HARRISBURG PA 17129-0002
May also be faxed to : (717) 772-4193
Rhode Island:
Rhode Island taxes military residents the same as other residents.
South Carolina:
SC taxes military residents just like regular residents except that it does not tax reservist drill pay. SC is very generous to the spouses of military (residents of another state) in that they allow you to exclude the active duty income of the non-resident military member from the calculation of what percentage of deductions to allocate to the spouse. This generally results in 100% of the deductions against only the spouses SC income. It is very difficult to get tax software to handle this correctly. Line 1 of the SCNR should have no active duty military income in the Federal column.
South Dakota:
SD does not have an income tax.
TN does not have an income tax but they do tax interest and dividends. Generally these would need to exceed $1250 for an individual and $2500 for a couple.
Texas does not have an income tax.
Utah taxes resident service members the same as other residents.
Vermont does not tax military pay of VT residents stationed outside of the state of VT. They do tax military income of their residents when stationed in VT. Military pay is subtracted on line 32. A tax return is not required if the only income is military pay while stationed outside VT. 

Virginia taxes military residents just like other residents except that they give a subtraction of basic military pay of up to $15000. The subtraction phases out dollar for dollar as income goes from $15000 to $30000 and is completely gone at $30000 of income. (If a military member made less than $15000, it would all be subtracted. If they made $20000, they get to subtract $10000.) The subtraction code is 38.
Washington does not have an income tax.
West Virginia:
West Virginia taxes military residents unless they spent less than 30 days in WV. In this case they file as a non-resident. WV does not tax military income of reserves or national guard called to active duty by Executive Order of the President.
Wisconsin taxes military residents the same as other residents except that they do not tax military pay of reserves or national guard called to active duty. Rent paid by the military member in a state other than WI is allowed to be used for the School Property Tax Credit (not military housing.) If a military member is stationed outside the United States, they may take a credit of up to $300 for pay received while stationed outside the U.S.  Wisconsin does not tax military retirement.
WY does not have an income tax.
Feel free to send questions to Kirk at
I am available to prepare taxes via mail, e-mail, fax and online approval. No fees are charged until the return is complete and you are 100% satisfied. If the fees are too high, refund too low, or we determine that a cheaper filing method is appropriate, I will return all materials and charge no fees.
I will check any individual tax return from 2012, 2013, 2014 or 2015 for free. If I find an error, I will offer to fix it for a fee if desired
I have made every effort to ensure the above information is 100% accurate, but I am human and the various governments love to change the rules. If you think something is wrong please inform me via e-mail at