IRS

Are You Withholding the Right Amount of Taxes from Your Paycheck?

Damian Davila — Tue, 03 Apr 2018 08:30:14 +0000

In 2017, the IRS received 152,235,000 tax returns — and of those returns, more than 73 percent were granted a refund. With the average refund last year standing at $2,895, you might think getting a windfall in the spring is a good thing. But rather than giving the government an interest-free loan all year, wouldn't you have preferred to have an extra $241.25 per month in your paycheck?

On the other hand, the 27 percent of taxpayers not receiving a refund may be getting the opposite — a big tax bill. They may not be having enough money withheld from their paychecks for taxes.

This is why it's important to withhold the right amount of taxes out of your paycheck. Let's review how to cover your projected tax liability while minimizing your refund. (See also: Bigger Paycheck or Bigger Tax Refund — Which Should You Pick?)

Meet the IRS Withholding Calculator

With the passing of the Tax Cuts and Jobs Act, many Americans are still trying to figure out the full effects of this legislation on their paychecks. In an effort to help taxpayers make sense of recent changes to the tax law, the IRS updated its Withholding Calculator on February 28, 2018.

While the IRS recommends that all taxpayers take a second look at how much in taxes they're taking out of their paychecks, the agency highly encourages the following groups to check their withholdings for 2018:

Two-income families.
People with two or more jobs at the same time or who only work for part of the year.
People with children who claim credits such as the Child Tax Credit.
People who itemized deductions in 2017.
People with high incomes and more complex tax returns.

How to use the IRS Withholding Calculator

Here's your game plan to achieve a "Goldilocks" withholding rate on your paycheck this year.

1. Gather your latest pay stub(s) and latest tax return

If you don't receive a pay stub in the mail, contact your human resources office to get a copy or learn how you can download one online from your company portal. Depending on your unique financial situation, you may also want to find your 2016 return (or your 2017, if you've completed it) to more accurately estimate your 2018 income, budget, expenses, and list of tax credits.

2. Provide general information and list potential tax credits

In the first two sections of the IRS Withholding Calculator, indicate your filing status, whether or not anybody can claim you as a dependent, how many jobs you and your spouse (if applicable) have, how many dependents you will claim on your return, and whether or not you or your spouse will be 65 or older on January 1, 2019.

Additionally, you will need to list any applicable tax credits, such as the Child Tax Credit and Earned Income Tax Credit. This is why it's helpful to have past returns handy to help you estimate those credits. (See also: 8 Tax Return Mistakes Even Smart People Make)

3. Detail your wage income and withholding

Next, enter your gross wages, salaries, tips, and any bonuses you expect to receive in 2018. Using your most recent pay stubs, enter the total federal income tax withheld to date in 2018 and the federal income tax withheld from your last salary payment. Indicate how frequently you receive your paychecks, and, if applicable, when you started this job in 2018, and when you expect this job to end in 2018.

If you receive any other taxable income, make sure to include it as well. The IRS Withholding Calculator is only as accurate as the information you enter, so leaving that income out may result in a higher tax liability.

4. List deductions

Here is one of the biggest changes implemented by the Tax Cuts and Jobs Act. If your standard deduction ($12,000 for individuals, $18,000 for heads of household, and $24,000 for married filing jointly) is more than your total itemized deductions, your standard deduction will be used to calculate your withholding. Otherwise, your total itemized deduction amount will be used. So, this is why it still pays to keep track of all of those deductions throughout the year.

Use your latest return to estimate your 2018 itemized deductions, including medical and dental expenses, paid taxes (up to $5,000 for single filers and $10,000 for married filers for applicable state and local income taxes, property taxes, or sales taxes), gifts to charity, and other itemized deductions. Remember that beginning in 2018, job and certain miscellaneous expenses are no longer deductible. (See also: 12 Things You Should Know About the New Tax Law)

5. Adjust your W4

Once you have entered all the data, the IRS Withholding Calculator will provide you with clear instructions on how to update your W4 with your employer. Depending on your situation, some action items may include changing your filing status, adjusting your number of allowances, and withholding an extra amount every paycheck.

Following the instructions from the calculator, you'll cover your tax liability just right.

Revisit the IRS Withholding Calculator as necessary

Don't set it and forget it. If your job (Promotion? Salary bump? Side gig?) or life situation (Married? Baby?) changes, revisit the IRS Withholding Calculator. The calculator will help you make sure you have the right amount of tax withheld from your paycheck at work.

The IRS recommends submitting your updated W4 to your employer as soon as possible. Withholding takes place throughout the year, so it's better to take this step right away.

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This article is from Damian Davila of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

4 Things You Need to Know About Gift Tax

Kat Tretina — Thu, 22 Mar 2018 09:30:15 +0000

A recurring question each tax season centers on financial gifts; what they are and how they are taxed. Gifting money, property, or valuables to your friends and loved ones can be complicated if your gift exceeds certain monetary limits. Once your gift has exceeded these limits, it becomes subject to gift tax.

Understanding gift tax can be enormously beneficial to you and the receiver of your gift. Whether you are trying to pass on money or expensive items to a family member or friend, understanding the gift tax can help you save over the long run.

What is the gift tax?

The gift tax is a tax on anything with a tangible value that is given to someone without receiving anything, or less than the item's full value, in return. The gift tax is paid by the donor in most situations. The point of such a tax is to prevent people from gifting away all of their assets before they die in an attempt to avoid estate taxes.

For example, if a loved one gifts you their old car for less than its fair market value, it could be subject to the gift tax. For the purposes of gift tax, the IRS defines fair market value as "the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts."

How the gift tax actually works

Only gifts that exceed a certain tangible value in a year are subject to the gift tax. For tax year 2017, that exclusion was $14,000. In 2018, the federal gift tax exclusion will rise to $15,000. For a couple, these exclusions are per person. So, a married couple in 2018 could gift an adult child $30,000 to buy a home without being subject to gift tax, so long as the gift is deemed to be split between the two parents.

If your gift is more than the exclusion amount, you will need to complete IRS Form 709: U.S. Gift (and Generation-Skipping Transfer) Tax. You must complete this form every year you make a qualifying gift.

When you actually have to pay gift tax

To make matters confusing, you don't actually have to pay gift tax until you surpass the lifetime gift limit. (It's the same amount that's exempt from estate tax, by the way.) That limit was $5.49 million per person for tax year 2017, but was increased to $10 million, indexed to inflation, with the passage of the new tax law in December 2017. The IRS recently announced the recalculated lifetime limit for decedents who pass in 2018 has been set at $11.18 million. Any gifts that fall under the annual exclusion limits do not count against that lifetime limit. Regardless of whether or not you have to pay up, you still have to file Form 709 each year you gift more than the exclusion amount.

If you have three children, and you give each of them $18,000 in 2018, you have surpassed the exclusion by $3,000 per child, or $9,000 total. That $9,000 will count against your lifetime tax-exempt gift limit of $11.18 million.

What isn't subject to gift tax?

A number of gifts are exempt from the gift tax. Exempt gifts include:

College tuition. If you are willing and able to pay the tuition for your child, grandchildren, relatives, or friends, you do not have to pay the gift tax.
Political contributions. Political contributions, as long as they remain within the legal limit, are tax exempt. Be sure that you still file the required tax documents to record any political contributions.
Medical bills. Like tuition, payments made directly to a medical institution to cover the cost of care or medical bills for a loved one are exempt from the gift tax and do not need to be declared on your taxes.
Gifts to your spouse. If you buy your spouse a gift, such as an expensive piece of jewelry, that gift is not taxable.
Charitable donations. Any gifts you make to a qualifying charity, including cash or valuables, are not subject to the gift tax.

Be sure to speak with a tax expert, wealth management firm, or estate manager if you have more complicated questions or concerns in regard to gifts and the gift tax. (See also: How to Choose the Best Tax Preparer)

[Editor's note: An earlier version of this article incorrectly reported the lifetime gift tax exemption. The exemption is $11.18 million for 2018, and not $5.6 million.]

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This article is from Kat Tretina of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Here's What to Do If You Get Audited

Mikey Rox — Tue, 27 Feb 2018 09:30:09 +0000

We often exaggerate the phrase, "My worst nightmare," but when it comes to getting audited, it's true. Audits are many people's worst nightmare — but they don't automatically have to mean financial disaster. To help navigate the unwelcome process, consider these important steps to take as suggested by tax professionals.

1. Don't panic

A lot of folks' first response to receiving their audit notice is to panic. Just the word "audit" has the ability to throw everything into a tizzy. But in all probability, if you've reported your taxes accurately (or at least tried to), the situation is likely not as bad as you think.

"It can be easy to fly off the handle and make what can be simple requests for information into a pressure-filled, stress-inducing scenario," says certified financial planner Joel Ohman. "This need not happen if you have someone — a CPA, tax attorney, or other trusted professional — representing you and counseling you."

Slow down, take a deep breath, and call whoever does your taxes. Trust them; rely on their advice.

2. Read the notice carefully

Take a good look at the audit notice you received. Many audits are desk audits or computer document-matching audits rather than the complete tax return audits done in-person.

"If the audit request is a document-matching audit, they will typically ask you to verify certain lines on the return," explains Grafton "Cap" Willey, CPA and managing director of the New England division of CBIZ MHM. "Very often they will propose an adjustment based on the information they have received. They will state that you reported 'such and such' and they have additional documents that they do not see reported."

3. Prepare the required documents

Documentation is the key to success in audits. Provide organized documents such as 1099s, K-1s, W-2s, and canceled checks, and reconcile them to the amounts claimed on the return. If you do not have adequate documentation, it's more likely that you won't get the deduction.

"IRS information is not always correct, so look it over carefully and make sure that they have the correct information," Willey adds. "Investment gains and losses are often misrepresented and very often the IRS will assume a zero-cost basis on unreported transactions. Providing corrected information will usually satisfy them."

When going through your documentation, if you come up with more deductions than you claimed, don't be afraid to submit them in your response. The IRS can be very strict on accepting documentation for charitable donations and business expenses, however.

4. Submit your documents on time

Don't make matters worse by missing deadlines. An audit is a serious matter that can result in heavy fines, and you don't want to put more stress on the process by being uncooperative. Follow the guidelines and get your documents submitted by the date expected. (See also: The Easiest Way to Avoid a Tax Audit)

5. Don't let your mouth get you in more trouble

The IRS is very good at making people feel nervous about being audited, and when people are nervous, they tend to ramble — sometimes to harsh consequences.

"Remember the IRS's job is to appropriate your money for government needs, and your job is to justify why you should keep the money yourself," explains CFP Brent Dickerson, owner of Trinity Tax Advisory. "They are not your friend, and they are not there to help you keep money for yourself; many people in an audit situation fail to remember this fact. They let down their guard and often say things that they don't even realize can bite them. Therefore, it's in your best interest to have a representative work on your behalf with the IRS."

6. Bring your CPA with you to your in-person audit

If the audit is an in-person audit, consider bringing along a tax professional to represent you at the audit.

"The IRS is not afraid to try to intimidate a taxpayer representing themselves," Willey says. "A tax professional that has experience with tax audits should be aware of the rules and know when the agent may be fishing for issues. Very often, giving a tax professional a power of attorney authority may avoid the taxpayer from having to sit down with the IRS agent, which many taxpayers would like to avoid."

Make sure your records are well organized and well documented; make it easy for the agent to follow. If they have confidence that you're presenting good documentation, they will be more likely to accept what is presented to them.

7. Don't be afraid to disagree and negotiate

Sometimes a tax audit is a negotiation — you may have to concede to some changes on smaller items in order to not have big changes on larger items. It really depends on the agent. Some agents nitpick minor items, while other agents go straight for the big issues.

"In my experience, IRS field agents tend to rigidly apply the law in favor of the Treasury," says Matthew T. Eyet, Esq. of Sandelands Eyet LLP. "If at the end of the audit you think the agent got it wrong, file a protest to take your case to the Office of Appeals where the appeals officers are typically more taxpayer-friendly in their analysis."

In addition, he adds, unlike field agents, appeals officers are allowed to consider the hazards of litigation when negotiating a settlement. This almost always means a better result for you.

8. Hire an enrolled agent if you're caught red-handed

If you've really dug yourself a hole and committed criminal acts by submitting fraudulent taxes, you'll need more than a CPA to help you. An enrolled agent is a tax expert and recognized by the IRS as having unlimited right of representation. They're your best hope of the least amount of recourse.

"If you are facing counts of criminal charges, you'll need a lawyer," says Dickerson. "If your business is being audited or if you have a sole-proprietorship with lots of accounting needs, then you may want to opt for a CPA. All of these professionals have their own specialties when it comes to tax and each is able to represent clients in front of the IRS — but only attorneys can represent in cases of criminality." (See also: 10 Reasons You Should Really Fear an IRS Audit)

9. Pay what you owe ASAP

You want this situation to be over, and the best way to accomplish that is to pay what you owe immediately. If you don't, you run the risk of added interest and penalties with late fees on top of that.

If you don't pay the balance in full in the first 21 days of receiving notice of what you owe (for balances less than $100,000), penalties begin accruing. The faster you can get this squared up and put behind you, the better.

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This article is from Mikey Rox of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Here's What to Do If Your Wages Are Garnished

Denise Hill — Tue, 27 Feb 2018 09:00:08 +0000

The concept of wage garnishment is frightening. And while having your wages taken to pay off a creditor is considered an extreme "last resort" to collect on a debt, it is more common than you may think.

A 2013 report by ADP Research Institute found that approximately 7 percent of the 13 million employees assessed in their survey had experienced wage garnishment that year, the majority of which were workers aged 35 to 44. The most common reasons for this drastic form of collection were unpaid taxes, child support, consumer debts, and student loans.

If you have fallen behind repaying what you owe, and creditors are threatening to or have already garnished your wages, here are the things you should do. (See also: Be Careful Who You Owe: Here's Who Can Garnish Your Wages)

Understand what wage garnishment means

First, it is important to understand what wage garnishment is and how it works. In a wage garnishment, creditors have sued and won a judgment against you. A court issues an order requiring your employer to withhold a portion of your paycheck. This is done until your debt is paid in full. Different garnishment rules apply to different types of debt and each state sets its own legal limits on how much of your paycheck can be garnished.

Nonwage garnishment, which is also known as a bank levy, is a legal action that allows creditors to tap directly into your bank account. Typically, the funds in your account are frozen, and the bank is ordered to remove the necessary funds to satisfy the debt.

Once a judgment is entered against you, the person or entity that won the lawsuit gains access to a portion of your wages by providing a copy of the court order to local law enforcement. Law enforcement sends the court order to your employer. Your employer must notify you of the garnishment and begin withholding part of your wages. Your employer is also responsible for ensuring the garnished funds are sent to your creditor. (See also: What Really Happens When You Don't Pay Your Student Loans)

Know your rights

If you have defaulted on a loan, stopped paying your credit card bill, or have incurred massive amounts of medical expenses, creditors can't just take money from your paycheck. There is a process that must be followed.

You have to be sued.
A judgment must be entered against you.
A court ordered wage garnishment must be issued.
You have to be notified of the court order (by your employer, and most times the creditor).
You have the right to appeal the decision.

It is also important to note that federal law places limits on how much creditors can take from your paycheck. The amount that can be garnished is capped at 25 percent of your net income or the amount by which your weekly wages exceed 30 times the minimum wage, whichever is the lowest. Some states set lower garnishment limits so it is important to know the laws that apply to your particular situation.

Know the exceptions to the rules

While the above rules govern most cases of wage garnishment, there are a few exceptions. For example, when it comes to child support, half your net earnings can be taken without a court order. If you don't have a spouse or other children whom you support, a whopping 60 percent can be taken. And an additional 5 percent can be tacked on if you are more than 12 weeks in arrears.

If you owe money to the IRS, tread carefully. It can take a big bite out of your wages, without a court order. The amount it can take depends on the number of dependents you have and your standard deductible amount. However, before snatching your money, the IRS must notify you of their intent first. They are required to send a wage levy notice to your employer, who is required to supply you with a copy. (See also: 10 Reasons You Should Really Fear an IRS Audit)

State and local tax agencies can also garnish your wages without a court order. Most states have laws limiting how much they can take. The information concerning the rules and limits is available at your state's department of labor.

The bottom line is unless you owe child support, back taxes, or student loans, your creditors cannot garnish your wages without going through the appropriate steps and obtaining a court order.

If possible, avoid the process altogether

When facing a situation where you know you can't pay a debt — of any kind, but especially child support — the best course of action is to be proactive. Contact your creditors (or petition family court) and try to reach a restructured payment arrangement.

If you don't show up to court or you lose your case, the creditor automatically wins a judgment against you to garnish your wages or bank account.

Try to settle the debt

If you know a creditor is considering taking legal action, see if you can settle the debt. This is especially effective with credit card companies. Often times, most creditors (including the IRS) are willing to accept a settlement — which is a partial payment of the total amount due — in lieu of going to court. This allows you to avoid a lawsuit, wage garnishment, and even more damage to your credit. (See also: 4 Ways to Negotiate Credit Card Debt)

Understand the court order

If a judgment is issued against you, carefully review the court documents. Make sure all the information is accurate. Creditors can make mistakes. Check to ensure the outstanding amount is correct and it's not something you've already paid. Also, examine the debt carefully to be sure that it is indeed your debt. We live in an era of security breaches and identity theft. It is important to ensure that you are not being sued for someone else's fraud.

It is also important to know that in some circumstances, some states provide protection for a portion of your wages — these are called exemptions. When you receive the garnishment notice, research the laws in your state and find out if and how much wage protection you are entitled. File a petition in state court requesting the exemption.

Challenge the judgment

When a judgment is issued against you, you have the right to appeal it. If you believe the judgment is flawed, is unreasonable, will cause undue financial harm, or is being improperly executed, you can contest the court's ruling. You will be notified of the ruling and of the process to appeal. Pay attention to rules governing the appeal and file immediately — in some cases, you may have as little as five business days to voice your objection. If you fail to show up in court, the creditor automatically wins a judgment against you.

Accept the judgment

Accepting the judgment isn't necessarily a bad thing. You are forced to face and remedy a situation that has probably caused you copious amounts of stress. You can simply allow your wages to be garnished and make your payments that way.

Don't file for bankruptcy or quit your job

Bankruptcy immediately stops garnishment proceedings, however it is ill-advisable to file just for this reason. Bankruptcy carries with it a litany of consequences and implications and shouldn't be considered lightly. Filing bankruptcy to avoid wage garnishment would be akin to extinguishing a match with a fire-hose. Always consult a professional before you take any drastic measure that can have detrimental and long-term consequences.

Quitting your job is equally ill-advisable. You're doing nothing but prolonging and complicating the process. If you fear retaliation from your employer, understand that under federal law, you cannot be fired if your wages are garnished to pay off one debt. These protections lessen, however, if more than one creditor has garnished your wages.

It's also important to note that becoming unemployed doesn't negate the judgment. The judgment will be enacted on the next job you get and is still part of your credit history. Continuously trying to skirt payment could result in the court taking more aggressive action which could include serving jail time.

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This article is from Denise Hill of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Tax Scams You Should Know About for 2018

Kat Tretina — Tue, 30 Jan 2018 09:00:05 +0000

Tax season is underway. While no one really enjoys doing their taxes, everyone looks forward to getting a tax refund. It's no wonder why. According to the IRS, over 80 percent of tax returns resulted in a refund for tax year 2015. And the average refund was a whopping $3,120.

However, all that money makes tax season one of the busiest times of the year for scam artists. Each year, criminals target taxpayers to steal their personal information or their tax refunds.

Most scammers prey on vulnerable populations, such as the elderly or first-time tax filers, but anyone can be at risk. These are the top tax scams you should be aware of in 2018. (See also: Beware These 6 Phony IRS Calls and Emails)

1. Threatening phone calls

A common tax scam involves aggressive phone calls. You'll receive a call — sometimes from a number that shows up on caller ID as from a Washington D.C. area code— and the person on the line will claim to be a representative of the IRS.

They can be very convincing. They may know your full name, your mother's maiden name, and even the last few digits of your Social Security Number.

That person will say you're behind on your taxes or filed a fraudulent return. They may threaten you with immediate arrest, going so far as to say police are on their way to your home. They'll say the only way to avoid jail is by making an immediate payment with a credit card over the phone.

Know that the IRS does not communicate over the phone and does not threaten taxpayers with jail time. If there is a problem with your return, or if you do owe money, you will receive a notification in the mail. If you receive these calls, hang up right away.

2. Information phishing

Similarly, you may receive calls or emails from so-called IRS representatives or tax preparation software companies. They may claim that there's a problem with your return or refund and that they need to verify your information to fix the issue. They'll ask for personal information like your Social Security number, birth date, and place of employment. Then, they use that information to file a fraudulent return in your name to claim your refund.

Remember, the IRS will only send you information through the mail. If you're unsure if an email is real, open up a new browser window and log into your account that way, or look up your tax preparer's phone number and call that person directly.

3. Requests for gift card payments

Another scam involves a call from an IRS impostor who claims that your return notification letter was returned as undeliverable. That person will tell you your bill is overdue and that you must make a payment immediately.

Instead of asking for your credit card or personal information, they'll ask you to send them a prepaid gift card or debit card. Know that the IRS does not accept payments in this format.

4. Identity theft

Identity theft is a serious issue. You may think that canceling and replacing your credit cards is all you need to do, but the problem can be much more involved than you think. Thieves can use your personal information to submit a fraudulent tax return and collect your refund.

If you went through any form of identity theft, or if your personal information was stolen, it's a good idea to place a fraud alert on your credit reports and notify the IRS. If you suspect tax-related identity theft — for example, when you try to file your return you get a notice that your return has already been filed — you'll need to fill out IRS Form 14039, Identity Theft Affidavit, and follow the mailing instructions on the form.

Moreover, it's a good idea to complete and submit your tax return as soon as possible to ensure thieves cannot submit a return in your name. (See also: 8 Reasons You Should File Your Taxes as Soon as Possible)

5. Tax preparer fraud

Fraudulent tax prep "professionals" often advertise their ability to get you the largest refund possible. They do this by falsifying information on your return, such as adding nonexistent dependents, claiming credits or deductions you don't qualify for, and reporting incorrect income. They'll also typically base their rates off a percentage of your refund.

The IRS encourages you to ask your tax preparer questions about anything suspicious or confusing, and to look into their credentials and certifications before agreeing to hand over your return. All legitimate tax preparers should have a PTIN (preparer tax identification number).

It's important to carefully vet your tax professional and to closely look over any forms before signing. Regardless of whether you've been scammed or not, you will still be on the hook for any fraudulent information reported on your return.

Verifying any IRS activity

Some scam artists can be very convincing. If you're not sure whether it's a con or not, hang up or close your email. Call the IRS directly at 1-800-829-1040. You'll be connected with a real representative who can review your account and let you know if there's anything they need from you. They can also help you report any fraudulent activity or scams.

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7 Things You Need to Know About 401(k) Hardship Withdrawals

Dan Rafter — Tue, 23 Jan 2018 09:30:09 +0000

You know it's a bad idea to take money out of your retirement plan before you turn 59 ½ years old. Not only will you face hefty financial penalties, you're risking your financial stability in the future. But what if you're facing an economic hardship and you're in dire need of the money?

If you have a traditional IRA or Roth account, you can take an early withdrawal at any time. In some cases, you can even avoid the withdrawal penalty, if you meet certain criteria. It's harder, however, to withdraw money early from your current employer-sponsored 401(k) plan. You'll need to check if your plan allows for an early withdrawal. Some plans will only allow contributors to take out what are known as hardship withdrawals before you hit age 59 ½.

The bad news is there aren't many situations in which you can qualify for these hardship withdrawals. And of course, taking money out of your 401(k) plan early is never an ideal financial move. (See also: 5 Dumb 401(k) Mistakes Smart People Make)

Here are a few key things you need to know about hardship withdrawals.

1. "Hardships" have set definitions

IRS rules spell out a narrow list of circumstances in which you can qualify for a hardship withdrawal. If you want to use your money for anything other than these special cases, you're out of luck.

For all scenarios, there must be an immediate and heavy financial need to take an early 401(k) withdrawal. Acceptable scenarios include unexpected medical expenses, tuition and educational fees, and burial or funeral expenses. You can also qualify for a hardship withdrawal for costs related to purchasing a home, if your home is damaged and you need to pay for repairs, and to keep yourself from being evicted or foreclosed on.

2. Hardship withdrawals come with big penalties

If you do need cash quickly, your 401(k) plan might seem like a logical place. After all, the money in your plan is yours. But a 401(k) plan is supposed to force you to save for your retirement, not be a source of emergency funds. That's why most plans won't allow you to take money out of them until employment with your company ends.

Hardship withdrawals are the exception to this. But if you use this exemption to take money out of a 401(K) plan before you turn 59 ½, you'll be hit with penalties. First, these early withdrawals are taxed as ordinary income. Even worse, your early withdrawal will also be hit with a 10 percent federal tax penalty.

This makes withdrawing 401(k) funds early, even for a financial hardship, painful. If you have an alternative way to get the money you need, you should take advantage of it. (See also: How to Come Up With $1,000 in the Next 30 Days)

3. There can be penalty exceptions

That 10 percent penalty is harsh, but there are circumstances in which you might not be hit with it. You might be able to avoid that penalty if you are disabled or if your medical debt is higher than 7.5 percent of your adjusted gross income. You might also avoid the penalty if a court has ordered you to give the money from a hardship withdrawal to a former spouse, a child, or a dependent.

4. Not all plans allow for hardship withdrawals

Not all 401(k) plans have the option to take hardship withdrawals. Your employer decided whether it wanted to offer such withdrawals when it set up its plan. There is no requirement from the IRS that employers offer such an option.

To determine if your plan allows for these withdrawals, contact your plan administrator. In most companies, this will be someone in your human resources department.

5. There are limits to your withdrawal

Even if you quality for a hardship withdrawal, you can't take out an unlimited amount of money. IRS rules state that you can only take money from your 401(k) account if you have no other funds to cover your hardship. And then, you can only withdraw enough funds to cover the costs of your financial emergency. You can't take extra dollars for a financial cushion.

6. You may need proof of your hardship

Your plan administrator may require proof that you need to take the hardship withdrawal. This might mean you'll have to provide your administrator with copies of medical bills, repair bills, or an eviction notice. You might also need to provide copies of your bank account statements proving that you don't have other funds available to cover your financial emergency.

7. When the money is gone, it's gone

After you take a hardship withdrawal, you are typically forbidden to make any deposits into your 401(k) account for six months. Once that six-month period ends, you are allowed to start depositing money back into your 401(k) account as you had been doing before.

This brings up what might be the biggest negative to hardship withdrawals: The money you take out of your 401(k) plan is gone forever. It is not a loan. You aren't simply borrowing it and putting it back. This could really hurt come retirement time.

This is why you should search for other means to cover your financial emergency. Turn to hardship withdrawals only as an absolute last resort. (See also: 3 Sources of Fast Cash Besides Your 401(k))

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What Every Retirement Saver Should Know About Required Minimum Distributions

Emily Guy Birken — Wed, 10 Jan 2018 09:30:11 +0000

You may be aware of the fact that contributing money to a tax-deferred retirement account, like a traditional IRA or a 401(k), means you get to put money aside before it is taxed. This reduces your current tax burden and gives you a great incentive to save for retirement.

Unfortunately, Uncle Sam will eventually want his cut of that money. That's where required minimum distributions (RMDs) come in.

The good news is that you have until age 70½ before you have to worry about RMDs. But it's still important to understand how RMDs work and what to expect before you get to that age milestone.

What is a required minimum distribution?

Deferring taxes is great for the taxpayer, but the IRS can't afford for taxpayers to defer their taxes indefinitely. Individuals with tax-deferred retirement accounts have to actually withdraw money — and thereby pay taxes — or else those taxes will never get paid.

Everyone holding a 401(k) or IRA account (with the exception of Roth IRAs) must begin withdrawing money from those accounts during the year they reach age 70½. This ensures that account holders have enough time to allow their money to grow without permanently sheltering their money from federal taxes.

The IRS has established minimums that you must withdraw each year after reaching age 70½. If you fail to withdraw the proper RMD, you face a stiff penalty: The IRS will take 50 percent of the amount you should have withdrawn.

Calculating your RMD

It's also important to note that you are responsible for calculating and withdrawing the correct RMD each year — and the calculations aren't necessarily easy. Even if the custodian of your IRA or 401(k) does the math and paperwork for you, you are the responsible party in the IRS's eyes.

So how do you figure out your RMD? You need to start with three pieces of information:

Your date of birth.
The balance of each tax-deferred account as of Dec. 31 of the year before the year in which you turn 70½.
The IRS distribution table.

This IRS distribution table calculates your life expectancy based on your age. The table gives you a number that corresponds to the number of years the IRS expects you to live.

For instance, let's say a retiree was born on February 4, 1948, and will turn 70 in the first half of 2018. This retiree has a single IRA, with a balance of $250,000 at the end of 2017 (the calendar year before the year in which she turns 70½). To calculate her RMD, she'd look up her age (70) on the IRS distribution table to find the distribution period, which in this case is 27.4. She would then divide her IRA balance by the distribution period for her 2018 RMD:

IRA balance / Distribution Period = RMD

$250,000 / 27.4 = $9,214

To keep on the right side of Uncle Sam, she will need to withdraw a minimum of $9,214 from her $250,000 IRA in 2018. But remember, the operative word is "minimum." Account holders can always take more than their RMD if they choose to do so.

Why am I celebrating my 70½ birthday?

While 70½ may seem like an arbitrary number, there is a lot of thought put into this milestone age. The IRS makes a distinction between people born in the first half of the year, and those born in the second half. If your birthday falls between July 1 and Dec. 31, you don't officially have to take an RMD until the year you turn 71.

This means that those with birthdays in the first half of the year take their first RMD the year they turn 70, and those with the later birthday take their first RMD the year they turn 71 — which averages out to 70½. (See also: 6 Age Milestones That Impact Your Retirement)

Required beginning dates

To offer retirees a little more time to get their ducks in a row, the IRS does not require account holders to take their first RMD until April 1 of the year following the one in which you reach age 70½. That April 1 deadline is known as the required beginning date. The year in which that date falls depends on whether you have a birthday in the first or second half of the year.

So, our Aquarian born Feb. 4, 1948 will turn 70½ on Aug. 4, 2018. But remember, those born in the first half of the year calculate their RMD based on the year before they turn 70. So while she can wait to take her first RMD until April 1, 2019, at that point she'll calculate that RMD based on her age of 70 (which was her age as of Dec. 31, 2017), as well as her account balance as of Dec. 31, 2017.

The first year following the year in which you reach 70½ you will usually have two required distribution dates. Besides the April 1 date we just discussed, you'll also have to take another withdrawal by Dec. 31 of that same year. For our Aquarian, that means she will have to take a second RMD by Dec. 31, 2019. This RMD will be calculated based on her 2019 age of 71 and her account balance as of Dec. 31, 2018. This distribution catches her up on her requirements, and during all subsequent years, she is only required to take one RMD.

The required beginning date is similar for anyone with later birthdays. Let's say you're a Virgo with an Aug. 31, 1948 birthday. You'll turn 70½ on Feb. 28, 2019, which means you won't have to take your first RMD until April 1, 2020, and you'll calculate the amount based on your age of 71 (which is your age as of Dec. 31, 2018) as well as your account balance as of Dec. 31, 2018 — the year before you turned 70½. In addition to the April 1, 2020 distribution you will also have to take your 2020 RMD by Dec. 31, 2020, which you will calculate based on your age then of 72, and your account balance on Dec. 31, 2019.

Figuring out your required beginning date

If your birthday falls between Jan. 1 and June 30	If your birthday falls between July 1 and Dec. 31
Your required beginning date is April 1 of the calendar year you turn 71.	Your required beginning date is April 1 of the calendar year you turn 72.
You will use the age of 70 to calculate your first RMD amount.	You will use the age of 71 to calculate your first RMD amount.
Your second RMD is due by Dec. 31 of the calendar year you turn 71.	Your second RMD is due by Dec. 31 of the calendar year you turn 72.

How your RMDs are taxed

Since the entire exercise of taking RMDs is about making sure you pay the income taxes you owe, it's important to understand how your distributions will be taxed.

Your RMDs will be taxed as regular income at your applicable federal tax rate for the tax year for which you are making the withdrawal. This, in fact, may be the easiest-to-understand aspect of RMDs.

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This article is from Emily Guy Birken of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

The Cost of Finding a Treasure Chest Full of Gold

Paul Michael — Tue, 28 Nov 2017 09:00:06 +0000

Most of us have had the fantasy of discovering hidden treasure. Maybe it's digging in the backyard and unearthing a chest of gold, or it washes up on the beach. However it happens in your mind, finding treasure and living happily ever after is the end of the story. But what about the costs and legalities involved? How much of that treasure would you actually get to keep?

First, can you legally keep the treasure?

"Finders keepers, losers weepers." Is that an accurate description of the law when it comes to treasure, or finding anything of value? Well, yes and no. United States common law dictates that a treasure trove belongs to the finder. However, there are discrepancies to this in some states.

For example, Texas does not recognize the common law regarding treasure troves. In Louisiana, found treasure must be split between the finder and the property owner. In Tennessee and Idaho, the treasure belongs to the landowner.

In other states, you are required to make a reasonable effort to return found treasure to the rightful owner, which includes first taking it to the local police. If no one claims the find after a certain time period, it's yours. If you find treasure and do not report it or make efforts to return it to a rightful owner, you can be found guilty of theft. What's more, if the gold you find was due to criminal activity, it could well be claimed by the state if the rightful owner cannot be found.

So, make sure you are free and clear in the eyes of the law before you think of spending a cent from that chest of gold.

How much of the treasure will be yours to own?

Again, this is going to vary depending on what you found and where you found it. Look at the example of the Schmitt family and the treasure chest they found on a shipwreck in 2015.

Filled with gold and coins valued at over $1 million, it would seem they hit the jackpot. However, the haul was discovered on a wreck off the coast of Florida. By law, the state collected 20 percent of that $1 million, and as the wreck was owned by a company called Queens Jewels, LLC, the remaining gold had to be split 50-50 between that company and the Schmitts. That reduced their $1 million find to $400,000.

You may get lucky and find your treasure on a piece of land not owned by anyone, and live in a state that abides by the treasure trove law. But guess what? You still have to pay Uncle Sam ...

That treasure chest's value must be reported to the IRS

Taxes: It's a dirty word at the best of times, but it can really cast a dark cloud over your haul. IRS code section 61 states that "gross income means all income from whatever source derived." While the tax code does not specifically call out buried treasure, it has been left broad enough to collect taxes on whatever the IRS deems to be income. And you can bet a find of valuable gold coins or jewels will make the IRS sit up and take notice. You can look for legal deductions to reduce your tax burden, but don't avoid paying it altogether. If you are living a Champagne lifestyle on a beer budget, the IRS will become suspicious. (See also: 35 Bizarre Things You Can Be Taxed On)

Know what you're selling, and how to sell it

So, you've gone through all the steps, and the treasure chest is yours. It's time to sell the gold and pocket the cash, and you know you will have to report that money to the IRS. What are your options?

For a start, you need to know exactly what it is that you're selling. Not all gold coins and jewelry are made alike. In some instances, you may have a very valuable artifact that has historical significance, or was made by a highly-prized designer. In that case, the object will be worth much more than the going rate for an ounce of gold. If you have these items appraised, and they are indeed collector's pieces, you will most likely have to put the object up for auction. In that case, the auction house will take a percentage of the final value.

If, on the other hand, it's simply a bunch of gold that is worth the going market price, you should find legitimate sales avenues. The first place to go is a reputable jeweler in your area. Their main source of income comes from selling jewels, not trading in gold, and they will be less likely to rip you off. Avoid those "cash for gold" places; they will try to give you the least possible amount of money for your trade. The same is true of pawn stores. The owners aren't knowledgeable in what you have, and just want to buy low and sell high. Also, do your homework. What kind of gold do you have? If it's 24 carat gold, it will get the highest value.

A box of treasure is a lucky find however you slice it — but you will not get to keep the whole amount unless you're intent on breaking the law and accepting the consequences.

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This article is from Paul Michael of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Don't Get Audited! How Your Side Gig Needs to Handle Taxes

Damian Davila — Thu, 26 Oct 2017 09:00:06 +0000

The gig economy is booming. In 2016, a TIME poll found that 45 million Americans offered some kind of good or service through an online platform, whether it was running errands, renting out their homes, or offering rides in their cars. With so many people earning extra income this way, you can bet that Uncle Sam wants its fair share of those earnings. Understanding some basic rules about taxes in the gig economy can help you avoid frustration and penalties.

Renting out your home

At $924 per month, Airbnb hosts command the highest average monthly income out of all others taking part in the sharing economy. Here are some key things to keep in mind if you rent your space. (See also: 13 Things I Learned From Renting Out My Home on Airbnb)

1. The 14-day rule

According to the IRS, if your rental property also serves as your residence, and you rent out the space for no more than 14 days during the year, you don't have to report those earnings as income. Note that you also cannot claim any deductions from rental expenses if you rent for fewer than 14 days per year.

Airbnb and similar companies will still report your earnings even if you're under the two-week threshold. But as long as you provide documentation that you meet the 14-day rule, you don't have to include rental income on your federal return. If you do have to report income, use Schedule C or E of Form 1040.

2. Deductible expenses

The IRS allows you to deduct a long list of applicable costs for your rental operation, including advertising, cleaning and maintenance services, utilities, property insurance, and property taxes. Check the rental section on IRS Publication 527 for a full list of eligible expenses.

You can deduct 100 percent of direct rental expenses such as fees to Airbnb and rental insurance, and allocate a portion of general expenses such as mortgage interest and utilities. If you only rent out a room that is one-sixth of the size of your home, you can only allocate one-sixth of a general expense.

3. Form 1099-K

When you earn over $20,000 and make over 200 transactions in a calendar year, Airbnb will issue you a Form 1099-K. Airbnb will mail you this form and keep an electronic copy under "Payout Preferences." This form is an IRS information return used to report certain payment transactions, which improves your voluntary tax compliance.

4. Pay attention to local occupancy taxes

On top of the IRS, you should also keep an eye on state and local government agencies. For example, throughout 2017 the House Finance Committee of Hawaii is evaluating an "Airbnb bill" to collect hotel room and general excise taxes from Hawaii-based short-term and vacation rentals.

5. Report rental losses

In the event that your rental operation goes sour, you can deduct losses up to applicable limits. Let's imagine that you own a $400,000 home and that you spent $400 to get a room ready for rental. However, nobody took you up on your offer. Per the IRS at-risk rule (for property placed in service after 1986), you can write off up to $400,000 in rental losses. So, you can deduct the $400 as a rental loss on your return.

Driving people in your car

Lyft and Uber drivers make an average $377 and $364 per month, respectively. Here are some tax-related pointers to keep in mind when declaring that income. (See also: How to Get a High Rating and Make More Money as an Uber Driver)

1. Keep track of all 1099s

Unlike a full-time employer, Uber and Lyft won't issue you a W-2. Instead, these and other ride-sharing companies issue two types of 1099 forms to most drivers.

Form 1099-K: Includes all payments that you received from customers directly related to driving.
Form 1099-MISC: Keeps track of all other non-driving income, such as payments for referrals and other types of bonuses.

While companies aren't required to issue a 1099-K unless you process 200 transactions or more (and make at least $20,000), and they're not required to issue a 1099-MISC unless you make at least $600, Uber and Lyft generally will issue those forms anyway just to remind you to report your income made through ride-sharing.

On Uber, access your tax documents by logging in to partners.uber.com and clicking "Tax Information." On Lyft, look for tax documents in the "Tax Info'" tab of the "Driver Dashboard" of your Lyft app.

2. Deduct applicable expenses

You'll quickly notice in Box 1a of your 1099-K that the reported amount is actually greater than what you received. The reason is that the reported amount in that box includes Uber's commission and other fees. On your Schedule C, Profit or Loss from Business (Form 1040), you can deduct those fees and other applicable expenses. Some examples are:

Bottled water and snacks for your passengers.
Business taxes and license costs.
Highway tolls.
Car cleaning expenses.
Car maintenance costs.
Gas.

It's a best practice to keep a copy of all receipts so that you can back up your claims. One great way to do so is to open a bank account or credit card and use it solely for driving-related expenses. That way, your monthly statement becomes your monthly expense report. (See also: When You Should Get a Business Credit Card Over a Consumer Card)

3. Include mileage in your return

Within your 1099s, you'll also receive a summary for "On-Trip" mileage. For all business miles driven in 2017, you can deduct 53.5 cents per mile. So, if you were to drive 2,000 miles, you would deduct $1,070 (2,000 x $0.535) on your return.

You may also deduct additional miles that Uber and Lyft didn't report as long as those miles are directly related to your gig. Some examples are miles that you drove before a ride was canceled or on your way to meet an Uber or Lyft inspector. Keep a detailed log of those miles and include date, time, initial mileage, and final mileage.

4. Consider getting a separate smartphone

An internet-enabled smartphone is a key part of your operation. To make it easier for the IRS to identify what mobile phone expenses are related to your driving, get a new phone and use it exclusively for Uber or Lyft. This way you'll be able to deduct 100 percent of all phone costs, including cost of the phone, monthly charges for voice and data, and any essential accessory (chargers or mounts) from your driving income.

Tips for all side giggers

Whatever your gig, be sure you're keeping up with your taxes.

1. Report all income

From assembling furniture through TaskRabbit to delivering business supplies with Postmates, there are plenty of other ways to make money through the sharing economy. (See also: 13 Ways to Make Money Online That Aren't Scams).

All companies have to issue you a 1099-MISC once you make $600. Even when you don't hit that threshold and don't receive a form, report the income on your return. The IRS charges a 25 percent inaccuracy penalty on top of applicable taxes and interest for late payments.

If you happen to complete additional tasks or services for a client that aren't tracked on an app or website, it's a good idea to still include them in your income. When you're making the bulk of your income through the gig economy, your federal tax return becomes a key document to prove how much you make per year. This can be useful when applying for a credit card or other form of credit.

2. Make estimated federal and state tax payments

Lessen the tax blow by submitting estimated tax payments throughout the year. Use Form 1040-ES, Estimated Tax for Individuals to submit tax payments up to four times per year. For tax year 2017, you can submit payments on April 18, June 15, September 15, and January 16, 2018.

Most states also allow side-giggers and freelancers to submit estimated tax payments. To learn more about your state tax obligations, contact your local state tax office.

3. Adjust withholding from your day job

Don't pay more taxes than you have to. If a full-time employer is already withholding taxes from your paycheck, use the IRS Withholding Calculator to adjust how much is taken out. It has been estimated that 75 percent of Americans pay too much in taxes throughout the year. The calculator will provide you suggestions to adjust your withholding so that you meet your tax liability and keep the most out of your day job paychecks.

4. Hire an accountant

Using Schedule C from Form 1040 is a great way to reduce your taxable income, but is also a way to increase your chances of receiving an audit from the IRS. Individuals using Schedule C are more likely than corporations to get an audit. If you're planning to include a very long list of deductions, paying a professional will be worth your while to hedge against a potential audit. You can deduct what your accountant charges you as a business expense, after all.

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This article is from Damian Davila of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

9 Ways Expats Can Maintain Their Credit Scores

Carrie Kirby — Mon, 18 Sep 2017 08:30:10 +0000

Moving abroad can feel like the ultimate fresh start. But one element of American life you should never jettison is your good credit. Your U.S. credit score may not mean much in a foreign land, but assuming that you are not relocating for the rest of your life, you'll need that credit score someday when you come back. Rather than letting your credit score fall out of good graces, here's how you can maintain it while living abroad:

1. Don't run away from debts or financial obligations

At the end of college, my boyfriend and I landed exciting jobs in Beijing. The only problem was that we had a yearlong lease on our college apartment with nine more months left on it. When we couldn't find a subletter, we ditched and hoped for the best.

Bad idea. When the landlord stopped receiving rent checks, he threatened to report us to a collections agency and to the credit bureaus. We ended up negotiating a partial payment, and we learned a valuable lesson: You can't run away from what you owe.

2. Keep your credit cards open

You're off to live in the jungles of Tropicanaland, where the only currency accepted is the cowrie shell. So why would you need those plastic credit cards that have to be paid in U.S. dollars?

Keep them — especially the ones you've held longest — because the age of your credit accounts is a factor in your credit rating. Imagine you had just one credit card. If you have had that card for 12 years, close it when moving abroad for three years, then come home and have to open a new account, your average account age just went from 12 to zero. That will hurt your credit score. If you keep it open while you're gone, you'll instead come home to an average account age of 15.

Another way that keeping your credit cards open benefits your credit score: It improves your credit utilization ratio, which calculates the percent of available credit that you're using. The higher this ratio, the more negatively it will impact your credit score. If your cards are paid off, and you leave them open, the amount of available credit you have increases — raising your credit score.

3. Find a way to use your credit cards periodically

The largest single factor for your credit score is whether you make payments on time. If you're not using your credit, you have no opportunity to demonstrate that you pay on time, which could hurt your score. Not only that, but a card issuer may close an account that sits dormant for years. There's no hard rule on when that might happen, but if you're going to be overseas for a very long time, it's a risk. (See also: How to Avoid Getting Your Credit Card Canceled)

To keep your payment track record going and to prevent an account from being considered inactive, find some regular expenses to set up on autopay. Maybe you still belong to a U.S. professional organization that you pay dues to, or want to support your favorite charity with an annual gift.

In many, even most, countries, you could use your U.S. credit cards on local purchases. However, you might be paying foreign transaction fees or losing money due to the exchange rate. Also, if most of your income is earned abroad, it might be hard for you to pay for a lot of ongoing charges in U.S. dollars. Consult the card issuing bank and consider the exchange rate implications before deciding to use your credit cards abroad long term. (See also: Follow These 5 Credit Card Rules When Traveling Abroad)

Of course, in order to pay for these charges, you'll probably also need to keep a U.S. checking account open and funded.

4. Establish online accounts

When I lived abroad, I had to rely on my mother to open my mail and make sure any charges got paid. This could get embarrassing, like the time my mom asked why I was spending hundreds at a place called "Casino." I had to explain that this was really, truly the name of a French grocery store.

Nowadays, if you are living in a location with unfettered internet access, you may be able to handle your business without stateside help. Before you go overseas, establish online access to your checking and credit accounts. This should allow you to not only pay your bills remotely, but also monitor your accounts for fees, fraud, and overdrafts — other potential causes of credit score damage. You can even choose to have your credit card bill paid out of your checking account automatically, if you're confident that the funds there will cover the bills.

5. Touch base with your banks and credit accounts before you move

It's always a good idea to inform banks and creditors when you're traveling, but even more so if you are moving away long term. They may have special hotlines for contacting them if you need help overseas. And knowing where you live could help your card issuer catch fraud more easily.

6. Maintain a U.S. address

Seasoned expats advise this for a number of credit-related reasons. Some banks, credit cards, and investment accounts might not be set up to do business with a foreign address. If for some reason you want to open a new account, you'll need a domestic address to do so.

You can use a friend or relative's address or a mailbox service. Either way, make sure you are able to actually read any correspondence you get in a timely manner. That way, if a bank or credit account sends you a warning notice, you'll know right away and avoid credit-damaging mistakes. Fortunately, there are now services that will open and scan all mail for you, in case you don't have anyone you trust at home to do this.

7. Pay your taxes

If you don't pay money you owe to the U.S. Internal Revenue Service, you could end up with a tax lien sitting on your credit report for the next seven to 10 years — and good luck getting any credit in the U.S. while that is sitting there stinking things up.

You may or may not owe taxes while you are living and working abroad, but you should still look into whether you need to file a tax return. You can claim a credit for any taxes you pay to a foreign government, which may eliminate your tax burden to the IRS. However, you'll still owe for any taxable U.S. investment gains or income such as rent payments on a U.S. property you own. It's especially important to report foreign bank and investment accounts to the IRS. Some expats advise hiring an accountant who specializes in Americans living abroad to file your tax return.

8. Expect to spend time shoring up credit when you return

If your only use of credit during a decade overseas was credit cards, you may have saved your credit profile from oblivion, but it still won't be as great as it might have been if you'd stayed home. That's because about 10 percent of your credit score is based on having a healthy mix of credit types: not just "revolving accounts" like credit cards, but also installment loans such as a car loan or a mortgage.

Get back on the credit horse when you get home, and after making a series of on-time installment loan payments, you should see your score improve.

9. Be vigilant against identity theft

Being far away might make it easier to miss the warning signs of identity theft, such as bills arriving at your home addressed to someone else. So monitor those online statements and check your credit report regularly. You might even consider paying for a credit monitoring service. (See also: Don't Panic: Do This If Your Identity Gets Stolen)

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This article is from Carrie Kirby of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

What to Do After Losing Your Social Security Card

Dan Rafter — Wed, 31 May 2017 09:00:11 +0000

You lost your Social Security card. Any time personal information goes missing, it can be unnerving. How big of a problem is this, exactly?

The card itself is not much of one. Replacing a lost Social Security card is free and relatively simple. The bigger worry is what happens if your Social Security number falls into the wrong hands, and criminals use it to steal your identity. Then, you have a problem.

You can reduce the odds of trouble by acting quickly. Follow this fast plan if you've lost your Social Security card.

Protecting your identity

To understand whether someone has stolen your Social Security number, keep a close watch on your credit reports. Thieves could use your Social Security number to apply for new credit cards in your name, racking up debt without you even realizing. This could send your credit score tumbling. You might also start receiving calls from angry creditors wondering why you haven't paid your bills.

The best way to determine if someone is illegally using your Social Security number is to order copies of your credit reports from AnnualCreditReport.com. You are entitled to one free credit report from each of the three national credit bureaus — Experian, Equifax, and TransUnion — each year. Once you have your reports, study them carefully. Look for new lines of credit taken out in your name that you know you never applied for.

If you do suspect someone is using your Social Security number illegally, visit IdentityTheft.gov, a website run by the Federal Trade Commission, to report the theft. You can also file an online complaint with the Internet Crime Complaint Center.

It's important to also report the theft to either Equifax, Experian, or TransUnion. The credit bureau will place a fraud alert on your credit report, and will also notify the other two bureaus so that they will do the same.

Next, contact the IRS. This will keep identity thieves from filing a tax return in your name and then collecting a refund that is owed to you.

A simple fix if there's no evidence of identity theft

If you want a new Social Security card, you may be able to apply for a replacement on the Social Security Administration's website. Replacements are free. First, you'll need to create a mySocialSecurity account. You must be a U.S. citizen who is 18 or older with a U.S. mailing address. You must also have a driver's license or state-issued ID from one of the following 18 places: Arizona, California, District of Columbia, Florida, Idaho, Iowa, Kentucky, Maryland, Michigan, Mississippi, Nebraska, North Dakota, New Mexico, Pennsylvania, South Dakota, Texas, Washington, or Wisconsin.

If you don't meet the criteria for an online application, you can submit an application for a replacement card in person or by mail to your local Social Security office. You'll need to provide your U.S. driver's license, state-issued nondriver identification card, or U.S. passport.

You can apply for a maximum of three new Social Security cards a year, and a maximum of 10 during your lifetime.

What if you're a victim of identity theft?

If you have evidence that someone else is using your Social Security number, you can request a new Social Security number from the Social Security Administration. Just be sure you can actually prove that someone is using your number and that this use is harming you. If you can't provide evidence of this, you won't be given a new Social Security number.

For example, your evidence could be a credit report listing several credit cards that you've never applied for. Or, evidence could be a letter from the IRS informing you that your income tax filings were rejected because someone else already filed them.

If you suspect someone is using your number, call the Social Security Administration fraud hotline at 1-800-269-0271.

To prevent your Social Security number from falling into the wrong hands, don't carry your card with you. There is absolutely no reason to keep your Social Security card in your wallet. Instead, keep it in a safe-deposit box, at home, or in another secure location. (See also: 5 Things to Never Keep in Your Wallet)

This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Best Money Tips: What to Do if You Get an IRS Notice

Amy Lu — Thu, 27 Apr 2017 08:30:09 +0000

Welcome to Wise Bread's Best Money Tips Roundup! Today we found articles on what to do if you get an IRS notice, things that are proven to make you happier, and ways to invest in yourself without spending a lot of money.

7 Lessons From Tax Day to Remember for Next Year

Tim Lemke — Fri, 21 Apr 2017 08:00:10 +0000

Cue the sigh of relief: Another tax season has come and gone. Before you kick back and relax, though, take a little moment of self-reflection. Did Tax Day make your stress levels soar?

If the answer is yes, it's time to brush up on a few key lessons to take with you into the 2017 tax year. We guarantee you'll be breathing a little easier come next April.

1. Keep track of all your income

Specifically, don't forget about taxes you'll need to pay on any income you earn during the year outside of a full-time job. This includes money from freelance work or self-employment, dividends on investments, interest payments, and even gambling winnings. Be sure to track all of this income so that you're not surprised by a tax bill later.

2. Save all of your paperwork

Make sure you keep careful track of any forms and paperwork necessary to file your taxes. This includes your W-2 or any 1099s, as well as documents from banks, investment firms, and your mortgage company. These forms are usually sent out in February.

More immediately, if you make any contributions to charity, you'll need the documentation. If you own a small business, you'll need receipts for all expenses you plan to deduct. If you plan to seek deductions for any unreimbursed medical expenses, you'll need a bill from your health care provider. All of these are important in order to enter accurate information on your tax return. As you gather them throughout the year, set them aside in a file or box that you keep in a safe place.

3. Deductions and credits are your friends

A credit is a straight reduction in your tax bill. A deduction means you reduce the amount of your income that is taxable. Either way, these tax breaks should not be overlooked.

You can get a tax credit for having a kid. You can get a tax deduction if you pay interest on your mortgage. You can get a tax deduction for charitable donations. There are even deductions and credits for using energy-efficient appliances or driving a hybrid car. The list of possible deductions and tax credits is massive, and chances are, you qualify for at least a few. Most tax preparers and tax preparation programs will walk you through these deductions and credits to make sure you're getting the maximum benefit. If you haven't paid much attention to potential tax deductions or credits in the past, however, make sure you start this year. It could save you significant money.

4. Understand how tax-advantaged investment accounts differ

In addition to claiming tax credits and deductions, you can reduce your tax bill in advance simply by saving for retirement. If you use a 401(k), traditional IRA, or Roth IRA to build your nest egg, there are considerable tax advantages, and you need to understand the main differences.

With a 401(k) and traditional IRA, any money you contribute to your account throughout the year will be deducted from your taxable income now. In some cases, this could move you into a lower tax bracket and save you considerable money on this year's tax bill. With a Roth IRA, money you contribute is taxed now, but you will not have to pay taxes on any investment gains when you withdraw the money at retirement.

5. If you are getting a big return, that's not a good thing

Getting money back on your taxes is certainly better than owing so much to the IRS that you pay a penalty. But if you are getting a considerable amount back after filing your return, you may have had too much taken out of your paycheck and overpaid taxes throughout the year. So in a sense, the government has been holding onto your money interest-free for no reason when you could have been using it for yourself. To make sure this doesn't happen again, ask your employer for a new W-4 and increase the number of exemptions you claim.

6. If you make a mistake, you can amend your return

Tax time can be nerve wracking because people are petrified of making a mistake and having the IRS come after them. But the actual chances of the government knocking on your door are quite low. The IRS simply does not have the staff to audit many individuals, and when they do, they usually target either very wealthy people or people with very complicated tax returns.

If you do discover that you made a mistake, you can file an amended return without much hassle. Simply file Form 1040X, Amended Tax Return, along with the corrected (or missing) documents you did not originally file with your return. This happened to me once when I forgot to report some dividend income, and I never had the taxman knock on my door. (See also: The Easiest Way to Avoid a Tax Audit)

7. Use your taxes as a learning opportunity

Even with all these lessons under your belt, tax time can still be a tedious and stressful time of year. When all else fails, change your perspective. I personally find the process of doing taxes to be fairly educational. You can see a clear picture of how much money you actually took in during the year, and how much the government takes. The process of finding deductions can be a learning experience as well. If you approach doing your taxes with an attitude of curiosity, you may find the whole process to be less painful.

This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

What to Do If You Have a Tax Lien On Your House

Mikey Rox — Mon, 17 Apr 2017 08:30:08 +0000

The government doesn't play around with taxpayers who skip out on what they owe. When you ignore your federal, state, or property tax bills — and you don't make any attempts to pay the balance — the government can place a tax lien on your house.

A tax lien is a legal claim on property for failure to pay taxes owed. It gives the tax authority (also known as the lienholder) first rights to your property over other creditors.

A lien differs from a levy in that the government doesn't seize your house or other property. Keep in mind that a lien can become a levy at some point if you never pay your taxes or never make arrangements to satisfy the debt. The tax authority decides when to impose a levy. You'll receive written notice of the levy at least 30 days before it takes place.

A lien is a serious matter because it can negatively affect your credit. Unpaid tax liens can remain on credit reports indefinitely, whereas paid tax liens can remain for up to seven years from the date filed.

Of course, the best way to handle a tax lien is to avoid one in the first place. But if the damage is done, here's how to put this ugly mark behind you.

1. Dispute a filing error

It's not uncommon for mistakes to appear on credit reports. In fact, according to recent data from the Consumer Finance Protection Bureau, 76 percent of the 185,700 credit-reporting complaints they've received since 2011 are related to errors — including state or federal tax liens that mistakenly appeared on credit reports.

If you check your credit report and find a lien reported in error, don't ignore this mistake. This can lower your credit score. Contact the IRS or your state tax office to file a dispute. If a review of your account proves that you don't owe the debt, the government withdraws the tax lien (as if it never happened). A withdrawal also removes the lien from your credit report.

Thankfully, the number of tax liens reported in error should be dropping. In response to criticisms by the CFPB, the top consumer reporting agencies — Experian, Equifax, and TransUnion — issued a new provision. As of July 1, 2017, tax lien and civil judgment data will only be included on credit reports if they contain three pieces of information: the person's name, address, and Social Security number or date of birth. This information must be current according to court records as of the last 90 days.

The association representing the credit bureaus expects half of the consumers with tax liens on their credit reports will see them removed.

2. Pay your tax bill in full

Parting with your hard-earned money isn't easy, but paying your tax bill in full is one of the fastest ways to get the government off your back and move on with your life.

Typically, the government releases tax liens within 30 days of full payment of an outstanding debt (including penalties and interest). A release removes the lien from the property.

Unfortunately, paid tax liens can still remain on your credit report for up to seven years. However, under the IRS's Fresh Start Program, after paying your balance in full, you can submit a request to have a federal tax lien withdrawn from your credit report before the seven-year mark. Some states also give taxpayers the option of requesting an early withdrawal of a state tax lien from their credit report once they've paid their debt in full.

3. Set up an installment plan

If you can't pay what you owe in full, set up an installment plan with the government. This lets you pay off your tax debt over time. The tax authority releases the lien once you've set up a payment plan.

In the case of federal debt, the IRS allows individual taxpayers to set up monthly direct debit payments on debt amounts up to $50,000 for up to six years. Go to IRS.gov and apply for installment payments through the online payment system. If you owe more than $50,000, or require longer repayment terms, request installment payments by completing and mailing Collection Information Statement Form 433-A or Form 433-F.

Taxpayers who owe less than $25,000 and who've made at least three consecutive direct debit installment payments also can request to have the lien withdrawn from their credit report. However, defaulting on an installment agreement can trigger a new tax lien.

Some states also allow installment plans to repay a tax debt, though the criteria for these plans varies by state.

4. Sell the property

If you don't have money to pay an outstanding tax debt in full, and you can't afford an installment plan, another option is selling the property and satisfying the debt with proceeds from the sale. However, this method only works if the sale price is high enough to pay off the lien and any existing mortgages on the property. If the sale won't generate enough proceeds to pay off attached liens, you can't sell the property. If you're able to sell the home, the company handling your escrow account forwards payment to the lienholder after closing.

Keep in mind that you'll need to contact the lienholder before closing to request a lien release. In the case of federal taxes, this involves requesting a Certificate of Discharge from the IRS. If the request is approved, this document releases (or removes) the lien from the asset being sold (though it stays in place in every other way), and allows the property to transfer to the new owner lien-free.

5. Refinance the property

Then again, maybe you don't want to sell your home. There's also the option of refinancing and borrowing cash from your home equity to satisfy a state or federal tax lien on the property. Since refinancing replaces an existing mortgage with a new loan, mortgage lenders will not approve your loan application unless they have first lien position on the title. This puts the lender in priority position to benefit from liquidation if the property goes into default. For this to happen, you'll have to request a lien subordination from the IRS or your state tax office before applying for the loan.

Subordination doesn't eliminate a tax lien — rather, the lien becomes secondary to a lender's lien on the property. And with the lender's security interest first, you're more likely to acquire a new mortgage.

Be aware that your ability to refinance depends on how the tax lien impacted your credit. A tax lien will reduce your credit score, and to refinance, you'll have to meet a lender's income and credit score requirements. You need a minimum credit score of 620 for a conventional loan and a minimum credit score between 500 and 580 for an FHA loan.

This article is from Mikey Rox of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

What to Do When Your Tax Preparer Makes a Mistake

Dan Rafter — Thu, 13 Apr 2017 08:00:10 +0000

You might think that hiring a tax preparer to file your income taxes will guarantee a mistake-free return. Unfortunately, you'd be wrong.

In 2015, the National Consumer Law Center used mystery shoppers to test the work of 29 tax preparers. The results were surprising: Only two of the returns compiled by these preparers came in error-free. That's bad news for a lot of people. USA Today reported in February that almost 79 million e-filed tax returns were completed last year by professional tax preparers.

And here's even more bad news: The IRS says that if your tax preparer makes a mistake resulting in you having to pay additional taxes, interest, or penalties, you are responsible for paying these fees — not your tax preparer.

If your tax preparer does make a mistake on your return, what can you do? Here are five suggestions.

1. Contact your preparer

If the IRS sends you a letter claiming that there are mistakes on your taxes, call your tax preparer for an explanation. Tax preparers who do make mistakes might offer to pay any fees, penalties, or interest charges for you. This might not restore your confidence in their abilities, but it will help save your budget.

2. Pay the penalties

If the IRS is charging you a penalty for a tax mistake, even if that mistake was made by your preparer, pay it. You might be battling it out with your tax preparer in the hope of getting this professional to pay the penalty on your behalf, but the IRS doesn't care. If it doesn't receive its payment, you are the one who will face additional financial penalties.

If your tax preparer refuses to pay for its mistake, send a check to the IRS. Then continue your fight against the preparer.

3. Know your rights

Check any contract you signed with your tax preparer. There might be language in the contract stating what your tax preparer will do in the event of a mistake. Some tax preparers will pay the interest and penalties that result from a mistake, but not any extra taxes you might owe.

Some tax preparation firms, especially the big ones, might offer insurance that you can purchase for an extra fee. If you've bought this insurance, your tax preparer might be obligated to pay any interest, fees, or extra taxes you owe because of their mistakes.

Be aware that tax preparers won't pay any penalties on your behalf, even if you've purchased extra insurance, if the mistakes they've made are because you provided them with inaccurate information.

4. Check the statute of limitations

If your tax preparer made a mistake that caused you to overpay on your taxes, you have three years to request a refund from the IRS. You must provide documentation to back up your claim that you overpaid.

This statute of limitations works in reverse, too. If you underpaid your taxes because of a preparer mistake, the IRS has three years in which they can come after you for the money you owe. If your tax preparer made a substantial error, however (such as omitting 25 percent or more of your gross income), the IRS can go back up to six years. It's recommended to keep your records for at least this long. Be aware there is no statute of limitations for those who knowingly file fraudulent returns, evade taxes, or fail to file altogether.

5. File a complaint

If you discover that your preparer made an intentional mistake, perhaps to boost your return, make an official complaint with the Office of Responsibility at the IRS. If your preparer is a member of the American Institute of Certified Public Accountants, National Association of Enrolled Agents, or a state law association, you can also file a complaint with these organizations. Such complaints could cause tax preparers to face fines or lose their licenses.

Reduce the odds of a mistake by hiring the right professional

Sometimes you can prevent a future mistake by hiring the right tax professional upfront. The truth is, anyone can work as a tax preparer. Preparers must apply for a Preparer Tax Identification Number from the IRS. But getting this number is easy: It costs $50, and the IRS says that applying takes just 15 minutes.

If you're searching for a tax professional, it's best to work with either a certified public accountant with experience completing tax returns, or what is known as an Enrolled Agent. To become an Enrolled Agent, tax preparers must first pass a three-part test given by the IRS that covers the ins and outs of individual and business tax returns. Some certified public accountants will also be Enrolled Agents.

Ask any tax preparer for the phone numbers of past clients. Then call these clients to ask about the work the tax preparer turned in. The IRS also recommends that consumers only work with tax preparers who charge a flat fee. Preparers who charge a percentage of your tax refund might be tempted to fudge the numbers to boost your return.

Finally, make sure that you provide all the proper documents and numbers. The tax preparer may or may not double check your numbers. Maybe you forgot about the antique you sold on eBay. Maybe you transposed a number when adding up your home office deductions. You can't depend on the tax preparer to notice that something is off or verify your numbers. The best professionals will ask you a lot of questions to ensure you've provided all the information. But others may just take your documents and enter the numbers.

The bottom line is if the IRS audits you and discovers that the preparer made mistakes — intentional or accidental — you'll have to pay any penalties and fees.

This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: