Officially ending a marriage simplifies taxes

Every year during tax season I come across people who are still legally married even though they haven’t had contact with their spouse for years. They cannot file a tax return as “Single.” If they aren’t divorced or legally separated, that leaves them stuck with a “Married Filing Separately” (MFS) tax status.

There are several disadvantages to using the MFS filing status, including:

  • You are not eligible for Earned Income Credit.
  • You can not deduct student loan interest paid.
  • You do not qualify for Education Credits (American Opportunity or Lifetime Learning Credit) related to college expenses.
  • You must know and list your spouse’s name and social security number on your tax form; if you cannot, then your tax return will need to sent in by mail instead of submitting electronically.
  • If one spouse itemizes deductions, the other spouse must also itemize deductions.
  • On the Iowa return, you must report approximately how much income your spouse has; if you cannot, then your Iowa return will need to be sent in by mail.

There is an exception – one group of people who are split from their spouse but do not have to file MFS. These are people who are paying the cost to keep up a home for someone else (typically a parent who is keeping up a home for his/her children).  These individuals can be “considered unmarried” if they have not lived with their spouse at any time during the last six months of the year; if so they qualify for “Head of Household” filing status, which allows them to receive the Earned Income Credit and other tax benefits. However, when the children are grown and the taxpayer can no longer claim “Head of Household,” then they must use Married Filing Separately as their tax status.

“What’s the point of all this?” you may be asking.  I have two reasons for covering this topic today, as this long COVID-extended tax season finally approaches its end.

  • First, I’m tired of breaking bad news to people – the news that their tax return may be difficult to file and they can’t get some of the tax credits they might want.  
  • Second, to put forth the suggestion indicated in the title: If the marriage is over, maybe it would be smart to make that official. If you have reasons to avoid divorce, consider a legal separation if possible. Taking that step would make tax filing easier for both parties.

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Keep your whole refund: File taxes for FREE!

Filing a tax return is an annual necessity for most Americans, and to a lot of people it feels complicated. That’s why they pay someone else to do the work for them.  It’s just like how I pay someone else to work on my car, because I don’t have the needed knowledge or skills.

Even if you are not highly skilled, however, it may be possible for  you to get your tax return filed for free! The IRS trains and certifies volunteer tax preparers through VITA (Volunteer Income Tax Assistance) and through AARP. Volunteers have to pass several tests in order to serve. If you have moderate or low income and if your return is fairly ordinary in complexity, you may be eligible to have those volunteers file your return for you.

To find a free tax site near you, call 211 or go to www.irs.gov/Individuals/Free-Tax-Return-Preparation-for-You-by-Volunteers and search by zip code! Most people can file through the VITA or AARP programs if they have income from a job, pension, social security, investments and other typical sources. The tax volunteers will also make sure you get the tax credits and deductions you are entitled to.

There are a few types of tax issues volunteers are not allowed to address, including: rental income; farm income; certain types of business income (if you need to use depreciation, or deduct business use of your home, or if you keep an inventory of products or supplies).

Another way to file your tax return for free is through IRS Free File. This lets you do it yourself on-line using user-friendly commercial software.  You don’t need to be a tax expert to do this, either!

Whether or not you expect a tax refund, if your tax situation is not too complicated, it’s smart to think twice before  you pay $150 – $400 to have someone else do your taxes for you!

What have been your most positive experiences with filing your tax return?

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Refund Advance? Resist the Temptation!

Tax season is coming up fast.  If you’re one of the millions of Americans who expect a hefty refund, you may be excited — impatient, even.

It’s important to have realistic expectations. If your refund includes the Earned Income Tax Credit OR the Additional Child Tax Credit, the earliest you’ll receive your refund is around February 27, even if you file on the earliest possible date in January. Congress passed a law two years ago requiring that those refunds not be processed until after February 15, to allow plenty of time for the IRS to gather and process the information it receives from employers around the nation.

The best way to get your tax refund quickly involves a few key steps:

  • File an accurate and complete return.  Don’t rush to file before you even have all the documents and information you need.
  • Be sure you claim only the dependents and credits you are entitled to.
  • File electronically. When paper returns are mailed in they take weeks longer.
  • Receive your refund via direct deposit.

What about refund loans? If you believe some advertising, or the sales pitches of some tax preparers, getting a refund advance is the easiest way to get your refund quickly. It may seem easy, but it’s actually risky.  If anything goes wrong with your refund, the loan will be due anyway, and how will you repay it?  If you can’t repay it on time, you’ll face additional fees and perhaps debt collection headaches.

A refund advance is a loan; the lender gives you money now, and you probably spend it. Then when your refund actually comes through, the loan is automatically repaid to the lender. But if the refund doesn’t come through as planned, the lender will turn to you for repayment, even if you no longer have the money.

What could go wrong with your refund? Actually, a lot could go wrong.

  • In some cases, people’s refunds are withheld in order to pay debts owed by the taxpayer — debts such as unpaid student loans, back child support, or other government debts.
  • In other cases, irregularity in paperwork can delay refunds. This might not mean that you don’t get your refund, but it might mean a delay, which could cause you some headaches with the lender.
  • One more situation when people don’t get the refund they expect occurs when there was an error in preparing their return. Perhaps you weren’t entitled to a particular credit, or perhaps you are not entitled to claim a dependent. You didn’t mean to cheat on your return, but due to an error somewhere in the process, your refund is less than expected.

Refund advance loans are advertised as no fee/ no interest loans. The catch, however, is that you are required to file your return through the tax service where you obtain the loan; their fees are often much higher than fees charged by a non-lending tax service. What’s more, if you qualify for free tax preparation, then there would be no reason to pay any fee at all.

Resist the refund advance, and be secure in your plans for using your refund!

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Volunteers Needed

1040What are you doing in February, March and April? If you don’t have plans to dip your toes in the warm sand of a tropical beach I have a suggestion for you.  Find a local VITA program and volunteer to help.

VITA is the Volunteer Income Tax Assistance program supported by the IRS. A volunteer prepares returns for clients who have incomes at or below $54,000. If you like solving puzzles, then you would also enjoy the challenge of figuring out how to complete a tax return. Each one is different and because families don’t always fall into the Mom, Pop, and two kids definition, it can be challenging. Rewards come in the “thank you’s” and hand shakes of clients who have additional tax refund dollars to pay for other life expenses.

Training is available to help you certify. The IRS grants you exemption from liability for omissions or errors as long as you prepare returns within the scope of your certification. You can and should recommend a client take their return to a paid professional when it’s out of scope!

Volunteers also serve as greeters who schedule appointments and make sure the necessary tax documents and identification have been brought to the site.

A tropical island would be fun in the cold days of February, but you can generate a warm feeling inside by helping others.  To volunteer visit this IRS site: https://www.research.net/r/vitatcesignup

Joyce

Joyce Lash

Joyce Lash

Joyce Lash is a Human Sciences Specialist in Family Finance who wants to keep you ahead of the curve on financial information.

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Missed tax deadline?

1040I had a call today from someone wondering about the tax deadline — is it really too late to file?  He was happy to hear that even though the official deadlines are past, he can still file his tax return.  In fact, for those of us who are required to file (that includes most people who work), we still must file a return.

Will there be a penalty for filing late?  It depends.

  1. If you have a refund coming, there is no penalty for filing late.  That’s great news for many people.  In fact, you are allowed (and encouraged) to file your tax return and claim your refund up to three years past the filing deadline.  That means that now, in May of 2016, you can still file and get your refund for 2015, 2014, and 2013.  If there is an earlier year you did not file, you can (and should) still file a return, but you will not receive your refund.
  2. If you owe the IRS, you may owe a penalty for filing late, and also for paying late.  You will also usually be charged interest.  For this reason, people who expect to owe a payment upon completion of their tax return should file an extension and send a payment at least equal to what they expect to owe before the April tax-filing deadline.  Taking these two steps means  that: a) they will not be paying their taxes late, so no penalty or interest there;  and b) the extension gives them several more months to submit their return with no late penalty.

Read more from the IRS.  And here’s a good news bonus: IRS Free File options are still available for qualifying households!

~Barb

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Tax Tips for Back-to-School

salestaxholiday-15“Where has summer gone?!” That refrain is echoing everywhere I turn! (or maybe it just seems like it). For many of us, August means turning a corner – back-to-school time is clearly in sight.

Today I’m offering two tax-related back-to-school tips:

  1. Sales Tax Holidays can be helpful. Iowa’s Sales Tax Holiday is coming up this weekend. On August 7-8, no Iowa sales tax (state or local) will be charged on most clothing and footwear purchases priced under $100. Other states have sales tax holidays too.  TIP: you don’t need to have children going back to school to take advantage of this bonus!
    WARNING: in your rush to save 7%, be cautious about buying everything in sight. Sometimes the word “Sale” puts a rosy glow on items which we would never purchase under normal circumstances. Keep your receipts in case you change your mind after the rose-colored glasses come off.
  2. Iowa’s K-12 Tuition and Textbook Credit can increase your tax refund, so save your receipts and keep records. Why? It applies to more than just tuition and textbook costs. Many of the supplies you buy, from notebooks and calculators to football cleats and show choir costumes, as well as the fees you pay for your children’s K-12 classes and school activities qualify for this tax credit (line 44 on the Iowa tax return).  It’s a 25% credit, up to $250 per child. There are a few rules to be aware of, so check the details, but don’t miss out! It’s a commonly-overlooked credit. I missed it myself for the first nine years my children were in school.

Summer isn’t over yet – enjoy the month of August! But as you get ready for back-to-school season, a little tax knowledge can save you money!  ~Barb

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Proof of Health Insurance

tax-sign-sm-15457-53DG-1804x2712During this first tax-filing season since the requirement to carry health coverage has been in place, lots of taxpayers are worried about proving they have health insurance. This year there is no need to submit proof with your return, but it is wise to place some type of documentation with your tax return before you file it away at the end of the season.  Doing so will ease your worries if the IRS ever needs to follow up with you for more information.

If you purchase insurance individually, you may have the greatest need to maintain documentation that shows how many months of the year you were covered, the type of coverage, and premiums paid.  Those who are covered through an employer plan or a public program such as Medicare may have an easier task, but should also keep some type of documentation.  You should keep these – as you do other tax records – generally for three years after you file your tax return.

In future years, showing proof of health coverage may become more important, so we might as well start off on the right track with our 2014 tax files. To find other tax-related information about the health care law, visit irs.gov/aca.

~Barb

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Time to change your W-4?

IRS logo 2Tax time is a good time to check up on many aspects of your finances.  As I gather documents for my own tax return, I am aware that 2014 will likely be the last year in which I can claim a dependent.  That also means my filing status will change from “Head of Household” to “Single” in 2015.

With that in mind, I made some changes to my W-4 form.  When is the last time you checked your own W-4 form to see if it needs changes?

If you are an employee, you have a W-4 form on file with your employer.  The information on the form guides the employer’s withholding of federal and state income tax from your paychecks.  We fill those forms out when we start a new job; unfortunately, we sometimes never look at them again.  If you have changes in your marital status or the number of dependents in your household, it’s generally wise to review your W-4.

What happens if you don’t?  It could mean a surprise when you file your tax return.  In a situation like mine, where I no longer have any dependents, failure to change my W-4 would probably mean I would need to pay extra tax (and maybe a penalty) when I file my 2015 tax return.

In a situation where the number of dependents goes up, you would get a larger tax refund.  Generally that’s happy news to people, BUT…  I always wonder how much better off they would’ve been with less income tax withheld from their paychecks all year long.  Perhaps they would have had greater financial stability, less stress, fewer late fees, and less debt if they had received their pay throughout the year, rather than waiting for their tax refund.

Personally, I’m relieved that I remembered to make the change.  More taxes will be withheld from my monthly paycheck, which will prevent an unpleasant surprise at tax time a year from now.

~Barb

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Do you need a health insurance exemption?

Please PayIf you didn’t have health insurance coverage for any portion of 2014, you may encounter a surprise on your income tax return.  Americans are now required to carry health coverage, unless they qualify for an exemption.  Those who did not will face a fee, called the “Individual Shared Responsibility Payment.”

There are two kinds of exemptions; some can be handled directly on your tax return, while others require application and approval.  That approval process can involve a 2-3 week waiting period, so now is a good time to get going on it if you haven’t already done so.

Exemptions which can be handled directly on your tax return include:

  1. Income-based exemptions (i.e. if your income is low enough that the law agrees that you can’t afford health insurance).
  2. Only a short gap in coverage (less than 3 months)
  3. Not lawfully present in the United States
  4. Member of a health-care sharing ministry
  5. Member of a Federally-recognized Indian tribe
  6. Incarceration
  7. If you had coverage beginning on or before May 1, 2014, you have an automatic exemption for the months before that. NOTE: this exemption is unique to 2014, because the open enrollment period was extended until March 31.  The same exemption will not be available in future years
  8. Employer coverage with a non-calendar plan year, so you were not able to join your employer plan until, for example, July 1.  This exemption is available only in 2014.

Exemptions requiring application and approval.  You need to apply for these exemptions through the health insurance marketplace (www.healthcare.gov), and if you are approved, you will be issued an Exemption Certificate Number which must be added to the tax return.

  1. Hardship exemptions.   Even if your income appeared to be high enough that you could afford insurance, the marketplace may grant you an exemption if you faced certain hardships, such as homelessness or eviction, domestic violence, large medical expenses, disaster, and others.
  2. Religious objections.  If you are a member of a recognized religious sect whose members object to insurance, you may apply for an exemption.
  3. AmeriCorps coverage available to those serving in AmeriCorps, VISTA, or NCCC.

The list above is not 100% comprehensive, nor does it give all the details.  If you (or someone you know) were uninsured for part of 2014, I recommend you go to www.healthcare.gov/exemptions to find out if you qualify for an exemption.

At that link, you will also find information about the fee for being uninsured.  Although the fee for 2014 will be fairly small, it will go up in 2015, and again in 2016, so now is the time to consider enrolling in health insurance.  Go to www.healthcare.gov for details.

~Barb

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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