You just learned of the passing of a loved one. During this stressful and emotionally taxing time, you also find out that you’re receiving an inheritance. While you’re grateful for the unexpected windfall, knowing what to do with an inheritance can bring its own share of stress.
While the amounts vary greatly, the Federal Reserve Board’s Survey of Consumer Finances reports that an average of roughly 1.7 million households receive an inheritance each year. First words of wisdomâresist the urge to spend it all at once. According to a study funded by the Bureau of Labor Statistics, one-third of people who receive an inheritance spend all of itâand even dip into other savingsâin the first two years.
Not me, you say? Still, you might be asking, “What should I do with my inheritance money?” Follow these four steps to help you make smart decisions with your newfound wealth:
1. Take time to grieve your loss
Deciding what to do with an inheritance can bring with it mixed emotions: a sense of reprieve for this unexpected financial gain and sadness for the loss of a loved one, says Robert Pagliarini, certified financial planner and president of Pacifica Wealth Advisors.
During this time, you might feel confused, upset and overwhelmed. âA large inheritance that pushes you out of your financial comfort zone can create anxiety about how to best manage the money,” Pagliarini says. As an inheritor, Pagliarini adds that you may feel the need to be extra careful with the funds; even though you know it is your money, it could feel borrowed.
The last thing you want to do when deciding what to do with an inheritance is make financial decisions under an emotional haze. Avoid making any drastic moves right away, such as quitting your job or selling your home. Some experts suggest giving yourself a six-month buffer before using any of your inheritance, using the time instead to develop a financial plan. While you are thinking about things to do with an inheritance, you can park any funds in a high-yield savings account or certificate of deposit.
âA large inheritance that pushes you out of your financial comfort zone can create anxiety about how to best manage the money.â
2. Know what you’re inheriting
Before you determine the things to do with an inheritance, you need to know what you’re getting. Certified financial planner and wealth manager Alex Caswell says how you use your inheritance will largely depend on its source. Typically, Caswell says an inheritance will come in the form of assets from one of three places:
Real estate, such as a house or property. As Caswell explains, if you receive assets from real estate, you will transfer them into your name. As the inheritor, you can choose what to do with the assetsâtypically sell, rent or live in them.
A trust account, a legal arrangement through which funds are held by a third party (the trustee) for the benefit of another party (the beneficiary), which may be an individual or a group. The creator of the trust is known as a grantor. âIf someone inherits assets through a trust, the trust documents will stipulate how these assets will be distributed and who ultimately decides how they are to be invested,” Caswell says. In some cases, the assets get distributed outright to you; in other instances, the trust stays intact and you get paid in installments.
A retirement account, such as an IRA, Roth IRA or 401(k). These accounts can be distributed in one lump sum, however, there may be requirements related to the amount of a distribution and the cadence of distributions.
When considering things to do with an inheritance, know that inherited assets can be designated as Transfer on Death (TOD) or beneficiary deeds (in the case of real estate), which means the assets can be transferred to beneficiaries without the often lengthy probate process. An individual may also bequeath cash or valuables, like jewelry or family heirlooms, as well as life insurance or stock certificates.
Caswell says if your inheritance comes in the form of investment assets, such as stocks or mutual funds, you’ll want to think of them as part of your own financial picture. âAll too often, we see individuals end up treating inherited assets as a living extension of their passed relative,” Caswell says. Consider how the investments can be used to support your financial goals when thinking about things to do when you get an inheritance.
An average of roughly 1.7 million households receive an inheritance each year.
3. Plan what to do with your financial gain
Just like doing your household budgeting, it’s important to “assign” your inheritance to specific purposes or goals, says Pacifica Wealth Advisors’ Pagliarini. Depending on your financial situation, the simple concepts of save, spend and give may be a good place to start when deciding on things to do when you get an inheritance:
Bolster your emergency fund: You should have at least three to six months of living expenses saved up to avoid unexpected financial shocks, such as job loss, car repairs or medical expenses. If you don’t and you’re deciding what things to do with an inheritance, consider parking some cash in this bucket.
Save for big goals: Now could be a good time to boost your long-term savings goals and pay it forward. Things to do when you get an inheritance could include putting money toward a child’s college fund or getting your retirement savings on track.
Tackle debt: If you’re evaluating what to do with an inheritance, high-interest debt is something you could consider paying off. Spending on debt repayment can help you save on hefty interest charges.
Reduce or pay off your mortgage: Getting closer to paying off your homeâor paying it off entirelyâcan also save you in interest and significantly lower your monthly expenses. Allocating cash here is a win-win.
Enjoy a little bit of it: It’s okay to use a portion of your inheritance on something you enjoy or find rewarding. Planning a vacation, investing in more education or paying for a big purchase could be good moves.
Donate funds to charity: Thinking about your loved one’s causes or your own can continue legacy goals and provide tax benefits.
When deciding what to do with an inheritance, taxes will need to be considered. “It is extremely important to be aware of all tax ramifications of any decision around inherited assets,” Caswell says. You could be required to pay a capital gains tax if you sell the gift (like property) that was passed down to you, for example. Also, depending on where you live, your inherited money could be taxed. In addition to federal estate taxes, several U.S. states impose an inheritance tax and/or an estate tax.
Since every situation is unique and tax laws can change, when considering things to do with an inheritance, consult a financial advisor or tax professional for guidance.
Make your windfall count
Receiving an inheritance has the potential to change your financial picture for good. When thinking about the things to do when you get an inheritance, be sure to give yourself ample time to grieve and to understand all of your options. Don’t be afraid to lean on the experts to get up to speed on any tax and legal implications you need to consider.
Planning can go a long way toward making the right decisions concerning your newfound wealth. Being responsible with your inheritance not only helps ensure your financial future, but will also honor your loved one’s legacy.
The post 4 Smart Things to Do When You Get an Inheritance appeared first on Discover Bank – Banking Topics Blog.
Inheriting property or other assets typically involves filing the appropriate tax forms with the IRS. Schedule K-1 (Form 1041) is used to report a beneficiaryâs share of an estate or trust, including income as well as credits, deductions and profits. A K-1 tax form inheritance statement must be sent out to beneficiaries at the end of the year. If youâre the beneficiary of an estate or trust, itâs important to understand what to do with this form if you receive one and what it can mean for your tax filing.
Schedule K-1 (Form 1041), Explained
Schedule K-1 (Form 1041) is an official IRS form thatâs used to report a beneficiaryâs share of income, deductions and credits from an estate or trust. Itâs full name is âBeneficiaryâs Share of Income, Deductions, Credits, etc.â The estate or trust is responsible for filing Schedule K-1 for each listed beneficiary with the IRS. And if youâre a beneficiary, you also have to receive a copy of this form.
This form is required when an estate or trust is passing tax obligations on to one or more beneficiaries. For example, if a trust holds income-producing assets such as real estate, then it may be necessary for the trustee to file Schedule K-1 for each listed beneficiary.
Whether itâs necessary to do so or not depends on the amount of income the estate generates and the residency status of the estateâs beneficiaries. If the annual gross income from the estate is less than $600, then the estate isnât required to file Schedule K-1 tax forms for beneficiaries. On the other hand, this form has to be filed if the beneficiary is a nonresident alien, regardless of how much or how little income is reported.
Contents of Schedule K-1 Tax Form Inheritance Statements
The form itself is fairly simple, consisting of a single page with three parts. Part one records information about the estate or trust, including its name, employer identification number and the name and address of the fiduciary in charge of handling the disposition of the estate. Part Two includes the beneficiaryâs name and address, along with a box to designate them as a domestic or foreign resident.
Part Three covers the beneficiaryâs share of current year income, deductions and credits. That includes all of the following:
Net short-term capital gains
Net long-term capital gains
Unrecaptured Section 1250 gains
Other portfolio and nonbusiness income
Ordinary business income
Net rental real estate income
Other rental income
Directly apportioned deductions
Estate tax deductions
Final year deductions
Alternative minimum tax deductions
Credits and credit recapture
If you receive a completed Schedule K-1 (Form 1041) you can then use it to complete your Form 1040 Individual Tax Return to report any income, deductions or credits associated with inheriting assets from the estate or trust.
You wouldnât, however, have to include a copy of this form when you file your tax return unless backup withholding was reported in Box 13, Code B. The fiduciary will send a copy to the IRS on your behalf. But you would want to keep a copy of your Schedule K-1 on hand in case there are any questions raised later about the accuracy of income, deductions or credits being reported.
Estate Income and Beneficiary Taxation
If you received a Schedule K-1 tax form, inheritance tax rules determine how much tax youâll owe on the income from the estate. Since the estate is a pass-through entity, youâre responsible for paying income tax on the income thatâs generated. The upside is that when you report amounts from Schedule K-1 on your individual tax return, you can benefit from lower tax rates for qualified dividends. And if thereâs income from the estate that hasnât been distributed or reported on Schedule K-1, then the trust or estate would be responsible for paying income tax on it instead of you.
In terms of deductions or credits that can help reduce your tax liability for income inherited from an estate, those can include things like:
Estate tax deduction
Short-term capital losses
Long-term capital losses
Net operating losses
Credit for estimated taxes
Again, the fiduciary whoâs completing the Schedule K-1 for each trust beneficiary should complete all of this information. But itâs important to check the information thatâs included against what you have in your own records to make sure that itâs correct. If thereâs an error in reporting income, deductions or credits and you use that inaccurate information to complete your tax return, you could end up paying too much or too little in taxes as a result.
If you think the information in your Schedule K-1 (Form 1041) is incorrect, you can contact the fiduciary to request an amended form. If youâve already filed your taxes using the original form, youâd then have to file an amended return with the updated information.
Schedule K-1 Tax Form for Inheritance vs. Schedule K-1 (Form 1065)
Schedule K-1 can refer to more than one type of tax form and itâs important to understand how they differ. While Schedule K-1 (Form 1041) is used to report information related to an estate or trustâs beneficiaries, you may also receive a Schedule K-1 (Form 1065) if you run a business thatâs set up as a pass-through entity.
Specifically, this type of Schedule K-1 form is used to record income, losses, credits and deductions related to the activities of an S-corporation, partnership or limited liability company (LLC). A Schedule K-1 (Form 1065) shows your share of business income and losses.
Itâs possible that you could receive both types of Schedule K-1 forms in the same tax year if you run a pass-through business and youâre the beneficiary of an estate. If youâre confused about how to report the income, deductions, credits and other information from either one on your tax return, it may be helpful to get guidance from a tax professional.
The Bottom Line
Receiving a Schedule K-1 tax form is something you should be prepared for if youâre the beneficiary of an estate or trust. Again, whether you will receive one of these forms depends on whether youâre a resident or nonresident alien and the amount of income the trust or estate generates. Talking to an estate planning attorney can offer more insight into how estate income is taxed as you plan a strategy for managing an inheritance.
Tips for Estate Planning
Consider talking to a financial advisor about the financial implications of inheriting assets. If you donât have a financial advisor yet, finding one doesnât have to be complicated. SmartAssetâs financial advisor matching tool can help you connect with professional advisors in your local area in minutes. If youâre ready, get started now.
One way to make the job of filing taxes easier is with a free, easy-to-use tax return calculator. Also, creating a trust is something you might consider as part of your own estate plan if you have significant assets you want to pass on.
If you are a homeowner with a mortgage, you might have heard about your right to redemption. For those who have been struggling to make their house payments, this is one route that can be taken to avoid foreclosure.Â Â
What is the Right of Redemption?
If you own real estate, making mortgage payments can be hard, but foreclosure is something that most people want to avoid. The right of redemption is basically a last chance to reclaim your property in order to prevent a foreclosure from happening. If mortgagors can manage to pay off their back taxes or any liens on their property, they can save their property. Usually, real estate owners will have to pay the total amount that they owe plus any additional costs that may have accrued during the foreclosure process.Â
In some states, you can exercise your right to redemption after a foreclosure sale or auction on the property has already taken place, but it can end up being more expensive. If you wait until after the foreclosure sale, you will need to come up with the full amount that you already owe as well as the purchase price.Â Â
How the right of redemption works
In contrast to the right of redemption, exists the right of foreclosure, which is a lenderâs ability to legally possess a property when a mortgager defaults on their payments. Generally, when you are in the process of purchasing a home, the terms of agreement will discuss the circumstances in which a foreclosure may take place. The foreclosure process can mean something different depending on what state you are in, as state laws do regulate the right of foreclosure. Before taking ownership of the property through this process, lenders must notify real estate owner and go through a specific process.Â
Typically, they have to provide the homeowner with a default notice, letting them know that their mortgage loan is in default due to a lack of payments. At this point, the homeowner then has an amount of time, known as a redemption period, to try to get their home back. The homeowner may have reason to believe that the lender does not have the right to a foreclosure process, in which case they have a right to fight it.Â
The right of redemption can be carried out in two different ways:
You can redeem your home by paying off the full amount of the debt along with interest rates and costs related to the foreclosure before the foreclosure sale OR
You can reimburse the new owner of the property in the full amount of the purchase price if you are redeeming after the sale date.Â
No matter what state you live in, you always have the right to redemption before a foreclosure sale, however there are only certain states that allow a redemption period after a foreclosure sale has already taken place.Â
Redemption before the foreclosure saleÂ
Itâs easy to get behind on mortgage payments, so itâs a good thing that our government believes in second chances. All homeowners have redemption rights precluding a foreclosure sale. When you exercise your right of redemption before a foreclosure sale, you will have to come up with enough money to pay off the mortgage debt. Itâs important that you ask for a payoff statement from your loan servicer that will inform you of the exact amount you will need to pay in order save your property.Â
Redemption laws allow the debtor to redeem their property within the timeframe where the notice begins and the foreclosure sale ends. Redemption occurring before a foreclosure sale is rare, since itâs usually difficult for people to come up with such a large amount of money in such a short period of time.Â
The Statutory Right of Redemption after a foreclosure saleÂ
While all states have redemption rights that allow homeowners to buy back their home before a foreclosure sale, only some states allow you to get your home back following a foreclosure sale. Known as a âstatutoryâ right of redemption, this right as well as the amount of time given to exercise it, has come directly from statutes of individual states.Â
In the case of a statutory right of redemption, real estate owners have a certain amount of time following a foreclosure in which they are able to redeem their property. In order to do this, the former owner must pay the full amount of the foreclosure sale price or the full amount that is owed to the bank on top of additional charges. Statutory redemption laws allow for the homeowners to have more time to get their homes back.Â
Depending on what state you live in, the fees and costs of what it takes to exercise redemption may vary. In many cases during a foreclosure sale, real estate will actually sell for a price lower than the fair market value. When this happens, the former owner has a slightly higher chance of being able to redeem the home.Â
What You Should Know About the Right of Redemption is a post from Pocket Your Dollars.
Flying can be a hefty expense â especially when youâre buying more than one airline ticket at a time. If you frequently fly with a companion, whether it be your child, spouse or friend, a companion pass can drastically reduce your travel costs.
While the terms vary depending on the airline and credit card, generally, companion passes allow a second passenger to fly with you for free or at a significantly discounted rate. Some credit cards automatically offer a companion pass when you are approved for the card or each year on your account anniversary. Others require you to charge a certain amount within a given time frame to earn the pass.
For more details on some of the most common companion passes, including what they offer and how to earn them, read on.
AAdvantageÂ® AviatorÂ® Silver World Elite MastercardÂ®
British Airways Visa SignatureÂ® Card within a 12-month period, starting on Jan. 1 and ending on Dec. 31. For example, if you opened your card account in June 2020, you have until Dec. 31, 2020 to reach the spend requirement for that year.
How long is the Travel Together Ticket valid?
The Travel Together ticket is valid for 24 months from the date of issue.
Which cards help you qualify?
British Airways Visa SignatureÂ® Card
Delta SkyMiles ReserveÂ® American Express Card
Hawaiian AirlinesÂ® World Elite MastercardÂ® (50 percent and $100 discounts)
Hawaiian AirlinesÂ® Bank of Hawaii World Elite MastercardÂ® (50 percent and $100 discount)
Hawaiian AirlinesÂ® Business MastercardÂ® (50 percent discount)
Alaska Airlines Visa SignatureÂ® or Alaska Airlines VisaÂ® Business cardholder. As part of the introductory offer, you much spend $2,000 in the first 90 days to receive a companion fare. You will automatically receive the companion fare each year on your account anniversary.
Travel must be booked on alaskaair.com.
How long is the fare valid?
The Famous Companion Fare is valid from the date of issue until your next account anniversary.
Which cards help you qualify?
Alaska Airlines Visa SignatureÂ® credit card
Alaska Airlines VisaÂ® Business
How to get the Southwest Companion Pass, Earn sign-up bonus miles with the Southwest Rapid Rewards cards
The Bank of America content of this post was last updated on March 20, 2020.
My wife and I are looking to retire in three years from New Jersey to Florida or a Florida-type atmosphere â warm weather, no snow!
We will be getting around $5,000 from Social Security monthly and will have a little over $1 million spread among savings/401(k)/house equity. We want to buy a condo for about $250,000 that has all the extras like pools, restaurants, social activities and near the beach.
Can you make any suggestions?
With 1,350 miles of coastline in Florida alone, never mind the rest of the South, you have many possibilities for your retirement. But as you can imagine, properties closest to the beach are more expensive, so ânear the beachâ may involve some compromise.
I started my search with Realtor.com (which, like MarketWatch, is owned by News Corp.) and its picks of affordable beach communities, but didnât stick to it exclusively.
My three suggestions are just a starting point. No place is perfect, not every development will have all the amenities you want, and every town has its own personality, so you may want to think about what else is important to you. You also may want to consider gated communities and townhomes, not just multistory condominium buildings.
As you narrow down your list, I recommend you visit at least twice â once in the winter to experience the crowds in high season and once in the summer to understandÂ what southern humidity is like. Itâs worse than in New Jersey.
Think about how you will build your new social network, even with all the social amenities in your condo building. Donât rule out the local senior center or the townâs recreation department.
Consider renting for the first year to test it out to make sure youâve picked the right area.
Then there are the money questions. The last thing you need is a surprise.
Youâll have condo fees; they can be quite high, particularly in a high-rise building along the beach. What do they cover and what donât they cover? How much have fees been rising over, say, the past 10 years? How does the board budget for bigger repairs? More broadly, are you OK with the condo associationâs rules?
Ask about the cost of both flood and wind insurance given that the southern coastline is regularly threatened with hurricanes. Thatâs on top of homeownerâs insurance. Or are you far enough inland that you can get away without them?
Walk into the tax assessorâs office to try for a more accurate tax assessment than your real-estate agent may give you. And since this would be your primary residence, ask about the homestead exemption.
And donât forget that youâre trading your New Jersey heating bill for more months of air conditioning; what will that cost?
Finally, three years isnât that far away.Â Start decluttering now. Thatâs hard work, too.
Here are three coastal towns to get you started on your search:
This town of nearly 25,000 on the Gulf Coast is part of the Sarasota metro area, deemed by U.S. News & World Report to beÂ the best area in the U.S. to retire. Venice is 25 miles south of Sarasota and its big-city amenities; itâs 60 miles north of Fort Myers, the runner-up in the U.S. News listing.
It also made Realtor.comâs list ofÂ affordable beach towns for 2020.
This is a retiree haven â 62% of residents are 65 and over, according to Census Bureau data.
While you can always travel to the nearby big cities, when you want to stay local, see whatâs on at theÂ Venice Performing Arts CenterÂ and theÂ Venice Theatre. Walk or bicycle along the 10.7-mileÂ Legacy TrailÂ toward Sarasota and the connecting 8.6-mileÂ Venetian Waterway Park TrailÂ to the south. The latter will lead you toÂ highly ratedCaspersen Beach.
Temperature-wise, youâll have an average high of 72 in January (with overnight lows averaging 51) and an average high of 92 in August (with an overnight low of 74).
HereâsÂ what is on the market right now, using Realtor.com listings.
Boynton Beach, Florida
On the opposite side of the state, smack between Palm Beach and Boca Raton, is this city of about 80,000 people,Â plenty of whom are from the tri-state area. More than one in five are 65 or older.
Weather is similar to that in Venice: an average high of 73 in January and 85 in August.
Boynton Beach is in the middle of developing theÂ 16-acre Town Square projectÂ that will include a cultural center and residential options, among other things. Still, this is an area where one town bleeds into the next, so whatever you donât find in Boynton Beach, youâll probably find next door.
At the western edge of town is theÂ Arthur R. Marshall Loxahatchee National Wildlife Refuge, 145,000 acres of northern Everglades and cypress swamp. TheÂ Green Cay Nature CenterÂ is another natural attraction.
You can also hopÂ Tri-Rail, a commuter train line that runs from West Palm Beach to the Miami airport with a stop in Boynton Beach, when you want to go elsewhere. The fancier Brightline train isÂ adding a stop in Boca RatonÂ to its existing trio of West Palm Beach, Fort Lauderdale and Miami; the current plan is for a mid-2022 opening.
This city has many amenity-laden retirement communities, and the median listing price for condos and townhouses fit your budget, according to Realtor.com data. HereâsÂ whatâs on the market now.
Myrtle Beach, South Carolina
If youâre ready to look beyond Florida, Myrtle Beach, S.C., with nearly 35,000 people, made Realtor.comâsÂ 2018Â andÂ 2019Â lists of affordable beach towns, and Murrells Inlet, just to the south and home to just under 10,000 people, made the 2020 list. The broader Myrtle Beach area, known as the Grand Strand, extends for 60 miles along the coast.
Summer temperatures in Myrtle Beach are a touch cooler than Florida; an average high of 88 in July, with lows averaging 74.
A word of warning: In the winter, average overnight lows get down to around 40, and average daytime highs reach the upper 50s. Is that acceptable, or too cold?
Myrtle Beach boasts of its low property taxes, especially when combined with the stateâs homestead exemption. While you may think of the city as a vacation destination, 20% of residents are 65 or older. (Nearly 32% of Murrells Inlet residents are seniors.)
Hereâs whatâs for sale now inÂ Myrtle BeachÂ and inÂ Murrells Inlet.
The post We Want to Retire to Florida or a Florida-Type Atmosphere and Buy a Condo With Lots of Amenities for $250,000âWhere Should We Go? appeared first on Real Estate News & Insights | realtor.comÂ®.
In a recent episode, I shared that I would be doing a 4-part series on divorce. I’ve been divorced for 5 years now and wanted to share what has worked for me, my ex-husband, and our 8 kids during this time. While divorce is not easy, time does help heal, and when your focus is putting your kids first, it is absolutely possible to maintain a healthy, happy family relationship.
My first episode in this series was 5 Expert-Approved Ways to Talk to Your Kids About Divorce. My second episode in this series was 5 Ways to Co-Parent with Your Ex-Spouse.
There really isn’t anything easy about divorce. Thankfully, as I discussed in the first two episodes, there are strategies and thoughtful ways to navigate through some of divorces issues, especially if the two parents are willing to put their personal differences aside and focus on their kids. In addition to the emotional turmoil that encompasses divorce, there is also another difficult component that couples must deal with and that is the financial aspect.
After 25 years of marriage and 8 kids, Mighty Mommy had to get her financial house in order and make some significant adjustments going from a two-income household to a single income.
Here are four financial considerations, as backed by the experts, to keep in mind if you are thinking of or getting a divorce.
1. Get Your Financial Documents in Order
The entire divorce process is completely overwhelming, and when you begin to delve into the financial ramifications, the stress is taken to a whole new level. Once we began having our small tribe of kids, we decided I would leave my career to be home with our family. During the last 10 years of our marriage I went back to work part-time as a freelance writer but by no means was I contributing significantly to our income. My ex-husband managed the majority of our financial affairs so when the reality of our divorce settled in, I knew the first thing I had to do was get a handle on every aspect of our financial status. I honestly wasn’t sure where to begin, but my divorce attorney recommended I start by gathering all my financial documents.
Maryalene LaPonsie, contributor to USNews.com writes in 7 Financial Steps to Take When Getting a Divorce that “as soon as you know you’re getting a divorce, collect all the financial documents you can.” She continues, by stating that these include:
“Credit card statements”
“Retirement account balances”
“Appraisals for valuable items, if available”
In addition, other documents to consider are:
Mortgage Statement, including any Home Equity Loans and purchase information
Checkbook Registry for the last year
Any other long-term debt account statements you may have, including car loans
2. Know Your Income and Expenses
When we began our divorce proceedings, I admit I was far more focused on my emotional state than my finances.
When we began our divorce proceedings, I admit I was far more focused on my emotional state than my finances. Because my ex was the one who paid all the bills and the sole provider for most of our marriage, I never worried much about the details of our 401(K) plan, life insurance policies or what our overall assets and debt totaled.
One piece of advice I received many times over was that I needed to know what our budget was so I could begin to realistically know what my living expenses would be.
Jason Silverberg, CFP at Financial Advantage Associates, Inc. and author of The Financial Planning Puzzle, told me via email: “If there was one singular, most important piece of financial advice that I could offer someone going through a divorce, that would be to understand where everything is and what everything’s worth. Without knowledge of what you own and who you owe money to, you really are going to have a hard time moving forward. You’ll also want to understand all of your sources for income and all of your monthly expenses as well. This will help you have a good handle on your budget to provide you critical understanding, so you can make smart financial decisions.”
He went on to say, “This exercise should be done both prior to as well as after the divorce. This way you can get a sense for how your household budget will operate on one income.” To help divorcing couples realize these figures, Silverberg has created the Personal Financial Inventory (1 page worksheet) inside the Picking up the Pieces eBook.
This exercise was extremely enlightening as I realized exactly where every penny (and then some) was going on a monthly basis. I was also able to gauge how much income I would need to start making in order to support these bills in addition to the child support and alimony payments I was receiving. One important factor to consider with child support is that it will decrease as your children get older, so I had to continually modify my budget based on this decrease. At first, it was overwhelming to see how much money I would need to keep our household running, but when you are armed with the figures and you pay attention to your monthly cash flow, it becomes easier to make adjustments. The fact of the matter is that some of the extra splurges such as frequent trips to the hair salon or buying my kids their usual top-of-the line items like sneakers or sports equipment had to be adjusted to what I could now afford. My kids have had some disappointments in this department, but they appreciated how we were trying to work together as a family-unit so that their lifestyle wasn't affected as drastically as it could've been which balanced everything out.
3. Consider What Professionals Will Represent You
There are important considerations to keep in mind when choosing which divorce professionals will represent you. Adrienne Rothstein Grace writes on the Huffington Post, 3 Steps to Prepare for Your Divorce, that you must align yourself with the right professionals. She explains “First, think about the divorce process you and your spouse will want to undertake and ask yourself the following questions:
“Is this going to be an acrimonious divorce? Or will my spouse and I cooperate?”
“Do I already know about all of our household and personal finances? Or do I suspect that I may be out of the loop on some assets, debts or income sources?”
“Do I trust my spouse to be cooperative and forthright?”
“Do I have any reason to believe that I will feel intimidated by my spouse during these proceedings?”
“Are we both focused on the wellbeing of our children?”
Grace says that “If you believe that you and your spouse will cooperate and will have joint best interests in mind while negotiating, then you might want to choose a divorce mediator or embrace a collaborative divorce. Those options are less costly, more private, and usually result in a more peaceful settlement process. However, if you’re not certain about finances, or cannot trust your spouse to be completely above-board and cooperative, then you might hire a traditional divorce attorney, who will only have your interests in focus while they help negotiate the complexities of your divorce.”
My ex-spouse and I decided to retain individual divorce attorneys. In addition, we also hired a Certified Divorce Financial Analyst, (CDFA) at the recommendation of each of our lawyers, who met with us jointly to give us a complete overview of what our financial future was going to look like. It's a huge wake-up call when you see all the numbers in front of you on paper. At our first meeting with the CDFA I learned quickly that I was going to have to go back to work, full-time to sustain the home we lived in as well as the upkeep, taxes, insurance, and basics like groceries for our large family.
It's a huge wake-up call when you see all the numbers in front of you on paper.
If you surround yourself with competent, caring professionals who will guide you through this very delicate journey, you will have made an important investment in your family’s future, financial well-being.
4. Stay in the Financial Know Throughout Your Divorce
Throughout your divorce, you’re bound to get all kinds of advice from friends, family, co-workers and other concerned individuals that will be looking out for you and have your best interest at heart. This can be both helpful and draining depending on your relationship with these people. When I began divorce proceedings, I too received lots of comments and suggestions from well-meaning folks, but I also decided I wanted to be armed with my own facts so I began reading lots of articles and books as well as listened to informative podcasts about divorce, particularly financially-related pieces.
My QDT colleague, Laura Adams, Money Girl, recently did an wrote about divorce in Getting Divorced? Here's How to Protect Your Money. She interviewed Stan Corey, a divorce expert and author of a new book, The Divorce Dance. This podcast had some terrific insight and some of the topics she and Corey cover in this interview include:
Different types of divorce proceedings that you can choose
The biggest mistakes that can cost you financially in a divorce
Why relying on a single family law attorney can be a bad idea
Tips for dividing up financial assets the right way—especially when you’re not so financially savvy
How to get divorced when you don’t have much money to pay for it
As you continue down the path of your divorce, surround yourself with as much information as you can, so that you will be able to make the best decisions possible for you and your children.
Five years later, I am still watching my financial picture very carefully. I work full-time and do freelance work on the side in order to maintain my home and other living expenses. I am extremely grateful that my ex-husband is very supportive of many of our 8 children’s extracurricular expenses, but the reality is I’m responsible for my own financial future so I have learned to be extremely careful with purchases and expenses.
The final topic in this divorce series will revolve around putting your kids first after the divorce.
How have you managed your finances during a separation or divorce? Please share your thoughts in the comments section at quickanddirtytips.com/mighty-mommy, post your ideas on the Mighty Mommy Facebook page. or email me at firstname.lastname@example.org. Visit my family-friendly boards at Pinterest.com/MightyMommyQDT.
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Using donor-advised funds is a more advanced tax strategy that has gotten more popular recently with the introduction of the Tax Cuts and Jobs Act (TCJA) in February 2020. The TCJA nearly doubled the amount of the standard deduction, which makes it less advantageous to itemize deductions such as charitable contributions. For people with a lot of charitable contributions, donor-advised funds are one option to still get a deduction for charitable contributions.
What is a donor-advised fund?
A donor-advised fund (DAF) is a registered 501(c)(3) charitable organization that accepts contributions and generally funds other charitable organizations. While the concept of a donor-advised fund has been around for nearly 100 years, they were typically only used by the ultra-wealthy. And while it is true that donor-advised funds are still not going to be useful for the vast majority of people, recent tax law changes have made their use more prevalent.
You can set up a donor-advised fund with most brokerages, including Fidelity, Vanguard, and Bank of America. You can donate cash, securities, or other types of assets to the DAF. The exact list of assets eligible for donation depends on the brokerage. After you have contributed, you can then make charitable contributions from the balance of your account.
You can maximize your charitable tax deductions in one year
One common reason that people set up donor-advised funds is to maximize their charitable tax deductions in a particular tax year. To show why this can be beneficial, Iâll use an example:
Our example family files their taxes married filing jointly and has regular charitable contributions of $20,000 per year. The standard deduction in 2020 for married filing jointly is $24,800. Because their amount of charitable deductions is less than the standard deduction, they may not see any tax benefit from their charitable contributions (depending on their amount of other itemized deductions). In 2021 they again plan to contribute $20,000 to charitable organizations and again are unlikely to see any tax benefit from doing so.
Now consider this same family now decides to set up a donor-advised fund in 2020. They have extra money sitting around in low-interest savings or checking account or in a taxable investment account. So they set up a donor-advised fund in 2020 and fund it with $40,000 in cash, stocks, or other assets. They are eligible to take the full $40,000 as an itemized deduction, even if they only use $20,000 to donate to the charity of their choice. Then in 2021, they can donate the remaining $20,000 to their preferred charity. They will not be able to deduct any charitable contributions in 2021 but can instead take the raised standard deduction amount.
You may be able to deduct the full value of stocks or other investments
Another reason you might want to set up a donor-advised fund is that you may be able to deduct the full value of stocks or other investments. Again, Iâll use an example to help illustrate the point.
Letâs say that you have shares that you purchased for $20,000 that are now worth $50,000. Many charities, especially smaller organizations, are not set up to accept donations of stocks or other investments. So if you want to donate that $50,000 to charity, you may have to liquidate your shares. This will mean that you will have to pay tax on the proceeds.
With a donor-advised fund, you can donate the shares to your fund and deduct the full fair market value of your shares. Then the fund can make the contribution to the charity of your choice.
Donate a wide range of assets
Another benefit to setting up a donor-advised fund is the ability to donate a wide range of different classes of assets. As we mentioned earlier, many charities are not set up in such a way to be able to accept non-cash donations. While the exact list of assets that a donor-advised fund can accept varies by the firm running the fund, it generally will include more types of assets than a typical charity.
Why you might not want to set up a donor-advised fund
While there are plenty of advantages to setting up a donor-advised fund, there are a few things that you might want to watch out for.
Itâs definitely more complicated than just making charitable contributions on your own. You may find that the tax savings are not worth the extra hassle.
On top of the added layer of complexity, most firms with DAFs charge administrative fees that can cut into your rate of return.
You may be limited on the charities that you can donate to. Each donor-advised fund typically will have a list of eligible charities. So you may find that a charity that you want to donate to is not available.
You also lose control over the funds that you donate – the donation to the fund is irrevocable, meaning once youâve donated to the fund you cannot get the donation back. While most advisors state that they will donate the money as you direct, they are not legally required to do so.
The money in a DAF is invested, so it may lose value. That means that the amount you were hoping to donate may be less than you were anticipating. You also typically have a limited range of investments available for your investment, and those funds also often come with fees.
It’s also important to keep in mind, the annual income tax deduction limits for gifts to donor-advised funds, are 60% of Adjusted Gross Income for contributions of cash, 30% of AGI for contributions of property that would qualify for capital gains tax treatment; 50% of AGI for blended contributions of cash and non-cash assets.
The post 3 Reasons to Set Up a Donor-Advised Fund to Maximize Your Charitable Tax Deductions appeared first on MintLife Blog.
The sad thing about cars is that like boats and diamond rings, theyâre depreciating assets. As soon as you drive yours off the lot, it immediately begins losing value. Some people are lucky enough to live somewhere with a reliable public transportation system. And others can bike to work. If you donât fall into either of those categories, however, a car isnât something you can put off buying.
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If youâre preparing to purchase a new or used vehicle, you might be wondering, how much should I spend on a car? Weâll answer that question and reveal ways to make sure youâre not overpaying when you buy your vehicle.
The True Cost of Buying a Car
Next to buying a house, buying a car is likely one of the biggest purchases youâll make in your lifetime. And if you want a quality vehicle that isnât going to break down, youâre probably going to have to pay a pretty penny for a new ride. The average cost of a brand new car was about $33,543 in 2015, compared to $18,800 for a used one.
When you buy a car, of course, youâre paying for more than just the vehicle itself. Besides the fee youâll pay for completing a car sales contract (known as a documentation fee), you might have to pay sales tax. Then there are license and registration fees, which vary by state. In Georgia, for example, youâll pay a $20 registration fee every year versus the $101 that drivers pay annually in Illinois.
The amount you pay up front for a car can rise by 10% or more when you add taxes and fees into the equation. And if you need a car loan, you might have to put 10% down to get a used car and 20% down to get a new vehicle. If you decide to roll the sales tax and fees into the loan, youâll cough up even more money over time because interest will accrue.
Once the car is in your possession, youâll have to pay for insurance, car payments, parking fees, gasoline and whatever other costs come up. In a 2015 study, AAA found that a standard sedan cost Americans $8,698 annually, on average. As convenient as having your own car might be, itâll be a huge investment.
Related Article: The True Cost of Cheaper Gas
How Much Should I Pay?
The exact amount that you should spend on a car might change depending on who you ask. Some experts recommend that car-buyers follow the 36% rule associated with the debt-to-income ratio (DTI). Your DTI represents the percentage of your monthly gross income thatâs used to pay off debts. According to the 36% rule, it isnât wise to spend more than 36% of your income on loan payments, including car payments.
Another rule of thumb says that drivers should spend no more than 15% of their monthly take-home pay on car expenses. So under that guideline, if your net pay is $3,500 a month, itâs best to avoid spending more than $525 on car costs.
That 15% cap, however, only applies to consumers who arenât paying off any loans besides a mortgage. Since most Americans have some other form of debt â whether itâs credit card debt or student loans that they need to pay off â that rule isnât so useful. As a result, other financial advisors suggest that car buyers refrain from purchasing vehicles that cost more than half of their annual salaries. That means that if youâre making $50,000 a year, it isnât a good idea to buy a car that costs more than $25,000.
How to Buy a Car Without Busting Your Budget
If youâre trying to figure out how to make your first car purchase happen, know that you can do it even if your finances are currently in disarray. If you look at a website like Kelley Blue Book before visiting a dealership, youâll have a better idea of what different makes and models cost. From there, you can set a goal and work towards reaching it by saving more and keeping your excess spending to a minimum.
Once you find a car you like (and that you can afford), you can save money by challenging or cutting out certain fees. For example, you can lower or bypass dealer fees for shipping and anti-theft systems. If youâre planning on getting an extended warranty, you can shop around and see if thereâs another company offering a better deal on it than your car manufacturer.
Meeting with more than one dealer and comparing offers can also improve your chances of being able to find a vehicle within your price range. So can timing your purchase so that youâre buying a car when a salesperson is more open to negotiating, like near the end of a sales quarter.
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If you need financing, itâs important to make sure youâre not getting saddled with a car loan thatâll take a decade to pay off. Long-term car loans are becoming more common. In 2015, the average new car loan had a term of 67 months versus the 62 months needed to cover the average used car loan.
The longer your loan term, however, the more interest youâll pay. And the harder itâll be to trade in your car in the future, especially if the amount of the loan surpasses the carâs value. Thatâs why some experts suggest that buyers get loans that they can pay off in four years or less.
How much should you spend on a car? Only you can decide that after reviewing your budget and figuring out if you can pay for the various expenses that go along with owning a car.
Keep in mind that getting a new or used car will likely involve taking on more debt. If you canât make at least minimum payments on the debt you already have, it might be a good idea to get a part-time job or concentrate on saving so you wonât have to take out a huge loan.
Update: Have more financial questions? SmartAsset can help. So many people reached out to us looking for tax and long-term financial planning help, we started our own matching service to help you find a financial advisor. The SmartAdvisor matching tool can help you find a person to work with to meet your needs. First youâll answer a series of questions about your situation and goals. Then the program will narrow down your options from thousands of advisors to three fiduciaries who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.
Medicare for All is a proposed new healthcare system for the United States where instead of people getting health insurance from an insurance company, often provided through their workplace, everyone in America would be on a program provided through the federal government. It has become a favorite of progressives, and was heavily championed by Senator Bernie Sanders (D-Vermont) during his runs for the Democratic presidential nomination in 2016 and 2020. If you are looking for help with medical planning under our current system, consider working with a financial advisor.
Medicare For All: How It Works
Sandersâ bill would replace all other insurance, with limited exceptions, such as cosmetic surgery. Private insurance, employer-provided insurance, Medicaid, and our current version of Medicare, would all be replaced by Medicare for All. The Affordable Care Act, commonly referred to as Obamacare, would also be replaced by Medicare for All.
Medicare for All is actually more generous than your current Medicare program. Right now, Medicare is for Americans 65 and older. They receive care, but theyâre also responsible for some of the cost. However, Sandersâ plan would cover medical bills completed, with no financial burden on the patient.
Sandersâ Medicare for All would be a single, national health insurance program that would cover everyone living in the United States. It would pay for every medically necessary service, including dental and vision care, mental health care and prescription drugs. There would be no copays or deductibles, with the exception of prescription drugs, though the cost would be limited to $200 a year. There may also be additional out-of-pocket costs for long-term care.
The government would set payment rates for drugs, services, and medical equipment. Each year, the Secretary of Health and Human Services would come up with a national budget for all covered services and spending would be capped by that national budget. Just 1% of the total health spending budget would be used to provide job dislocation assistance for people working in the insurance industry.
Sandersâ bill includes a four-year phase-in during which increasingly younger people could buy into Medicare. It would work like this: 55-year-olds would be able to buy into Medicare in the first year, 45-year-olds in the second year and 35-year-olds in the third year. Out-of-pocket costs would be reduced for everyone buying into Medicare. There would also be a public option insurance plan offered to people of all ages through the Obamacare marketplaces.
Medicare for All is effectively single-payer healthcare. Single-payer health care is where the government pays for peopleâs health care. The new name just makes the concept more popular. A Kaiser Family Foundation poll found that 48% of people approved of single-payer healthcare, while 62% of people approved of Medicare for All.
Medicare for All Cost?
If everything stays the same as it is right now, the combined healthcare spending by private and public sectors is projected to reach $45 trillion by 2026.
The libertarian-oriented Mercatus Center at George Mason University estimated that the cost of Medicare for All would be more than $32 trillion over a 10-year period.
Kenneth Thorpe, a health finance expert at Emory University looked at a version of Sandersâ Medicare for All during the 2016 campaign and estimated that the cost would be about $25 trillion over 10 years.
In order to pay for the program, Sanders has suggested redirecting current government spending of about $2 trillion per year into Medicare for All. To do that, he would raise taxes on incomes over $250,000, reaching a 52 percent marginal rate on incomes over $10 million. He also suggested a wealth tax on the top 0.1 % of households.
Medicare for All Pros and Cons
Pros and cons for this program partially depend on your income bracket. If you make less than $250,000, Sandersâ additional tax will not affect you. If you make more than $250,000 a year, or are in the top 0.1 % of household, Sandersâ tax to pay for Medicare for All would be a con for you.
In addition, universal health care requires healthy people to pay for medical care for the sick. However, that is how all health insurance programs work. Everyone buys in and pays the costs of health insurance, but the insurance company only pays when someone needs medical care or coverage. In every insurance plan, healthier people absorb the costs incurred by sicker people.
Universal healthcare lowers health care costs for the economy overall, since the government controls the price of medication and medical services through regulation and negotiation.
It would also eliminate the administrative cost of working with multiple private health insurers. Doctors would only have to deal with one government agency, rather than multiple private insurance companies along with Medicare and Medicaid.
Companies would not have to hire staff to deal with many different health insurance companiesâ rules. Instead, billing procedures and coverage rules would be standardized.
Hospitals and doctors would be forced to provide the same standard of service at a low cost, instead of targeting wealthy clients and offering expensive services so they can get a higher profit.
Universal healthcare leads to a healthier population. Studies show that preventive care lowers expensive emergency room usage. Before Obamacare, 46% of emergency room patients were there because they had nowhere else to go. The emergency room became their primary care physician. This type of health care inequality is a major factor in the rising cost of medical care.
Some analysts are concerned that the government may not be able to use its bargaining power to drive down costs as steeply and as quickly as Sanders predicts. Thorpe argues that Sanders is overly optimistic on this aspect of the bill.
Other analysts are concerned that insulating people from costs of care will drive up usage of medical care. Drew Altman, who heads the Kaiser Family Foundation, pointed out that âno other developed nation has zero out of pocket costs.â
People may not be as careful with their health if they do not have a financial incentive to do so.
Governments have to limit health care spending to keep costs down. Doctors might have less incentive to provide quality care if they arenât well paid. They may spend less time per patient in order to keep costs down. They also have less funding for new life-saving technologies.
Since the government focuses on providing basic and emergency health care, most universal healthcare systems report long wait times for elective procedures. The government may also limit services with a low probability of success, and may not cover drugs for rare conditions.
Other Medicare and Medicaid Expansion Bills
Lawmakers have introduced other Medicare expansion options, which would be much more limited than Medicare for All.
Senators Debbie Stabenow (D-Michigan), Sherrod Brown (D-Ohio) and Tammy Baldwin (D-Wisconsin) introduced the Medicare at 50 Act in February of 2019. Under the Medicare at 50 Act, people between 50 and 64 could buy into Medicare. Other than expanding the age, the main difference to our current Medicare program would be that coverage would automatically include Medicare Part A (hospital), Part B (physician), and Part D (prescription drug) coverage. In addition, you could choose Medicare offered through private insurers, known as Medicare Advantage. If you qualified for a premium subsidy under the Affordable Care Act, you would still be able to apply that to extended Medicare. This bill would effectively create a new insurance option for those 50 and older.
Senator Michael Bennett (D-Colorado) and Rep. Brian Higgins (D-New York) introduced a bill called Medicare-X Choice. This bill would offer Medicare to people of any age through the Obamacare marketplaces. This bill would not be initially enacted nationwide. Instead, the bill would focus on adding the Medicare option in places with few hospitals and doctors, or areas that only had one insurer offering coverage.
Senator Brian Schatz (D-Hawaii) and Rep. Ray Lujan (D-New Mexico) proposed a bill called the State Public Option Act that would let people buy into Medicaid, rather than Medicare. The details of covered services could vary from state to state, since this would be offered through Medicaid rather than Medicare. However, no plan would be able to offer less than essential health benefits covered under the Affordable Care Act.
Where the Presidential Candidates Stand
Sanders, of course, did not win the Democratic Primary. Joe Biden, widely considered significantly more moderate, won. Biden has an extensive healthcare proposal which expands many parts of the Affordable Care Act, but does not include a single payer Medicare For All program. Instead, it is based around a public option â a government plan only for those who want it, while private insurance companies remain the main driver of healthcare in the US.
President Donald Trump has not offered a comprehensive healthcare plan this time around. Early in his term, he and the Republicans in Congress tried to ârepeal and replaceâ The ACA, but were unsuccessful.
The Bottom Line
Healthcare is certainly a hot topic for the 2020 election process. Though Bernie Sandersâ (D-Vermont) version of Medicare for All would eventually eliminate all other forms of insurance, other Democratic candidates have varying degrees of support and versions of Medicare for All as a universal healthcare system. Though Medicare for All would likely lower the healthcare costs in the economy overall and increase quality care while also facilitating more preventative care to avoid expensive emergency room visits, you could end up paying more if you make more than $250,000 a year or are in the top 0.1 % of households. Whatâs more, some experts suggest that if costs are less onerous, patients will overuse the system and make setting up appointments for elective procedures more difficult.
Tips for Keeping Your Finances Healthy
A health savings account (HSA) may be a good option for younger people who are worried about potential healthcare costs. HSAs can greatly reduce monthly premiums.
Whatever the outcome on Medicare for All, it is important to keep yourself physically and financially healthy. If you are concerned about budgeting with health care costs, you may want to look into a financial advisor. SmartAsset can help you find your financial advisor match here.
According to the Internal Revenue Service (IRS), there was a 400% increase in phishing and malware incidents during the 2016 tax season. And tax scams extend far beyond email and malware to include phone scams, identity theft and more.Â While the April 15 filing deadline still feels far away, as Yogi Berra said, âIt ainât over till itâs over.â
Scammers use multiple ploys and tactics to lure unsuspecting victims in. The IRS publishes an annual âDirty Dozenâ list of tax scams. Sadly, while some of those scams lure people into getting ripped off, others lure people into unwittingly committing tax fraud by falling victim to fake charities, shady tax preparers and false claims on their tax returns.
The most important things you can do to keep yourself scam-free and protected thisâand anyâtax year are to:
Be waryâif it seems too good to be true, it probably is
Educate yourself on the most common risks out there
File your taxesÂ as early as possible
When you file your taxesÂ as early as possible, you can just politely decline scammer and you can protect yourself from taxpayer identity theft. Tax-related identity theft is primarily aimed at someone posing as you stealing your tax refund. Scammers are creative, sophisticated, persistent and move fast once they have your information in hand. Armed with your Social Security number, date of birth and other pieces of your personally-identifiable information, they can rob you. If youâve been the victim of a data breachâlearn the warning signsâyour information is likely available on the dark web. With your information, all a scam artist has to do is log in to a motelâs Wi-Fi network, fill out a fraudulent tax return online and walk away with a refund that could be and should have been yours.
What Is a Tax Scam?
A tax scam is a ploy intended to steal your information and/or your money. It can take several forms. The IRSâs âDirty Dozenâ for 2018 includes these scams:
Phishing scams, using fake emails or websites to steal personal information.
Phone scams where callers pretend to be IRS agents to steal your information or money.
Identity theft scams where identity thieves try and steal your personally identifiable information.
Return preparer fraud where a dishonest tax preparer submits a fraudulent return for you or steals your identity.
Fake charities where unqualified groups get you to donate money that isnât actually deductible on your tax return.
Inflated refund claim scams where a dishonest tax preparer promises a high refund.
Excessive claims for business credits where you or a dishonest tax preparer promises a high refund for claiming credits you arenât owed, such as the full tax credit.
Falsely padding deductions Taxpayers where you or a dishonest tax prepare reports more for expenses or deductions than really occurred.
Falsifying income to claim credits where a dishonest tax preparer cons you into claiming income you didnât earn in order to qualify for tax credits, such as the Earned Income Tax Credit.
Frivolous tax arguments where a scam artist gets you to make fake claims to avoid paying taxes.
Abusive tax shelters where a scammer sells you on a shelter as a way to avoid paying taxes.
Offshore tax avoidance where a scammer convinces you to put your money offshore to hide it as a source of taxable income that you have to pay taxes on.
Itâs important to know that if you fall victim, you may not just be the victim. You may also be a criminal and held accountable legally and financially for filing an incorrect return.
A new scam recently hit the wires too. For this one, scammers email employees asking for copies of their W-2s. People who fall victim end up having their names, addresses, Social Security numbers and income sold online. The emails look very valid but arenât If you see this or other emails that stink like âphish,â email the IRS at email@example.com
Phishing uses a fake email or website to get you to share your personally-identifiable information. They often look valid. Know that the IRS will never contact you by email regarding your tax return or bill.
Phishing emails take many forms. They typically target getting enough of your personally identifiable information to commit fraud in your name, making you a victim of identity theft if you take the bait.
Phishing emails may also contain a link that places malware on your computer. These programs can do a variety of thingsânone of them goodâranging from recruiting your machine into a botnet distributed denial of service (DDoS) attack to placing a keystroke recorder on your computer to access bank, credit union, credit card and brokerage accounts to gathering all the personally identifiable information on your hard drive.
Hereâs what you need to know: The IRS will never send you an email to initiate any business with you. Did you hear that? NEVER. If you receive an email from the IRS, delete it. End of story. Oh, and it will never initiate contact by way of phone call either.
That said, there are other sources of email that may have the look and feel of a legitimate communication that are tied to other kinds of tax scams and fraudulent refunds. And not all scams are emailed though. A lot of scammers will call. The IRS offers 5 way to identify tax scam phone calls.
2. Criminal Tax Preparation Scams
Not all tax professionals are the same and you must vet anyone youâre thinking about using well before handing over a shred of your personally identifying information. Get at least three references and check online if there are any reviews before calling them. Also, consider using the Better Business Bureau to see if the preparer has any complaints against them.
Hereâs why: At tax-prep time, offices that are actually fronts for criminal identity theft pop up around the country in strip malls and other properties and then promptly disappear a few days later. Make sure the one you choose is legit!
3. Shady Tax Preparation
Phishing emails arenât always aimed at stealing your personally identifiable information or planting malware on your computer. They may be simply aimed at getting your attention and business through enticingâand fraudulentâoffers of a really big tax refund. While these tax preparers may get you a big refund, it could well be based on false information.
Be on the lookout for questions about business expenses that you didn’t make, especially watching out for signals from your tax preparer that you’re giving him or her a figure that is âtoo low.â
If you are using a preparer and something doesnât seem right, ask questionsâeither directly from the preparer or by calling the IRS. The IRS operates the Tax Payer Advocate Service that can help answer your requests. The serviceâs phone may be unavailable during a government shutdown, but the website is always available.
Other soft-cons of shady tax preparation includeÂ inflated deductions, claiming tax credits that youâre not entitled to and declaring charitable donations you didnât make. Bottom line: If you cheatâintentionally or unintentionallyâchances are youâll get caught. So make sure you play by the rules and follow the instructions or work with a preparer who does. Yes, the instructions are complicated. Thatâs why itâs not a bad idea to get honest help if you need it.
As Yogi Berra said, âYou can observe a lot by watching.â Tax season is stressful without the threat of tax-related identity theft and other scams. Itâs important to be vigilant, because, to quote Yogi all over again, âIf the world were perfect, it wouldnât be.â
This article was originally published February 28, 2017, and has been updated by a different author.
The post 3 Tax Scams You Need to Watch Out For appeared first on Credit.com.