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Eight ways to make the most of your tax return

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WASHINGTON (2/25/14)--Tax filings in 2014 are up 2.5% from this time last year. Yet, of those who've filed, fewer taxpayers visited or used a professional tax preparer than in 2013 ( Feb. 14).
Tax-preparation software helps you file your returns accurately and with ease. But, without professional help, there still are countless ways to mess up a return. Here are eight ways to tighten up your tax return and avoid extra costs (MarketWatch Feb. 19):
  1. Get receipts for charitable donations: Make sure you have receipts for any donations of $250 or more by the time you file. Otherwise, you may not write them off.
  2. File a tax-free rollover correctly: If you rolled over a retirement account, tax-free, into a traditional IRA in 2013, your 1099-R shows a taxable retirement-account distribution, even though you didn't have one. Include the figure from Line 15a on your 1040; if it was a retirement-plan distribution, use Line 16a. Indicate zero in Line 15b or 16b, respectively, for the taxable amount. Write "rollover" next to it to avoid an Internal Revenue Service inquiry.
  3. Look for three potential mortgage breaks: If you bought an existing home in 2013, you may deduct mortgage points paid by the seller--as long as you reduce the tax basis of your new home by the amount of the seller-paid points you deduct. If you refinanced your mortgage in the past, paid points, and sold the home in 2013, remember to deduct the unamortized balance on Schedule A as "qualified residence interest." And if you sold your house in 2013 and prepaid a portion of the property taxes, you can deduct the amount on your return.
  4. Use the most favorable filing status: If you're single, your non-adult child lives with you, and you pay for more than half of household costs, you qualify to file as head-of-household--a more advantageous filing status than single. Even if you're married but lived apart from your spouse for at least the last half of 2013, you qualify.
  5. Don't forget baby: If you had a child in 2013, sign baby up for a Social Security number before you file your tax return. Otherwise, you'll be leaving your $3,900 personal exemption write-off on the table.
  6. Think about college-education tax credits: Your income might be too high to claim the Lifetime Learning and American Opportunity tax credits but, before you give up and claim your college-age child as an exemption, compare the exemption to how much your child could save by claiming an education credit. This gambit will work only if your child has enough income to owe taxes and the credit is worth more than the exemption.
  7. Take advantage of the retirement savings tax credit: If you contributed to a traditional or Roth IRA, a 401(k), 457, 403(b), or other retirement savings plan in 2013, you might be eligible for a tax credit of 10%, 20% or 50% of your contribution, depending on your income.
  8. Make the deadline: If you can't pay your tax bill by April 15, apply to get an automatic extension until Oct. 15. The interest rate is about 0.75% a month. Compare that with the 5% penalty you'll be charged if you do nothing.
For related information, listen to "Tax Time Doesn't Have to Be a Taxing Time" in the Home & Family Finance Resource Center.

Mindless way to save--contribute to 401(k)

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McLEAN, Va. (02/18/14)--Forty percent of Americans nearing retirement haven't saved anything, according to Federal Reserve data. And among those who have, the median savings balance is $100,000, not nearly enough to fund retirement ( Feb. 9).
Saving for retirement doesn't have to be difficult or time-consuming--or stressful. One of the easiest ways to save is by contributing to your employer's 401(k) savings plan.
401(k) plans offer unique saving opportunities because:
  • They are an easy way to save. Contributing to a 401(k) is simple. Money from each paycheck is transferred directly into an account. Chances are, you won't even miss the money that's not showing up directly in your paycheck.
  • They offer tax benefits. 401(k) contributions grow on a tax-deferred basis until you start taking distributions. That means if you earn $40,000 a year and put $5,000 into your 401(k), your taxable income for the year will be $35,000. The earnings that accumulate in your account aren't taxed until you start making withdrawals, usually after you reach age 59 1/2. Roth 401(k)s are different in that contributions are taxable income in the year you make them; distributions from the plan after age 59 1/2 generally are tax-free.
  • They don't require timing the market. No one can accurately guess the right time to get into the market or the right time to get out. By contributing to a 401(k) you can "set it and forget it" because you'll be making steady contributions on a regular basis.
  • They might offer an employer match. If your employer offers to match a portion of your 401(k) contributions, you leave money on the table if you don't contribute enough to receive the match. Check with your human resources manager to make sure you're not missing out.
Consider periodically upping your 401(k) contribution. If you get a raise, increase your 401(k) contribution by the amount of your raise or by a portion of it. Receiving a large tax refund or striving to meet a New Year's saving goal also might provide incentive to increase contributions.
For related information, read "Retirement: More to Prepare Than Finances" in the Home & Family Finance Resource Center.

Meet myRA, the newest retirement account

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NEW YORK (2/11/14)--A new retirement plan will make it easier than ever for lower-income Americans to save--assuming the savers aren't tempted by penalty-free withdrawals.
It's so easy to withdraw money from myRAs, the new government-backed retirement savings program President Obama has instructed the Treasury to create, that they might work better as an emergency savings fund than as the starter IRA (individual retirement account) for low-income Americans the president intends them to be (Forbes Jan. 30).
MyRAs will be available to workers initially through employers who don't already offer employees a traditional retirement savings plan.
Once the myRA program is fully implemented, it will be available to any worker who direct-deposits paychecks with household income less than $191,000, including those who would like to supplement an existing 401(k) (CNN Jan. 30).
Some myRA benefits:
  • Low startup cost. An initial investment can be as low as $25, with ongoing contributions as low as $5. By contrast, many IRAs require an initial deposit of at least $1,000.
  • No fees, no market risk. The money essentially will be invested in government bonds paying the same variable rate as the retirement account for federal employees. That rate last month was 2.5%.
  • Tax-free earnings. As with a Roth IRA, you can contribute up to $5,500 a year and grow the account until it reaches $15,000, at which point you will have to roll it into a Roth IRA.
  • Penalty-free withdrawals. You can take out money you've put into the account at any time, but any earnings you take out before age 59 1/2 will be subject to taxes and a 10% penalty.
Over the long term, the returns on a myRA likely will be lower than if they were invested in a market-based retirement account, but the returns are higher than most saving accounts. So if you're looking for a place to put short-term cash or a risk-free place to stash a few thousand dollars, keep myRAs on your radar.
For related information, read "Everybody's Money Matters: Inherited IRAs, Gifting, and Taxes" and "Tax Tips For Retirees and Those About To Retire" in the Home & Family Finance Resource Center.

Tax liabilities loom for boomers

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NEW YORK (2/4/14)--Baby boomers are headed into retirement with unprecedented tax liabilities unless they look ahead with careful pre- and post-retirement tax planning (Reuters via Newsday Jan. 24).
While tax-deferred retirement accounts such as 401(k)s and individual retirement accounts gave pre-retirees a welcome tax deduction when they were putting money in, those accounts may turn into a tax curse later. Boomers who concentrate all retirement savings in tax-deferred accounts will be paying income taxes on most of the money they live on.
Social Security benefits also are taxed, under a complicated formula. For single taxpayers with earnings (including half of their Social Security benefits) over $25,000, 50% of benefits are taxed.  For joint filers, the threshold is $32,000. At incomes above $34,000 for singles and $44,000 for joint filers, 85% of benefits will be taxed. Bottom line: You'll pay a tax on at least some of your Social Security benefits unless your income is very low.
Ease your future tax burden by planning ahead:
  • Diversify your tax buckets. Do this before you retire: Continue feeding your 401(k) at least up to the level of your employer match, but also take advantage of a Roth IRA if you qualify. Once you retire, you want some investments in an after-tax account for tax-free withdrawals.
  • Leave it to Roth. If your estate plan includes children, leaving them with a Roth IRA is better tax-wise than a traditional IRA.
  • Set a steady pace. Although spending in retirement won't be even-keeled your withdrawal rate should be, to a point. You may take expensive trips or purchase a new car in some years, but keeping withdrawals steady avoids pushing yourself into higher tax brackets with tax-deferred withdrawals during those high expense years.
  • Take advantage of low tax brackets. For 2014, a single person is in the 15% marginal tax bracket until her income reaches $36,900, then she jumps to the 25% marginal tax bracket until she reaches $89,350 in income ($73,800 and $148,850 for couples filing jointly). For example, a married couple who typically is in a high tax bracket and has only $50,000 of taxable income in a year may decide to withdraw an additional $23,000 from a tax-deferred IRA so it's only taxed at the low 15% level that year.
  • Protect your tax breaks. Generally, for many retirees the most efficient strategy is to take withdrawals first from taxable accounts, then from tax-deferred IRAs, then from Roth accounts. However, rather than emptying your taxable accounts just to protect all of your IRA, consider generating just enough withdrawals from the IRA to keep your tax rate low.
For related information, read "Retirement: More to Prepare Than Finances" and "Inherited IRAs, Gifting, and Taxes" in the Home & Family Finance Resource Center.