I have to issue 1099s!?

Funny I just wrote yesterday about how I don't hate taxes. Today, I'm less enamored with 'em. Or, at least, with the paperwork they entail.

I spent most of today working with my friend Neil to piece together a major and underreported story he stumbled on over the weekend: Tucked into the 2,000-page health care bill is a significant tax-code change. Gotta love how Congress tacks riders and stealth legislation into totally unrelated bills (like tossing "hey, bring your guns to national parks" into the credit card act).

From the story:

An all-but-overlooked provision of the health reform law is threatening to swamp U.S. businesses with a flood of new tax paperwork.

Beginning in 2012 all companies will have to issue 1099 tax forms not just to contract workers but to any individual or corporation from which they buy more than $600 in goods or services in a tax year. The stealth change radically alters the nature of 1099s and means businesses will have to issue millions of new tax documents each year.

"1099 tax form" sounds like an eyeball-glazing thing, but anyone who has ever freelanced knows what it is. Companies send out millions of them each year, to any individual they pay who isn't a salaried staffer. The vast bulk of the money I make comes from my day job, but every year I end up with a few stray 1099s for freelance articles.

Because I have freelance income, in the eyes of the IRS I'm running a small business. That means I file a Schedule C and -- the painful part -- pay self-employment taxes on my freelance income. (You know those Social Security and Medicare taxes you see deducted on your paycheck, which typically add up to 7.65% of your wages? What you're paying is actually only half the tax. Your employer pays the other half. Those who are self-employed get hit with both ends and cover the full 15.3%.)

Like all freelancers, I offset this pain by deducting anything I reasonably can. If I buy a new computer or phone line to use exclusively for work, I write it off as a business expense.

Starting in 2012, the health-care law requires businesses (that means us too, freelancers) to send 1099s not only to workers they pay for services, but to any entity they pay more than $600 to in a year. The example in Neil's story: If you buy an iMac, you have to send Apple a 1099 reporting what you paid for it.

As Neil quipped in response to my shocked "they're kidding, right!?" noises: "It's the Accountant Full Employment Act."

After we thrashed out as many details as possible -- which is not many, considering the IRS is a long way off from issuing guidance on how this will work -- I calmed down a small bit.

On the one hand, while I've received dozens of 1099s over the years, I've never issued one to other businesses. That sounds ... daunting. On the other hand, this is why tax software exists. I imagine Intuit's TurboTax team is doing the dance of joy over this looming tax change. By 2012, when the law actually kicks in, tax software packages should be well-equipped to fire off the millions -- or, as a CPA the Cato Institute talked with predicts, billions -- of new 1099s this will require.

Still. I see why activists are really, really tempted to just chuck the U.S. tax code and start over.

What your tax dollars buy

Like everyone else who has to balance a household budget, I flinch every so often when I see how much of "my" paycheck is disappearing toward taxes. Between that and my retirement/health care/etc deductions, I actually take home less than 50% of my gross pay. That's pretty common.

... and then I read stuff like today's news about the Johnson & Johnson drug recalls, which are fast getting ugly. The FDA did some serious smacking of J&J, especially for its failure to take action fast when it became clear something was amiss:

In its report, the FDA said McNeil did not initiate "corrective and prevention action" after it had received 46 consumer complaints from June 2009 to April 2010 regarding foreign materials and black or dark specks in its drugs.

Reading such things reminds me afresh of why I am happy to hand over a chunk of earnings to taxes: Because unfettered capitalism is actually a pretty crappy way to run a society, and I don't especially want to worry that over-the-counter painkillers are going to kill me or a nearby toddler because it was cheaper for a company to cut corners and ignore problems. I want regulators cracking whips over those who process meat, hold savings accounts, build bridges, fly airplanes and so on.

Sure, the government could be a more efficient steward of our cash -- I like internal watchdogs and get very cranky when they're hamstrung or ignored -- but in general, I'm a big fan of this whole "pay for an infrastructure that keeps society running" deal. It was a pretty clever system for us human beings to invent.

How to celebrate the anniversary of screwing up your taxes: Do it again

"We have a letter from the IRS saying we owe them money!" is not what you want to hear when you pick up the phone to answer a call from your spouse.

Ten years ago, the first year we were together, David and I managed to short the IRS to the tune of three grand and unexpectedly owe it all come April 15. The culprit was W-4 confusion: We both checked "married," not realizing that would set our withholdings as if we were each married *and* the family's only wage-earner. Throw together two salaries and a higher tax bracket and you have an expensive oops.

Since then, I've been pretty meticulous about the taxes, and we traditionally come in for a hefty refund. (Yes, intentionally -- we both would rather use the forced savings of overpaying the IRS than cut it close and end up owing. I realise that's financially foolish, but so far, the money I'm "losing" this way isn't enough for me to care.) This year's refund landed in my bank account just three days before David's panicky phone call.

It turns out what we owed money for was our 2008 taxes. "The income and payment information that we have on file does not match entries on your 2008 Form 1040," the letter sternly informed me.

"Calm down, wait till I get home, and I'll go through the records," I told David.

"Please give the IRS money so nothing bad will happen!!!" he replied. I admit, I shared a bit of the panic -- stiffing the IRS sounds like one of those things the federal government takes a very dim view of.

The form had one slightly reassuring line in it, though. "If this information is correct, you will owe $508," it said.

Okay. Suddenly owing $508 is no fun, but it's not like we were being told "cough up $10,000 and prepare for a stint in the debtors' gulag, and by the way, we're now gonna audit EVERY FORM YOU'VE EVER FILED WITH US, you untrustworthy tax-dodging leech."

The letter's "summary of proposed changes" showed two income payments unaccounted for on my 2008 taxes, but apparently very accounted for in documents the paying parties sent on to the IRS.

The first was $1,200 from Time Inc. for freelance work I did before I joined the staff, and for which I'd been paid on a 1099. When I went back in my records, I realised to my chagrin that the IRS was right. The work was done in late 2007 and paid in early 2008, and I'd totally forgotten about it by the time I filed my 2008 taxes -- which I did before the 1099 arrived in the mail. I hadn't included it. Note to self: Mint.com columnist Matthew might be on to something with his checklist manifesto.

The second entry in the IRS list was "taxable dividends" of ... $13. This came from the Sharesave account I cashed out just eight months after I started, because I left the company long before the shares vested. Apparently I made $13 in interest off it. I have no idea if that's true or not -- my dim recollection is that I got back exactly what I'd put in -- but since the taxes due on $13 are about what a cup of overpriced coffee costs, I had no interest whatsoever in digging out records or trying to fight that charge.

Happily, the penalties on stiffing the IRS -- at least for the three-figure amount I did -- are completely minor. The IRS says I owe $489 in taxes on the $1,213 I underreported, and $19 for a year's worth of interest. That's it. No "pay this draconian fine so you learn to never again shortchange the taxman" fees. I'd owe more interest and possibly some penalties if I didn't pay up straight away, but if I sent the check before March 31, I'd be back in Uncle Sam's good graces.

I cut the check that night. ("I will take this to the mailbox right this second," David said, sealing the envelope as he changed out the door.) The Treasury cashed it yesterday.

And I hope to never again be a tax scofflaw. I mean, I'm pretty sure the government (current debt: $12,644,040,577,175) kinda needs the cash.

What 'refundable tax credit' means

One provision in today's stimulus bill that's attracting lots of attention is the $8,000 refundable tax credit for first-time homebuyers who purchase in 2009. But what does "refundable" actually mean? The confusion runs deep. Since most of us are doing our taxes right about now, it seems like a good time for a rundown on the often-slippery distinction between credits and deductions.

Here, in ascending order of usefulness, are the various ways the IRS lets you adjust your tax bill:

Tax deduction: Most items you "write off" on your taxes are deductions, which reduce the amount of your income that the IRS considers taxable. The actual cash you save depends on what tax bracket you fall into. A single person with $40,000 in income would, for 2008, fall into the 25% tax bracket and owe $4,981 in federal taxes for the year (saith Bankrate's tax calculator). But add a $1,000 deduction, and the tax drops to $4,731 -- $250, or 25% of the $1,000 that's been deducted.

Most deductions require you to itemize your return -- and about two-thirds of American tax filers don't itemize. Itemizing is only worth it if your deductions will exceed the standard deduction. Unless you have a mortgage, extremely high medical bills, or other major expenses, the standard deduction is a better deal.

I didn't expect to itemize my return until we eventually had a mortgage, but I was surprised two years ago when my tax software spat out an itemized return. One of the things you can deduct is state and local taxes, and in NYC, those get whomping -- they finally overwhelmed the standard deduction David and I would otherwise take. If you do venture into Itemizationland, it pays off to start tracking deductible things like charitable contributions and unreimbursed business expenses.

Adjustments to income: A handful of deductions are available even to those who don't itemize their returns -- which is a great deal, especially for students, at whom many of these deductions are aimed. Two common ones: You can deduct tuition expenses and student loan interest (subject to income caps).

Often called "above the line" deductions, these adjustments work out mathematically just like itemized deductions. For a single filer with income of $40,000, a $1,000 income adjustment will lead to a $250 savings.

Nonrefundable tax credits: A tax credit is better than a deduction. Instead of adjusting your income, a credit adjusts your actual tax bill, dollar-for-dollar. Mostly aimed at students and low-income filers, credits are powerful weapons that can take your tax liability all the way down to $0.

One popular tax credit is the Lifetime Learning Credit, which lets you deduct 20% of your educational expenses. If you had income of $40,000, a $4,981 tax bill, and a $1,000 Lifetime Learning Credit (for $5,000 in eligible expenses), you'd get to shave $1,000 straight off your tax bill, cutting it to $3,981.

Nonrefundable credits are only useful to those who make enough to owe tax. If you had income of just $4,000 instead of $40,000, you'd have earned less than the standard deduction and you'd owe no tax. If you also had tuition expenses, you wouldn't get any extra tax benefit -- you already owe nothing, so there's no tax bill for you to deduct them from.


Refundable tax credits: If credits are "powerful" weapons, refundable credits are nukes. These rare beasties can take your tax bill below $0 -- instead of you owing the IRS, Uncle Sam owes you.

One of the most common refundable tax credits is the Earned Income Credit, which works to boost income for low-wage workers by offering tax breaks. The credit will reduce your tax bill, but if it reduces it past $0, you still get the cash.

That's why the $8,000 homebuyer credit in the economic recovery act will have such a profound effect on the tax bills of those who qualify. That single person with $40,000 in income and a $4,981 tax bill -- add in an $8,000 homebuyer credit and their tax bill drops to -$3,019, meaning there's a nice check on the way. If, like most of us, you've already made tax payments through payroll withholding or other methods, you'll get what you're owed on the credit plus a full refund of what you've already paid.

The Finance Buff has a good explanation of how refundable-versus-nonrefundable credits work, and a list of various credits and which category they fall into.

Now, having written all that up, I'll go stare forlornly at my 2009 tax filing, which has none of those nice credits and deductions I got to play with in past years. Still, since it netted me a nice refund check that arrived a few days ago, I can't whinge too much.

In which I help bridge New York's budget shortfall

This is one of the simplest tax years I've had in ages: one W-2 for me, one W-2 for David, some charity deductions (we don't have a mortgage, but we pay so much in state & local taxes that we do an itemized return anyway), and that's it. I had a 1098-E form for my student loan interest, but didn't get to deduct it this time around -- I seem to have capped out on that.

The 1098-E was a bit eye-opening. It reported that I've paid $1,407 in interest on my student loans this year. Considering that I paid about $2,600 total toward my loans this year, that sounded like a hell of a lot of interest. And my loans are at reasonable rates! I have two, one consolidated at 4.7% and one fixed about a point higher. So how on earth did I end up spending more than half my payments on interest when my rates are single digits?

... and then, with the help of my trusty 12C, I finally got it. What is, or should be, blazingly apparent to anyone who pays a mortgage. A single-digit percentage of a Giant!Sum is still a Large!Sum, and interest isn't a proportion of your payments. Whoever is loaning you the cash is making sure to get their interest payments first, in full and up front, each year on the total debt. The only way to make progress paying down the principal is to a) pay extra specifically toward it each month, or b) get the total due down to a small enough figure that your monthly payments equate to a significant chunk of it.

When I finally did that depressing math, I realized it'll be years before I make any significant headway paying down my student loan debts, unless I allocate extra cash to paying them down each month. (I've always rounded up just to make the budgeting simple and paid $20 or so extra each month, specifically marked on the online payment form as "allocate toward principal, not toward next month's payment," but clearly, that $20 isn't going very far.) Kids: When your parents gripe about ever-rising tuition costs, listen to them. I did my final year of undergraduate college credits 10 years after I did the first three -- and I had to borrow twice as much to cover that final year as I had left on my loans for all of the first three. Ow.

Still, since my loan rates are reasonable, I think saving for an apartment downpayment trumps paying down extra loan debt. So, it lives on with me, for about 8.5 more years.

Also new this year: We owed New York money. Back in college (the first time, lo that decade-plus ago), I remember ending up owing New York money every year. It wasn't much, usually $50 or so, but it was still irritating. I always took 0 allowances; how did I end up owing? New York just seems rigged like that. Thinking back on recent years, I have a vague recollection that my tuition and loan debts were all that got us from the owing-money territory and into refundland.

Fortunately, the Feds owe us way more than we owe New York (that whole 0-allowances thing), so doing taxes was still a happy experience overall. Still, I grumped a bit* when I read the quote this morning in Reuters from New York budget spokesman Jeffrey Gordon that, unlike California, New York "is not 'running on fumes' and revenues are coming in every day."

As I IM'd a friend: "Yes, revenues are coming in every day, and today, $151 of them came from me!"

*(I am generally ok with paying taxes in exchange for the happy civic things my tax cash buys. David is even more so. None of his tax-and-spend liberal sentiments were harmed in the making of this post.)

Tax prep: Giving Tango a try

Longtime Birds & Bills readers will recall that I have absolutely no loyalty when it comes to tax prep -- I'll use whatever program is cheapest and at least minimally user friendly. I used TaxCut through college, switched to TaxAct for a few years, and gave TurboTax a spin last year.

This year, just as I was starting to idly troll through discounts and figure out what to use, David mentioned a Second Life promotion offering free codes to use H&R Block's tax software. I assumed he meant TaxCut, and said sure, if he can head over to H&R Block's island and snag me a code, I'd be thrilled to use it. (David plays Second Life. I just snark at it.)

The Second Life freebie promotion code (well, "freebie" in the sense that it cost 100 Linden dollars, which is about 12 cents in U.S. dollars) seems to have dried up, but David got one before it did. But it turned out it wasn't TaxCut H&R Block was pushing, it's Tango, an entirely new option. It's kind of the in-between product. For basic, no-nonsense tax prep software, there's TaxCut. Tango has a jazzier interface, a more informal presentation, and access to tax professionals 24/7 if you need it. And, of course, for the full-service option, H&R Block has its walk-in offices.

Tango's slicker approach comes with a steeper price tag: it's $70, vs. about $35 for TaxCut. What does the extra cash buy you? Aside from on-call tax advice if you need it, it's paying for attitude. The Tango website gives you a pretty good idea what you're in for: it has a blog, and sells its multiplatform approach with the line "windows, apples, penguins - we love u."

I can see the Tango approach being useful for young and intimidated tax filers, which seems to be the demographic it's aiming at. It definitely has the Web 2.0-vibe. I couldn't decide whether I felt amused or condescended to by the quippy little messages it pops up throughout the prep process. Filling out my personal information at the start generated a bubble on the side saying, "This is kind of like when your aunt asks you when you're going to have children at Thanksgiving, isn't it?"

Like all version-one products, Tango is breakable. Because my company partially funded my HSA, they ticked a little box in 12c on the W2 saying they had. Tango popped up a note saying that meant I needed to file Form 8889, which it does not support. End message. Er? So does that mean I can't use Tango at all? Does it mean I need to file the form separately myself, if I completed the process with Tango?

I suppose this would have been the time to test out Tango's on-call tax-prep help, but I opted to forge on and deal with the problem later. Which ended up being a sound decision, because when I finished and was ready to file and put in my little Second Life code ... it was invalid. I tried a few times. Still invalid. Arugh.

So, Plan B. TaxAct apparently missed me last year. It sent an email Jan. 30 offering 30 percent off if I came back. Back I went, to reenter all the information I had already plowed into Tango. Luckily, my taxes are fairly straightforward, despite the vast pile of forms I seem to have every year (this time, it was 11, not counting charity receipts - three W-2s, an overpayment form from NY state, an interest statement from my bank, tuition and student loan interest statements, and several 1099s). About an hour later, my taxes were done - and, shock of shocks, the discount thingie worked, as last year's TurboTax discount totally failed to. My state and federal return e-filing and prep cost a grand total of $11.90. And, I'll note, TaxAct had no problem with Form 8889.

Yay TaxAct! All done, rebate en route. (Yes, I loan the government money interest free every year. This is a deliberate calculation, because David and I are crap at saving. It is much better for us financially for us to not stress about it and instead get a giant wad back at the end of the year. Plus, when I freelance heavily as I did this year, I don't have to worry about owing money at the end; it just comes out of the refund cash we've already amassed.)

Last year's tax-time surprise was discovering that I itemize, something I assumed I'd never do until we had mortgage expenses to deduct. But our state and local taxes now exceed the standard deduction, so we itemize and deduct them. Living in NYC cost us around $11,000 in taxes this year. Ow. When I briefly whinged about it, David told me to shut up and calculate what the subway saves me on car expenses. Hrm. Point.

Anyway, this year's surprise was finding that I file a Schedule C. Possibly I have had to do this before, but I don't recall seeing it come up, and I'm pretty sure I've had other years where I filed my freelance 1099 income. But this time around, when I plugged 'em in, up came the "hi you run a business, tell us about it" forms. Now I too get bitten by that self-employment tax all my freelancer friends gripe about! Ok, my bite was all of $106, but. I sympathize, my comrades.

The end of my HSA

Whew.

Three days into a four-day break, my brain is finally starting to work again. Changing jobs without a day off in between was not one of my cleverest moves; I ended up leaving with an article still owed to old job (finally filed, yay!), scary amounts of information to absorb at new job, and all sorts of errands needing do be done in my scant free time. Like getting my first personal cell phone -- all my previous ones have been work cell phones. (That is a whole grumpy post unto itself.)

I'm now in the fun process of trying to wind up all my old work benefits accounts and start my new-job ones. It's amazing how much ends up being linked to a job: I've got to sort out my 401k, health care and mental health care coverage (separate providers from standard health care, at both old and new company), WageWorks commuter cash account (THANK GOD I will be free of WageWorks), ShareSave cash account, and my Health Savings Account.

Ah, my HSA.

My new company has amazing health care options. The cost is a flat percentage of my salary. To cover both me and David is 2% of my gross (just me would be a mere 1%)-- which ends up being only a bit more than I was paying at my old job to insure just me, and will save us more than $1,000 a year by letting us cancel his (more expensive) insurance. It also appears to be better coverage, even though it's the same provider I had before, Empire Blue Cross. Seems the new plan coughs up for more comprehensive coverage. Yay!

The new job also offers an HSA, but the cost is such a small fraction less than the traditional coverage that it isn't worth it. So, after one year of experimentation, I'm ending my voyage into these minimally charted health-care waters.

So how did it work out?

I opted for the HSA last year because its premiums were less than one-third what the premiums would have been for traditional insurance. My company's strange plan made it so that it was less expensive to do the HSA and go through the entire deductible than it would be to pay for regular premiums.

On that front, it was a success. My usual doctor is out of network (in fact, she's trying to quit taking insurance entirely), and I used HSA money to pay the bill for an annual checkup. Though I was technically paying "out of pocket," it was cash that would otherwise have gone toward higher premiums, so it was cheaper. In the end, I paid around $500 less for health care last year than I would have with the traditional plan. I also had no emergencies, though. That number would look different if I'd required anything beyond the usual routine stuff.

While the HSA saved me money, the politics of the thing (it's a tax shelter masquerading as a health-care policy) drive me nuts, so I'm quite happy to be saying goodbye to it and heading back to a traditional plan.

Which prompted the question: Uh oh, what do I do with the HSA balance? The entire idea of HSAs is that unlike FSAs, the balance doesn't "expire" at the end of the year -- you're supposed to accumulate funds, as you would in a 401k or other savings plan. An HSA also is intended to be portable. If you change jobs, you can keep it.

But since I'm not going to be funding the HSA any longer, I don't really want to drag around the $230 or so I have left in it and keep it long-term. I was procrastinating in figuring out how to kill the balance when Amex solved the problem for me: it's also ditching its HSA plan.

Seems the HealthPayPlus HSA business isn't working out for American Express, the provider of my plan, and it's sold its accounts on to ACS/Mellon. Amex sent me a packet of papers to fill out to transfer my account to Mellon, but at the bottom was some fine print noting that if I don't take action by Jan. 18, Amex will simply close my HSA and send a check for the balance.

Score one for procrastination! I love it when ignoring problems actually does make them go away.

This distribution has tax implications. Because HSA funds come out of paychecks pre-tax, I'll presumably have to pay taxes on the money I get in the check from Amex. The paperwork they sent goes into no detail on how that will work -- it simply says "contact your tax advisor for more information regarding the tax implications of this option."

I am my tax advisor, and I have no clue, so I'm going to rely on the tactic that has been working so well for me: ignoring it. Whatever happens, the dollar amount is so small I'm not particularly worried about getting hit with a tax bill.

Using Gmail tags for tax document tracking

I have a long post on mortgages and general financial implosion in the works, but I wanted to throw up a quickie first about a handy Gmail trick I'm making heavy use of. Last year was the first in which I itemized my taxes, and the first time I needed to have a record of charitable dominations -- which, er, I didn't have, because I didn't realise I'd be itemizing and able to deduct. Forewarned is forearmed and all that, so this year, I'm keeping track of what I donate.

But keeping track of lots of bits of paper is a pain. Fortunately, I've found that I don't have to. I don't know if my pattern is the common one, but almost every donation I make is at least originated online, and often fulfilled that way. Which means that every donation generates an e-mail trail, with a thank-you and receipt. I created a charity tag in gmail to archive the e-mailed receipts, and voila. Instant filing system for donation records. Come tax time, I can just click my "charity" tag and tally up my donations.

TurboTax Rip-Off On Amex Discount

The reason I decided to try TurboTax this year was the 25% discount on the federal return cost. In actual practise, this translated to about $5 off, but by the time that sunk in I was committed.

Having just filed, I feel even more ripped off by my inability to actual get my damn $5. The offer didn't come with a promotion code; to use it, you're supposed to access TurboTax through a special page on OfficialPayments.com. (This special page: https://www.officialpayments.com/promotions/turbotax/amex/index.html) When I started my return, I initiated it at that site. When I went back to finish it today, I want straight to TurboTax. Come checkout time, no discount. So I went back to the original site and saw the note that you need to "Remember to access and complete your return through the TurboTax links on the American Express Web site." Being a dutiful little discount hunter, I clicked the link, re-stepped through TurboTax to the checkout ... and again saw no discount. GRRR.

At this point, I decided further chasing was not worth the $5 and surrendered. But if anyone does manage to use an OfficialPayments discount: What's the trick? Do you also need to open an account there and log in through that? (Something NOT MENTIONED BY AMEX AT ANY POINT ...)

Shock of the day: I itemize

When I get swamped, "tomorrow" tends to get interpreted loosely. Anyway, back into the tax trenches!

Although I finished doing my taxes, I haven't filed them yet: I'm one of the people affected by late tax-law changes that the IRS needed extra time to handle. People claiming the deduction for college tuition expenses were affected by the changes, which the IRS estimated would apply to about 1 million of the 136 million tax returns the IRS expects to process this season. Although, clicking over to that press release, I see a note that "As of 2/3/07, the IRS is Processing Extender Claims" ... so it looks like I can go file as soon as I finish blogging.

Others might also get tripped up trying to file early, though. Various news outlets are reporting rising corrections rates in the 1099s sent to investors with dividends and other investment income. Thanks to tax-law tangles, the error rate on those forms has climbed as high as 14 percent -- meaning that people who file early could face the frustration of finding corrected forms in their mailboxes a few months after they've finished their returns. (You can amend, though it's optional if the error was in the IRS's favor. Even if it's not, unless the error is huge, I imagine few people bother to make the correction. The odds of getting audited remain small and dwindling.)

The last few years I've been stumbling over discoveries of things I can still deduct even though I don't itemize. Last year, it was my tuition deduction: Even though I don't qualify for any of the educational credits (which give you $1 off your taxes for each credit dollar you qualify for), I did max out the $4,000 allowable deduction. Using that cut about $1,000 off my tax bill (or, in my case, added $1,000 to my refund). Sweet.

This year, I discovered that I do itemize. I always assumed we wouldn't have any reason to until we had a mortgage. But there are a handful of other scenarios that can make itemizing the cost-effective thing, and it turns out that the amount we pay in state and local taxes exceeds the standard deduction. (Ah, NYC. Did I mention how depressing it was to go through the TurboTax Local portion and have it wrack up a whopping refund -- until I ticked the 'I live in NYC box'? It actually had a little animation of my refund dollars spinning away as it wheeled its refund-calculation line backwards. When I winged at David about this, he responded, "Your taxes buy subways. It's worth it.")

The practical upshot of this is that for the first time, I'm deducting charitable donations. The downside is that because I always went along assuming "I don't itemize and get no deduction," I never kept the paperwork on our donations. Oops. Guess this is the year I start!

The TurboTax vs TaxACT decision

Our last W-2 finally arrived yesterday, so I plunged right into doing the taxes. Much banging around online turned up no good reviews of the online tax software, grrr. I didn't even find many current reviews of the boxed versions, which surprised me. Isn't this a gimmie for every personal-finance beat writer at any publication of size? PC magazine had one of the only comprehensive bake-offs I could find.

I usually go with TaxACT, but I swore to look elsewhere after running into some minor hassles last year. One look at the prices of "elsewhere" nearly sent me running back. My Amex offered me a 25% discount on the federal-return cost with TurboTax ... but the savings that translates to is actually pretty small, especially since the more-expensive state return isn't discounted. Even with the discount, the total cost for TurboTax online for me will be about $48 -- versus $16 for TaxACT. Ow.

Still .... TaxACT was annoying me, and I'd never tried anything else. The reviewers all swear by TurboTax. Solely for the experience of taking the Cadillac out for a test drive, I decided to shell out and try it. (And hey, blog fodder.)

The interface was indeed a little smoother -- but I'm not sure the end result was any different. I didn't turn up any exciting new deductions I wouldn't have otherwise known about. Plus, TurboTax still had one of the more annoying features that irked me with TaxACT: if you need to go back and revisit something out of order, it's easy to get lost. While working on my state return, I clicked back to the federal return to check out a previously entered amount. That lost my place in the state return workflow, and I couldn't get back -- I had to click through all the fields I'd already entered, costing me an extra 20 minutes of work. Grr.

So, next year, I'll probably save the money and return to TaxACT.

For those allergic to paying full price for tax software, various deals abound. TurboTax has a 15% off deal to anyone paying with a Visa, Amex, MasterCard or Discover. Your financial services providers may have their own deals. My friend Fahmi reports that Fidelity offers TurboTax free to its customers, and PC World is making TaxACT free to subscribers. State Farm also offers TurboTax free for customers.

Meanwhile, if you have an adjusted gross income of $52,000 or less, you qualify for FreeFile -- a program 70 percent of taxpayers are supposedly eligible for. FreeFile deals have all kinds of odd qualification standards, but the IRS helpfully offers a wizard to guide you to an eligible program.

More from the tax trenches tomorrow ....

More taxing tidbits

Following up on yesterday's tax theme, I figured I would dust off a link to one of last year's most vital tax-tip posts: Don't forget about "adjustment to income" deductions available even to those who don't itemize. There are a handful of items you can get credits or deductions for even if you claim a standard deduction, such as tuition and student loan interest payments, moving expenses if you relocated for work, children, and adoption costs. One interesting credit is available for those who make $25,000 or less and contributed to a retirement plan like a 401(k) or IRA.

Bankrate has a helpful rundown on such tax breaks. I suspect a number of B&B readers are students or are paying off student loans; don't forget to use that to your advantage on your taxes.

Tax round-ups and refunds

We're still waiting on W2s from my new company and David's company, so no tax filing yet for me. Still, since I imagine other people might be doing theirs already, I'll start dusting off the tax posts ...

I haven't figured out whether I'm sticking with TaxACT this year or switching to something that will annoy me less, but Consumer Search has a "review of reviews" with guides to the various programs. One thing that piques me: Reviewers continue to focus on the sold-in-stores CD versions of the various programs. I always use the Web versions. Do they offer the same features? The same pricing? Reviews don't say. GRR. Anyone know of a rundown that evaluates the online versions?

This year most people will be getting an extra $30 or more back on their taxes, thanks to the telephone tax refund. The government apparently got smacked down in some court rulings over long-distance taxes and told to pay them back, to the tune of $10 billion in refunds. (I was going to look up the rulings and give more details, but a quick troll of Google News turned up nothing -- and if the beat reporters are going to be lazy about this, I am too, unless anyone is really interested.) If you had long-distance services on a cell, VoIP or land line between Feb. 28, 2003, and Aug 1., 2006, you're eligible to collect. The IRS page has the formula; I imagine all the tax-prep programs are worded up about the rebate.

You can opt for either the IRS standard rebate or you can calculate what you actually paid for the tax, and take the higher amount. I took a brief stab at calculating and gave up after finding that a) my phone bill doesn't really break out this charge; it just lists "federal taxes" on the long-distance, and b) the entire monthly "federal taxes" bill on my long distance looks to be about 65 cents -- so I'm probably better off taking the flat refund.

Be warned, if you try to claim thousands of dollars on this refund, the IRS is probably going to get cranky. They've apparently already fielded a few cases where people have claimed they paid phone taxes that would correspond to phone bills larger than their actual income.

Using tax-cut apples to solve health-care crisis oranges

In honor of last night's State of the Union, it's time for another heath-care-and-taxes rant.

I'd seen articles suggesting that a health-care proposal would figure into the speech, and looking at a transcript, I see that Bush acknowledged we have a problem: "Many Americans cannot afford a health insurance policy." (Bush also said that the government has an obligation to care for "the elderly, the disabled, and poor children," and that private insurance is the best way to cover everyone else. I disagree and think we should have universal, government-based health care, but it seems like we're still a few years away from the current system collapsing into such a rubble that universal-care proposals become tenable.)

I am left genuinely confused about how the proposal is supposed to address the problem. Once again, this seems like an outright tax break camouflaged as a health-care-reform measure.

Bush's proposal is to create a new, additional standard deduction (available even if you don't itemize your return) for people who purchase health insurance. If you buy it, you'll be able to deduct $7,500 (for individuals) or $15,000 (if you have family insurance) from your taxable income. The idea seems to be that this reduced tax burden will free up money that currently uninsured people will use to purchase insurance.

The flaw in that logic? If you can't afford the premiums for a health-care plan, it's unlikely that a tax incentive will change your mind. CNN's detailed analysis includes White House estimates that this tax break would motivate 3 million to 5 million currently uninsured people to get coverage. With an estimated 46 million Americans uninsured, that's a barely noticeable dent.

This proposal would make insurance more affordable for self-employed people who don't currently get any tax write-offs for buying health care, as people with employer-sponsored plans already do. (All of my health-care premium payments are already tax-free.) That's a great thing, and I'd be happy to see tax breaks targeted at that specific issue. But this plan would also hand money back to scads of people who already have insurance and don't need this incentive. (Like me. Since the proposed $7,500 deduction is far more than amount I currently deduct to cover my premiums, this plan would effectively shelter an additional $6,000 or so of my income.) If Bush wants to increase standard deductions, fine, but, doing so under cover of "addressing the health care problems" is duplicitous.

Because this tax plan does nothing to address the real source of skyrocketing health-care expenses: a massively inefficient system. Getting more people insured does little good if insurance plans continue cutting back on what they cover and hiking premiums, while the system's worst problems, including its inscrutable and inflated cost structure, continue unchecked. For a very good (and very long) examination of what's going wrong and why, check out "The Health Care Crisis and What to Do About It."

Bush's State of the Union proposal is, of course, simply a proposal. Any actual legislation along the lines he suggestions would take months to pass and years to enact, and is unlikely to get through the current Congress, anyway. (Right now, it seems unlikely Bush could get a resolution praising fluffy kittens through Congress without vicious opposition.) But the administration's drastic misdiagnosis of the problem bodes ill for the chances of any significant reform proposals to address the urgent-and-growing problems with our health-care system.

Our descent into the stock-market inferno

David recently called me with terrifying news: "I'm going to exercise my stock options!" My response -- you have stock options!?!

Turns out his company, A Giant Madison Avenue Ad Conglomerate, chucked a handful of options at staffers about five years ago. They've recently vested. Although Giant Conglomerate's shares are trading dead flat to where they were five years ago, David's options carry a strike price of about half the current value -- so, if he exercises the options and cashes out, he'll see a profit. (A fairly tiny profit. Like, a rounding-error-on-Google-shares size profit.

Since neither of us has ever mucked around with the tax implications of anything related to stocks, I promptly wigged out. "Exercising stock options" is irrevocably linked in my mind to complicated tax situations and debacles with the AMT. "Whatever you do, do not exercise and hold the options!" I fretted at David.

I don't pretend to have looked in any detail at the minutia of how it works, but my understanding is that when you exercise options, you're taxed on the 'profit' of the difference between your strike price and the market price -- even if you end up holding onto the shares and not realizing any actual-cash profit. If, as happened to so many during the dot-com smashup, the shares you own then tank, you still owe on what they were 'worth' on your exercise date. So why would anyone exercise shares and not immediately sell them? If your options are expiring but you want to gamble on the shares going higher, you can buy and hold. It can also result in a lower total tax burden if you hold the shares for more than a year, shifting the gains into the capital-gains category (which can come with a lower tax rate than you pay on your regular income).

But I have no interest in gambling on Giant Conglomerate's shares climbing, and given the tiny sums at stake here, trying to game the tax rates would save us about enough to buy an extra box of cat food. So my vote was firmly cast in the "exercise and dump" category.

My next fret was about the logistics of that -- would we need a brokerage account? An accountant? I just write about stocks, I've never tried to do anything so silly as selling them ...

Fortunately, David's company is apparently prepared for having a workforce with no clue about these things, and has an arrangement struck with the financial institution handling the stock-option deal. Employees can arrange for their options to be exercised and sold simultaneously, with the tax withheld. We'll just get a check for the net amount, and presumably some paperwork for the IRS next year around tax time.

I haven't seen any of the paperwork on this -- David and his company are handling it. It still feels rather nebulous; I'm viewing the whole thing as a rather novel experiment. Now if only my company would start talking about spin-offs and IPOs, it'd really feel like 2000 all over again. Maybe I too will eventually get some of these newfangled stock option things.

Sometimes, it's the little things

I am kicking myself for not thinking of this sooner: Get a separate wallet pouch for storing affinity cards.

I had pretty much stopped taking advantage of store membership cards, purchase stamp/punch cards, store credit cards with discount offers, and whatnot because I can't keep track of them. I feel particularly silly for not thinking of this sooner because I already carry multiple wallets. I've always used two: one zip pouch for bills, coins and most-important plastic like my driver's license, primary credit card, and subway card; and a second zip pouch for the zillion other bits of plastic I have, like phone cards and little-used credit cards. Adding one more pouch for affinity cards seems a useful way to keep them accessible without further cluttering my primary wallet.

(Also, totally unrelated but too funny not to mention: "H&R Block gets its taxes wrong.")

Saving with FSAs (even if you're healthy)

Until now, I've avoided paying any attention to medical Flexible Spending Accounts (FSAs), a standard benefit available to corporate guppies like me. I lack kids or chronic health issues, the two factors that seem most prone to generating high healthcare bills. I'd never before tracked my annual medical expenses, but I'd bet that in an average year they total less than $200. The use-it-or-lose-it nature of FSAs made them seem more of a hassle than a benefit for casual medical spenders like me.

Then came The Big Hospital Adventure of '06, which has spawned promises of ongoing monthly healthcare expenses and a pile of bills with scary numbers. (Total bill sent to our insurance company for a weeklong stay: $20,484. Twenty thousand dollars. And this was basically a monitoring trip, no surgery or anything intensive like that. Daily shared room and board appears to have cost $1,950 -- for that rate, we could have checked ourselves into the Mandarin Oriental and booked a private nurse. Plus hourly caviar deliveries.) Our insurance eats most of it, but as insurance companies do, Aetna is finding ways to kick a sizable chunk back our way. So, suddenly this FSA idea sounds really appealing.

Especially since I saw the power of taxable income adjustments at work this year with my tuition deduction, which resulted in $4,000 of taxable-income reduction cutting our tax bill by $1,000. If I can use the FSA to reduce our taxable income by a few thousand, that will make a noticeable dent in our taxes and effectively reduce the cost of the whomping bills we'll be getting.

The big danger of FSAs is that you lose any unspent money left in the account at the end of the year. (You have a few months' grace period to actually claim reimbursement, but the expenses all have to be incurred by the end of the calendar year.) They're a bad gamble unless you have a pretty clear idea of at least the minimum you'll be shelling out.

However, there's a less-publicized flip perk I hadn't known about: your employer is required to let you claim reimbursement at any time during the year for the maximum amount you've elected to contribute -- even before you've actually made those contributions. In addition to the tax advantages, you're essentially getting a free credit line.

SmartMoney has a helpful article on FSAs and a benefits calculator. In some ways, the Big Hospital Adventure was well-timed. It came at the start of the year, and just as I'm changing jobs and will have the option to start up an FSA. If we're going to be contributing to the care and feeding of the medical-industrial complex, I'd like to at least wring out whatever financial advantages we can.

Filing systems, online and off

Today's gripe: Why are all filing cabinets ugly? Even Design Within Reach couldn't come up with a non-ugly cabinet.

I'm looking for a filing cabinet because I'm finally attempting to organize my ancient one, which is utterly overstuffed. (And ugly.) This also reminded me to look up the latest data on how long I should be keeping various financial papers.

An increasing number of my financial intuitions offer paperwork online. My banking statements, credit card statements, quarterly 401k statements, pay stubs and W-2s for up to three years, and phone and cable bills are all available at the providers' websites. Possibly foolishly, this dissuades me from keeping printed copies. Why should I sock away a pile of pay stubs when I can go to ADP's website and print out years' worth, if I ever run into a need for them? I have great faith in the Internet's storage powers.

What I have learned to print and keep, though, are tax returns. TaxAct, and probably all the other providers, regard storing returns as a 'premium' service. You get access for a few months, then poof, no more online return unless you want to pay extra fees.

Tax bites

Miscellaneous tidbits ...

-I haven't filed a 1040EZ in years -- out joint income has usually been above the cap. This year, the cap is lifted to $100,000, which will put a lot more people into EZ eligibility. However, there are good reasons in some situations to go the more complex route. This Bankrate.com article does a nice job explaining the different 1040 options.

-The tuition deduction I mentioned yesterday is an adjustment to income. You can claim it even if you don't itemize your return (which I don't).

-I'm getting very fond of Bankrate.com. It has a nifty article laying out other income-adjustment deductions available to those who don't itemize. Traditional IRA contributions, student loan interest, money spent by educators on classroom supplies, and moving expenses are among the items you can use to adjust your income downward -- which, as I found out, can dramatically affect your tax bill. The Bankrate article is two years old, but the IRS's website has an index of explanatory documents on various income adjustments.

-My friend Fahmi points out that anyone with a brokerage or other financial services account should check out what deals are available through their provider for tax-prep services. Fidelity offers TurboTax discounts; I'm sure other firms have similar deals. For those who really, really don't want to pay for prep software, H&R Block's TaxCut will let you do both your state and federal return free if you take your refund on a prepaid Visa card. (If that link doesn't show the offer, go in through the IRS's FreeFile site. It's a semi-hidden/limited offer.)

-Note for freelancers: Companies are required to send 1099 forms to any contractor they've paid more than $600. The deadline for sending those out is Jan. 31, so watch your mailbox.

-I think this is my last year with TaxAct. The interface is pretty clunky and buggy -- with Firefox 1.5, using TaxAct's 'back' button to rewind to the previous screen consistently brought up a screen full of blank data fields. After a few minor heart attacks thinking I'd lost all my entered data, I caught on that it's actually a display bug: If you go back, then forward, you see the data. Weird. More annoyingly, when I tried to research questions about the tuition credit (like 'can I deduct tuition fees I'm paying with loans?'), the built-in question system generally had little to offer. Thankfully, a few minutes with Google and the IRS's website answered all my questions.

So, TurboTax/TaxCut users -- how do you like your interfaces?

Milk your tuition expenses

Throughout January, I collect tax documents that show up in our mailbox and toss them in The Tax Pile. We don't itemize, have investment income, or do anything particularly complicated -- we each have one W-2, I have a few 1099s from freelancing, and I have a 1098-E each year for student loan interest. That's it.

So it rarely occurs to me to look for tax deductions for which some financial institution has not sent me a form. But as I was buzzing through TaxAct, the screen on tuition expenses caught my eye. Well, hmm. New School never sent me any forms, but I have tuition expenses in spades thanks to the endless Finish My Degree project. So I started researching what I can deduct.

I don't appear to qualify for Hope or lifetime learning credits, but I do nail the tuition and fees deduction, which allows you to lower your federal taxable income by up to $4,000. You can still claim the deduction on expenses you're using student loans to pay. Score! Claiming this got me nearly $1,000 extra back on my refund. New York State also let me deduct tuition expenses -- up to $10,000, this time. That notched my state refund up a few hundred.

If you're eligible, make sure to claim 'em. Maybe the memory of the deductions will ease the pain a bit next time I hand New School another of its gigantic tuition checks.