Color of Money Live: Your tax-time questions answered

Feb 15, 2018

Join Washington Post nationally syndicated personal finance columnist Michelle Singletary for an online discussion.

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Such a sad day. Hard to concentrate on anything other than the shooting in Fla. 

Nonetheless, thank you for joining me today. Let's get started. 

Hi Michelle, My parents recently received a nice payment from the state which is building a pipeline through their yard. They have gifted me $14k from this payment. Honestly, I am kind of in shock and feel a little bit weird about having this. I've never had money like this before that was just gifted to me. I have no idea what to do with it. My parents said I could do anything I want, but suggested putting most of it towards my mortgage and maybe taking myself on a vacation with the rest. I am in my late 30s, and have no debt other than the mortgage on my condo. I don't know where to start, really. Any ideas or columns you've written about coming into a large sum of money? Also, I can't shake the feeling that I don't deserve such a random pile of money when there are so many people without. I would like to donate some of it -- but how much? Help!

You have amazing parents. What a wonderful gift. (I'm open for adoption BTW). Okay just kidding.

A few things

1. Don't feel guilty. Feel blessed. Clearly your parents wanted you to share in their fortune. And there will always be need. 

2. I love that you are thinking of others. So if you're heart is moved definitely give. But be thoughtful about it. Is there a cause or charity you regularly support? 

3. I know some might think, "What she said give before talking about saving or paying down the mortgage?" Yup, I believe in giving first (I'm a tither). It's a sign of gratitude. 

After you decide how much to give, I would make sure you have a healthy emergency fund (3 to 6 months of living expenses). 

Also beef up or create a life happens fund. Different from emergency. This is for car repairs, etc. Maybe a few thousand.

How's your car holding out? If its lifespan is getting shorter, you could add more to the life happens fund for that.

4. If you have a solid emergency fund and life happens fund then sure go on a vacation. I would even do that before the mortgage prepayment. It's a treat your parents wanted you to have.

5. Check your retirement. I might put it toward that before the mortgage. 

6. After all this, if you've got money left over, sure make a lump sum extra payment to your mortgage. 

If I contribute to my IRA this month, will I be able to deduct it on my 2017 taxes? And is it too late to do a back door conversion to a Roth IRA?

Contributions to a Traditional or Roth IRA for 2017 can be made until April 17, 2018. It is not too late to make a contribution for 2017 but any conversion you do now will be for 2018.

My husband and I just found out we're expecting! While this was totally planned, we're both now spinning out a little at the reality of how much its all going to cost. We're lucky, we have a strong retirement (over $300k, we're in our mid 30's) taking advantage of all employer matching. We have savings and a Life Happens fund and with the exception of one car and our mortgage, debt free. I know our lifestyle will change somewhat when the baby comes, but I'm also just so daunted by the cost of childcare, the lost income (we both work full time, but I make much more than husband and would like to reduce my hours for the baby's first year), college and other savings, and just all of it. When we take a breath and step back, where do you suggest we start tightening? Should we start moving money from our savings to baby savings/college? I don't want to reduce the retirement if we can help it. I know we'll have a dramatic lifestyle change, but will it be enough to afford it all?! How do people cover $1600+ for day care a month!!

Breathe!

You got this.

In your 30s with more than $300,000 in retirement. You are already ahead.

Here's what I suggest

1. As soon as you can, start living on what it would be like to have extra baby expenses. It's like a trial run to see how added cost of say daycare impacts your budget. Put away the money in a savings account now and you'll have nine months worth of childcare, baby expenses already saved up giving you the room to take extra time off to be with the baby or reduce your hours. 

2. Start pricing out various daycare options. There in-home, center, taking the baby to someone else's home, etc. 

3. If you want to do a center or someone's home you'll probably need to get on a wait list not long after your first trimester. Baby slots aren't typically plentiful. 

4. You may have to roll back some of your savings to accommodate the baby expenses and that's okay. Or you can look at your budget really cut back on stuff to continue saving at the current rate AND add baby expens

5. Ignore all the guides, magazine stores, etc. that say you need this or that. Talk to parents and see what they really needed. New parents like all the new gadgets etc. but in my experience much of it isn't needed and overpriced. 

Finally congratulations! 

I am preparing a joint tax return for my spouse and myself. His financial advisor sold some stock for him during 2017 that was purchased many years ago when the account was under the direction of his mother. We have no idea how much was originally invested in the stock and shares were purchased several times over the years with automatic reinvestment of dividends. How do we go about determining the cost basis in this kind of situation?

The IRS position is that if you do not know your cost basis it is assumed to zero. This answer may not sit well with some people as it make the entire sale subject to tax. I would suggest reviewing your records to find the original purchase price plus the amount of dividends reinvested. Contacting the broker who held the stock may be a good starting point for obtaining that information. 

Last week I spilled a cup of tea on my laptop. I was devastated--it immediately shut down, and I got two estimates for liquid damage repair to be about $500. If I didn't have a life happens fund, I would have felt SO GUILTY drawing from my emergency fund of 6 months of expenses. That would have felt too frivolous and not like a true emergency. With the separate fund, I was able to quickly make the repair payment and try to move on without beating myself up (too much) over a careless and costly mistake.

Love, love, love this testimony. It's exactly why I suggest you have two savings accounts. Lots of people won't dip into the emergency fund when really a laptop is needed these days. Or they feel so guilty as you point out. 

So good for you!

Is it necessary to report a foreign bank account on Form 1040 even if the interest is reinvested and not sent to the account holder in the US? What if one starts reporting this account for the first time this year? Will this trigger IRS action? Should one consult a tax attorney before filing for 2017?

There are two main filing for reporting foreign bank accounts. The FBAR which is filed separate from the 1040 and the Form 8938 which is filed together. As a US citizen or resident alien you should already be reporting your worldwide income. If you have failed to do these filing from previous years, you should speak to a tax attorney on how you should proceed.

Does it make any difference where to set up an IRA? I have accounts with TIAACREF and figured I would use them, but should I look at different places?

You can open an IRA with any bank, broker, or financial institution that offers them. You should consider the investment options, customer service, and potential fees in making your decision. There are many low cost providers available and you should shop around.

Hi Michelle! I am really trying hard to get out of debt. $130K income, $24K debt. Sounds doable, right? However, I am struggling with staying focused. Between this vacation or that other thing, or this other thing, I am not making a ton of progress. I know I should be moving way faster than just paying a few hundred bucks a month. What can I do to take bigger bites out of this debt?

Vacation?

And with $24,000 in debt. 

Can I slap you into staying focused.

Do this for me.

For the next 21 days, I want you to do my financial fast. There's a book but you don't have to get it. 

During the fast you can't buy anything that is not a necessity. You cannot eat out. You cannot go to the movies (Yes, that means NOT seeing Black Panther. With all the hype it will still be out in 3 weeks). No shopping. Nothing not needed. 

You can pay your bills as usual. Buy food at the supermarket although I challenge you to eat yourself out of house and home meaning eat up everything in your home before you do more shopping. And when you do shop at the market still get just what you need. No extras. No steak!

Watch how much you will have with this is over. You'll see that you have more to put to your debt.

And until that debt is gone NO MORE VACATIONS. No more "other thing, or this other things." 

I mean it. 

Don't make me come over there and slap you :)

When my sons were born (in '94 and '97) my parents gave them each $1000 worth of stock in a savings and loan. They made the gift with me as the UGMA custodian/trustee. I have no documentation that the gifts were worth $1000 at the time they were gifted all those years ago. That S&L has been through more than a few mergers / acquisitions / takeovers / etc. over the years and has lost value from its original value. In 2017, I sold both son's stock holdings and gave them the proceeds. How do I handle it on my taxes this year?

As a general rule for appreciated gifts, the donor's cost basis transfers to the person receiving the gift. It is unfortunate that the basis has not been tracked over the last 20+ years. The IRS position is that unknown cost basis is assumed to be zero. I would suggest working with the broker to find the records to help support only paying taxes on your actual profit.

I get (a little) the people who see folks who are on disability, but seem to be able to function in a lot of ways that might add up to being able to hold a job. I have two cousins like that. BUT, if you want to stop giving benefits to people who are able bodied and not taking care of kids and elders and otherwise able to work, but just don't want to, then you can do that, But you can't then just arbitrarily decide how much money to cut. Because you have no idea how much money that will save. Maybe on 5% of the people fall into that category. Maybe it is 10%. Maybe the new rules will cut the people who no longer qualify to 3%. Maybe it costs more to enforce the rules than it saves to impose them. If you really care about subsidizing the unworthy, you CAN'T decide that you will cut 20% or 50% or 30% right off the top. Because that means you are just cutting to cut. And the new rules are just window dressing to justify the cuts, but most of the people whose benefits are eliminated or reduced won't violate the new rules at all. They are just people with kids who may lose their food subsidy or health insurance.

Please don't get me started on that budget without a heart! And it was dropped at the same time Trump Cabinet members are under investigation for flying first class and flying high on taxpayer dollars. Talk about hypocrites. 

I'm recently divorced, and as part of the settlement I kept the house. I live in a DMV suburb with excellent public schools. My child has an IEP and high therapy bills that insurance won't cover until the 6k deductible is met. I understand IEPs aren't transferable without a fight across county / school district lines. The school is great, the neighbors are great, the commute is great, the house is okay but needs work. The school district I would likely move to is very antagonistic to IEPs, based on reports from parents whose children have a similar diagnosis. I am at a crossroads about whether the cost to my child's education is worth getting rid of a mortgage payment that is really too high for my income. I keep coming back to it isn't, and I need to find a unicorn of a job that will pay me more money while maintaining flexibility for appointments, and working the same number of hours.

I have a special needs child (now a college student) so I totally get your situation.

But you had me at "mortgage payment that is really too high for my income." 

With a special needs child you need to make sure you're on sure financial footing. My kid was in a private school and I had to fight for services, etc. No IEP required. I've heard from plenty of parents with kids in public school where the IEP works and others who are greeted with troubles.

Still move if you have to and fight. Advocate. Call. Fight. Fuss. Thank those along the way you help pave the way for your kid. 

But the best thing you can do for your child is to make sure you are financially sound. 

At a high level, which new tax provisions are permanent vs temporary? Do you think the temporary ones will be extended?

Many of the individual tax provision expire at the end of 2025 and many of the business tax provision are permanent. There are many generalities and exceptions in this area as each part of the tax reform has its own set of rules. When many of the temporary provisions expire at the end of 2025, it will likely be a new government deciding whether to extend or not.

I am married with young children. We are in our late 30s and we are debt-free except for our mortgage. Neither of us knows much about money, though, and we don’t know what to do past “save”. So, our money is in many different accounts — 401k’s, college savings accounts, Roth IRAs, HSA, checking accounts, etc. Do you have some basic tips about which kinds of investments should be highest priorities or offer the best benefits? I feel like we are in a good situation currently but we don’t know where to go from here, so we arbitrarily put money into different “pots” without a real strategy or goal.

Okay from where I sit you know exactly what you are doing. You're saving for retirement, putting money in 529 plan, got savings. Many people would love to be in your situation.

But I understand. You want/need a second opinion.

Hire a fee-only planner and say you just want a long-term financial plan or confirmation that you're on the right track. 

What if your income is half that and you are already on the "fast"? How do you get out of debt?

I get asked this all the time. What if I'm already broke. Still do the fast or continue living on less. And start to figure out ways to earn more money or cut even further. Perhaps you can take in a roommate. Or you move to share space with someone else. Take on a second part-time job. Figure out if you have skills for a side hustle (tutoring, writing, copy editing, etc.). And if still you're doing everything and you can't make extra payments accept that getting out of debt is going to take a long time. 

Because it is what it is. 

While my 401k contributions ensure I maximize my company match to my 401k, how do I best decide on further retirement savings in my 401k versus a Roth IRA account?

Assuming you have maximized your employer match in your 401k, you may want to consider a Roth IRA because of the potential for tax free earnings in retirement. In addition, if you need funds before 59.5, you can always withdraw your contributions tax and penalty free. Keep if mind that Roth IRA contributions are limited or eliminated for high income taxpayers.

Hello: I am inquiring about my tax status that is the same every year. I am a single person, and I claim no one. I even had more taxes taken out of my paychecks several years ago, and I still end up owing the IRS every year.....I feel as though I'm working for nothing since I get no refund back at all. I am almost 64 yrs old.....I do not make a lot of money.....my average salary is $35-38,000/year......do not have any assets or own property.... Any suggestions? Thanks

If you end up owing taxes every year, you may want to adjust the number of allowances you claim on your W-4. Even if you are at Single with 0 allowances already, you can choose to withhold a specific dollar amount  of additional money per paycheck to get you closer to breakeven.

Also can I add something. Are you doing your taxes yourself or with a professional?'

If yourself maybe a tax professional can help identity tax breaks you aren't taking. Although with the new tax law perhaps you'll see less taxes next year.

Also, you are NOT working for nothing. Sure paying taxes hurts but it means you are making money. 

What is your best advice for how to redo federal withholding? The IRS has nothing yet. And what about Maryland withholding? They say they'll change the laws so we don't end up paying more but I've seen nothing about when..

Read Michelle's column: Check your paycheck — you might be getting too much money

The IRS expects to have a new withholding calculator available by the end of February. This calculator will allow you to estimate your income and determine the number of allowances you should be claiming on your W-4. It is unfortunate that most states do not make an equivalent calculator available and these are calculations that need to be done by hand.

I just received my "plan" binder and have started to implement the recommendations from my fee-only financial planner. I started work with her at the end of October and it has been worth every penny. Some of the steps are harder than others but part of my packages includes email support for a year. I have focus now and feel much better about my financial situation since I am about 10 years away from retirement. She even calmed my nerves over the market turmoil. Highly recommend, even though it was a little scary, too!

Thanks for sharing.

My income is very similar to yours. I'm single and in an apartment, but a somewhat pricey one ($1850 a month including parking). I max out my 401K (and the catch up amount). I put the max ROTH amount every year. I live rather nicely. I have long term care insurance which isn't cheap. I pay Comcast too much every month. I have a car, though I paid cash for it. And I still have $2000 a month left over for regular savings each month. You should be able to knock off this debt in under two years (there is interest that will slow you down). Remember, you can't spend money twice. If you are paying off your debt, you don't actually have an income of $130K. You have a lot less than that, because you have to pay off $24K with after tax dollars. You need to pull back by about $50K to pay off $24K plus interest with after tax dollars. More if you spread it out over more than two years.

Thanks for supporting the poster!

I submitted a question earlier, however I have not seen it post yet.....any idea why? Thanks

We have dozens and dozens of questions. Try to get to as many as possible. Not sure which one is yours. Please understand.

I just want to echo your column from the other day. People need to really scrutinize their new federal tax withholdings. I calculated that between my wife and I we are having almost $500 less taken out every month compared to before. There's now way I'm in line for that kind of cut. There were numerous stories late last year that stated that the Trump admin was putting political pressure on the IRS to make the withholding changes look really great due to the new tax law. Its only next year when they file their return (after the November election) that they'll find out they owe big to the government. Hopefully the IRS will come out with a new W-4 and calculator soon.

Although most peoples withholding will go down, this does not mean that everyones taxes will be reduced. There are many reasons why the recent tax legislation may increase a persons tax liability (most notably the 10k limit on state and local taxes). It is suggested that everyone make an estimate of their tax liability and also estimate their withholding to see if they are in line with each other. If not, then an adjustment to a W-4 should be made to get closer to breakeven. The IRS expects to update the calculator by the end of February 2018.

Hi Michelle! Thanks for all the great advice and for taking the time every week to engage with us. My wife and I just found out that she is pregnant about two weeks ago. We are incredibly excited, but we are also feeling a bit overwhelmed with all of the hard work ahead of us, both in regards to parenting and finances. Just a little bit about our finances, we are both 32, we own a home and have a very affordable mortgage payment (the house is big enough for at least one fully grown child) we have about $40,000 in savings, about $25,000 in retirement. Buying the house required a lot of saving and a lot of self-discipline, and we have been trying to continue this approach in regards to savings and retirement, though we could certainly do better. I was hoping you could give a little advice to us and to new parents in general about how to save and how to spend responsibly with a newborn on the way.

In an earlier answer I suggested that you start living as if the baby is here. Take out the money you would need for diapers, daycare, etc. See how it feels. Then see where you might have to cut. Don't use the money. Transfer it into a savings account and that that be the baby extra money when the baby comes for expenses, etc. You'll be ahead of the game. 

Also, try the 21-day financial fast. Now. It might help you see other places you can cut. 

Good luck with the pregnancy. 

I've got three, the last one just months -- months -- from going off to college. I'm so excited, I just can't hide it!

We expect to inherit between $40,000 and $50,000 from a generous relative, and we want to save it for college for our children (10 and 3). A 529 plan seems great for avoiding taxes on our regular earnings, but is it the best bet for an inheritance that would not be taxed? Any suggestions?

I'm a fan of 529 plans. Income is not taxed. And depending on your state you can get a state tax deduction for annual contributions. And trust me you will need every single dollar and more from that inheritance. 

I know the general advice is to try to minimize your refund amount so that it isn't too large. But no one ever says what qualifies as "too large." Is there a typical percentage of (taxable) income that would be the tipping over into the "too large" side?

If you receive a tax refund, you have effectively provided the government an interest free loan of your money. For many people, receiving a refund of more than $1,000 is unacceptable  as that money could have been in a 401k/IRA/bank earning a return. There is no "right" answer to this question as it is specific to each individual. 

Depending on what the IEP needs to address, is it possible to enlist the help of the therapist or a support group that can help you advocate for your child? And hopefully, the other parent is still in the picture and can help.

Good advice. 

It takes a village for any kid but definitely for a special needs child. And from other parents you learn a lot on how to advocate for your child. 

 

Where's the best place to go to determine how to adjust pay withholdings? I already owe $2k for 2017 and don't want to owe more for 2018.

As my column yesterday pointed out new withholding calculator & W-4 from IRS coming out by end of the month hopefully. 

Once out plug in your numbers (I suggest the online IRS calculator) and that should help you get to the right withholdings. 

No heart or soul. Many of the people who voted for the current president are the ones who are going to be the most hurt, including members of the military. https://www.military.com/daily-news/2017/05/24/proposed-food-stamp-cuts-would-hit-military-families.html

I know. Sad.

Contact the company via their web site. Most can help you with the history.

Thanks. Hopefully they can. 

Well, a computer is needed these days. I prefer a desk top. They are cheaper for the speed and storage you get. They last longer. And if I spill a drink on my keyboard, I can replace it for less than $40 at Staples (or even less than that if I look a little harder). The computer won't be injured. Then again, I'm the chatter who took the desktop to be repaired (for $110) rather than replace which all my friends and co-workers said to do.

Well for many laptop is better. My kids need to take it to class, library, etc. 

I have both. Do most of my work on desktop for exactly the reasons you state. But when I travel, can't pack up that big boy. So need both since I still have to work when I'm on the road.

In 2017, I rolled over a defined pension benefit from a previous employer to my current employer's 401k. It was a direct rollover, I never touched the money. I got a 1099-R but don't know what I'm supposed to do with it. Any ideas? Thanks!

This is a reportable event but not a taxable event due you doing a rollover. The gross distribution (amount rolled over) is reported on Line 16a and you type in "rollover" on Line 15b. Assuming you had no other retirement distributions, 15b would be 0 and "rollover".

Was it inherited? If so, wouldn’t there be a step up in basis to the value at the date of her death?

As a general rule, inherited investment have a cost basis equal to the market value on the date of death. Market value is the average of the high and the low trading prices. All inherited property holding period is automatically considered long-term.

This is one of the things that hate, hate, hate hearing. Unless you're taxed at 100%, working is always better than not working. Spoiler - we don't have a 100% marginal rate, although hitting a phase-out for a tax credit can make it feel that way on a small amount of income.

Exactly. But I get it. When you aren't making a lot it sure feels like 100%

Hi--Submitting early, since I won't be available for your chat. I've accepted a job on the other side of the country, and just found out that due to the new tax laws, I can no longer deduct the moving expenses from my taxes AND I'll be taxed on the tiny amount of moving expenses (which won't nearly cover the costs of the move) my new employer is giving me. Other than complain to my elected reps (which I've already done), is there anything I can do? I feel like I'm being punished (with more debt) for getting a better job.

The recent tax legislation eliminated the moving expense deduction/exclusion starting in 2018. Unfortunately, there is no way to circumvent this issue. One suggestion is that you may want to request that your new employer provide you a gross-up (tax assistance) for the additional taxes you will pay on your moving expenses. Please note that those additional taxes paid by an employer would also be considered income.

I'm not familiar with this. What does it stand for?

It's an Individualized Education Program or IEP. It means the school has to help meet special needs of your child. Required by public schools. But not private. 

They do just fine in the cheaper terry cloth onesies - no need for fancy stuff. They do not need five baskets worth of toys. They DO need a safe car seat and crib. Tiny rocker cribs are cute but out grown fast. If this is the first grandchild try and reel the grandparents in. I am going to be the grandmother that gives one small gift and a big 529 contribution. Oh, and one more thing. You said you know your life will change "somewhat" - HAHAHAHAHA.

Love your advice. 

My roof started leaking. Thanks to my Life Happens fund, I will easily be able to cover the estimated repairs. I could have covered the quote for a new roof, just barely, but seems like I can repair for now and have 5-7 years left before an entirely new roof is needed. It is just so nice to know that the money is there for when these things happen...and they will happen.

Life happens!

I am new to this program, can you quickly advise what the "Life Happens Fund" is?

Emergency fund is for like losing your job. Serious, serious cash flow issue.

Life happens fund is separate and you save in it for the things in life that happen, your car breaks down, your kid spills milk on your laptop, etc. 

The idea is that with the second savings you aren't constantly draining your emergency fund. 

I'm a pot person (Not the drug!). I like having different pots for my money. Helps keep me focused. 

You take money out of the life happens fund guilt-free because that's what it's for. When you drain it, fill it back up.

Start small if you have to, $500. But eventually aim for a few thousand because every time my car breaks down it's like $1,000. Of course it's 12 years old and counting.

I retired on July 31, 2017 and am receiving a $3600 annuity (gross) each month. This is my sole income (not counting prospective capital gains) right now until I start receiving social security payments as of August 1, 2018. My wife and I have relatively small traditional IRAs (51k and 20k, respectively) that I'm thinking of converting to Roth IRAs this year because my income level is the lowest it will be going forward. By 2019 I will have to begin drawing down my required minimum distribution from my 401(k) (and traditional IRAs if I don't convert them). So my question is, should I convert one or both of the traditional IRAs this year, or simply wait and draw down the required distributions in 2019 or 2020?

If you believe that your income in 2018 is below is "normal" level, you may want to consider a Roth conversion to benefit from the lower tax bracket. Roth IRAs are also exempt from future required minimum distributions. I would suggest you run a multi-year tax projection to see what is the most optimal conversion strategy for yourself.

I was badly hit with the equifax data breach - not financially, thank goodness but in time and effort and frustration. Got our taxes filed this week - I figured I'm prime for that being an issue too so I wanted to do it early.

Yup, file as early as you can!

I just started a new job and they don't match 401(k) (traditional or Roth) contributions and the only investment option is American Funds 2050 Target Date Retirement Fund - Class R2. Should I contribute to the 401(k) or just to my Roth IRA? I'm 32 and have retirement savings in both my TSP (from previous job) and Roth IRA

Assuming you are not receiving a match from your employer, you have choices on account type and investment provider. You may want to consider a low cost investment provider in conjunction with a Roth IRA. The Roth IRA provides for potentially tax free earnings in retirement and allows for contributions to be withdrawn tax and penalty free.

Hi there - wondering if you have a suggestion on the top vendors to file your taxes with? There are a lot of options and am wondering what is the best/for whom? Or is it really better to use an accountant? Thanks!

This is an individual decision. I like the ease of use. And I hate to promote one company over another. But I will say we have been using Turbo Tax. Not an endorsement, just what we do. 

Wow. That was fast. 

I'm so, so sorry if we didn't get to your question. But I read everything. And Eric said he would answer leftover questions from the chat. So look for a column with the answers.

Take care.

In This Chat
Michelle Singletary
Michelle Singletary writes the nationally syndicated personal finance column, "The Color of Money," which appears in The Post on Wednesday and Sunday and is carried in more than 120 newspapers.

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Eric Bronnenkant
Eric is the head of tax at Betterment. His 15 years of experience include working for EY (Ernst & Young), Fidelity, and as an adjunct tax professor at Seton Hall University.
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