Color of Money Live with tax expert Eric Bronnenkant

Jul 09, 2020

Welcome to a weekly discussion about your money hosted by Michelle Singletary, nationally syndicated personal finance columnist for The Washington Post.

This week, Michelle will be joined by tax expert, Eric Bronnenkant. What do you want to know about filing your taxes this year? Submit a question using the 'ask now' button at bottom of the chat.

Did you know: "Knowledge isn't power. The right knowledge is power." So, stay informed.

Want more advice from Michelle Singletary? Sign up for her newsletter on retirement, delivered every Monday.

Read & share Michelle Singletary’s Color of Money Column.

Follow Michelle Singletary on Twitter (@SingletaryM) and Facebook.

Thanks for joining me today for a live "text" discussion. No video or Zoom, just our words. 

I'm excited to have with me Betterment's tax expert Eric Bronnenkant. He'll be happy to take your tax questions. 

So, let's get started. 

I am so sorry. You must be exhausted with hearing about the missing stimulus payments. But what to do if the government says they're not coming and they are definitely owed? I have filled out taxes yearly. I don't make too much or too little. Who can I call?

I understand this situation can be very frustrating as the government is not always a model of organization. The economic stimulus payments were originally based on how you filed your 2018/2019 tax returns. If you did not receive a payment and you were entitled to one, you have another opportunity to claim it as a tax credit on your 2020 tax return. I recognize that does not help you today but should provide some comfort that you will eventually receive the money. Note - You can call the IRS but they are particularly overwhelmed at this point and it is very difficult to get in touch with anyone.

Eric is right. It's also possible you may still get your stimulus payment. There are still millions more payments the IRS is trying to get out. The agency is finally putting staff back to work at its centers. 

I'm a 73 year old woman on Social Security & haven't received my Stimulus check yet. Can you help me PLEASE?

I'm so sorry you are still waiting for your check. There are still a lot of folks still in line to get a payment. 

Here's a column that may help explain the delays: Didn’t get your stimulus payment? Here’s how to find it.

 

Thanks for taking my question. I'm not getting how Traditional IRAs are calculated for Required Minimum Distribution purposes. Yikes, I'm getting closer to 72 yrs than I care to admit! Is it a fixed age, and if not, how is the distribution determined?

Required minimum distributions for Traditional IRAs now start for individuals once they attain age 72. The first distribution is approximately 4% of the balance and the percent increases every year as you get older and ultimately get to about 50% at age 115. A few points key points to remember. 1. there is a 50% penalty on any amount not distributed that should have been.  2. You may want to consider converting some or all of your Traditional IRA to a Roth IRA to avoid the RMDs (Roth IRAs are exempt from RMDs). Live long and prosper!

Since my only income is Social Security, which is not taxable, I do not have to file a tax return. I need the money NOW!

I know. So many do. I know it doesn't help but please keep in mind the IRS shut down like so many businesses to protect workers from covid-19. So a very reduced staff was trying to get out tens of millions of payments. Read the column I just linked to. It's possible you also got a stimulus debit card and didn't know and threw it away. 

Read: You might have thrown out your stimulus payment. Treasury is sending a letter to tell you how to get it back.

 

Dear Michelle, Thank you for your chats and all of your helpful advice! Chase sent me a letter saying they were cancelling my credit card! I had always paid in full, never accrued interest charges and I actually hadn’t used it in quite some time. I am afraid it is going to ruin my credit score. I checked and it is currently 816, but this credit card was 17 years old and I know the age of your credit cards has an effect on the score. Also, now the amount of credit I have is lower. How much will this impact my score and what can I do to mitigate the effect? Should I open another credit card?

I wrote about this recently. Many lenders are fearing credit losses because of covid-19 and are closing accounts not being used or cutting credit limits. The way lenders see if a dormant card could be used by someone falling into financial trouble. So they are wiping their books of possible risk and since you are not using it anyway, they figure why should they carry the risk you might and then can't pay. But call the lender. You may be able to reverse the closure. And if you do not carry a balance on any of your cards, the closure should not bring down your score. Further, good credit history isn't immediately taken off your credit files. That history can remain for 10 years or more still giving you a boost to your credit score. You may see a dip but if you pay your other bills on time and aren't carrying revolving credit card debt you should be fine. 

Still, try calling the lender. And then just periodically use the card if you want to hang on to it. But, don't hang on to it if you are paying an annual fee and you don't really want to use it.

I had an old address on my 2018 tax return that the IRS used to send my stimulus check. I never received it as a result. It was probably returned to sender. I have recently filed my 2019 return but have not received my refund. Will the IRS resend my check to my correct address?

The IRS has provided a process to update your address for economic stimulus payments here. While this has worked for some people, other people might have to wait until next year to claim the credit on their 2020 tax return. Here is a link to update your address: Topic No. 157 Change Your Address – How to Notify the IRS

 

 

I need some expensive dental work. I have it in an emergency fund. Even better, I also have it in my medical flexible spending account, but even if I didn't I would be able to just pay for it outright and without missing a step in my other financial priorities. The flexible spending account is about the worst method I could think of for letting people pay for medical/dental expenses with tax free money, It is limited to employees of employers large enough to want to set it up. It is much more beneficial than the corresponding ability for others to deduct medical expenses that exceed a fairly large percentage of their AGI. You have to figure out in year one how much you are going to spend on unreimbursed medical expenses in year two. After a certain amount of rollover, you forfeit the amount you don't spend leading to people buying things they don't really need the last week of December, etc. But it sure is useful. It might be interesting to see if any of the people who have been furloughed/laid off this year then lost the amounts they had already paid into their flex spending accounts because they can't submit for reimbursements for medical expenses that happened when they weren't employed. And everyone knows about the mess that is going on with the dependent care reimbursements now that kids can't go to day care and nursery school and summer camp.

I agree maintaining a flexible spending account can take some effort. I manage ours and for many bills we have to scan and upload the receipts, etc. Still it works. Good news is the IRS, in light of covid-19, changed the rules recently to allow updates to accounts if for example you've saved for summer camp in a dependent care account and now your kid can't go. 

Read: With summer camps canceled, IRS relaxes rules on flexible spending accounts.

 

Confirm IRS reference for $300. charitable deduction without itemizing.

Yes - starting in 2020, cash contributions to charities up to 300 single/600 filing jointly are allowed as a deduction even if you do not itemize. This is a fantastic new opportunity to incentivize 90% of the population to donate to charity who takes the standard deduction. You can be charitable and receive tax benefits too!

Once again I owe on taxes. I went to adjust my withholding but they’ve changed that form. How do I get more money (like $100/month) withheld?

There is a new W-4 tax form which allows you to adjust the amount of income tax withholding from your paycheck. If you want to add extra withholding per pay period of a specific dollar amount, you can specific $100 on line 4C. The new W-4 form is more exact but admittedly more complicated to use. The IRS also has a withholding calculator where you can input your income and deductions and it will pre-fill a W-4 for you to provide to your employer. 

Definitely try the IRS withholding calculator. Here's the link.

You might also consider hiring a tax professional to help you figure this out if you are still underpaying.  

Do I need to submit for an extension on filing my taxes, or is it automatic?

The IRS extended the deadline for everyone from April 15 to July 15th 2020. This change required no action on behalf of any individual and was automatic. However, if you would like to extend the deadline further, you can file for an extension until October 15th. As a reminder, the extension fro July 15th to October 15th is not interest/penalty free. When filing for the extension, you should pay what you expect to owe.

I'm lucky enough to still have a job, but my pay has been cut by about 20%. I had a large credit card expenditure for a professional conference out of the country back in February and just received my reimbursement check. My savings are very low and adding the reimbursement to savings would help me more in making sure I have enough liquidity to pay rent/utilities/insurance/food? Is it crazy to bank that check and continue to make smaller payments to VISA, rather than pay off my VISA balance with it?

I have a few questions. In the subject line when you answer just put, "Not a tax question Part 2"

- How much is the credit card bill?

- What's the interest rate on the revolving balance?

- How much of the available balance are you using with this large expenditure? 

- Do you feel your job is fairly secure?

- Do you have any other credit card debt?

Is the $600.00 in additional unemployment taxable on my 2020 tax return?

Unemployment compensation is considered federally taxable income. In contrast, economic stimulus payments (i.e. $1,200) are not consider taxable income. Fun fact - NJ does not tax unemployment compensation even though the federal government does. Love the Garden State!

Hi Michelle, Early last year we had solar panels installed on our house (better for the environment, lower energy bill, etc.). We'd been saving for a car, but decided to do the solar instead and postpone replacing my junker. I'm proud to say that last week we paid off the solar panels and are back to saving for that car replacement. As another plus, our electric bill is now about 90% lower each month than before the solar panels! Feels so good to know that our only debt is the mortgage. (She/her/Tampa, FL)

Wonderful testimony. Just one thing. Keep in mind you are reaping the benefits of the panels because you had to pay to put them in. So, yes your bill is lower but you need to calculate the breakeven point before celebrating just yet. Although, there is a great benefit to the environment and that's certainly a good thing. 

Nonetheless, thank you for sharing and big props for saving to pay cash for the car. 

One of my oldest, generally unused cards was cancelled by the bank. I was sort of offended, but it did not affect my credit score that I recall. And remember unless you’re planning on needing credit now or very soon, you can weather the temporary dips in your score.

Exactly. If you have credit scores (and you have more than one) above 720 and definitely above 750 a dip resulting in a close card will  not impact your ability to get the best credit deals. And it's a myth that the good history from the card gets taken down. It often does not. 

If you know how much you need to withhold, you could also just set up your own savings account and transfer the necessary amount each month. When taxes come due, you'll have it all set aside already and will have made (a little bit of) interest on it already. I do this because my employer has messed up my withholdings every time I've tried to correct them. I do the same for other set but infrequent costs (e.g., car insurance) -- makes paying the bills less painful.

You most certainly can do this if you are disciplined. But many people aren't and seeing that money build up may be too much of a temptation. Also be careful that you don't underpay or you might be subject to an underpayment penalty. Keep in mind, we have a pay as you go tax system. 

Good Morning from Seattle - Thanks for doing this. I worked the first 6 mos of the yr, contributed the full amount to catch-up in 401K plus another $13K. I was laid off in June, and proceeded with retirement and pension (defined contribution) on July 1. With severance package I will receive 16-17 months equivalent pay in CY 2020. Can I open an IRA and make contributions to it and have the IRA shield additional CY2020 income from taxes for 2020? Steve

Since you have earned income for 2020, you would be able to contribute to a Traditional IRA. However, you may not be able to claim a deduction for your contribution since your income may be too high (>75k singe or >124k filing jointly) and you contributed to your employer sponsored plan. If your contributions does end up being non deductible, you may want to consider a conversion to a Roth IRA (known as a back door Roth) to make the future earnings tax free.

Can we still do qualified charitable distributions during 2020 even if we don't have to do Required Minimum Distributions? Michelle, the good news is that the June statement of our IRAs, etc. indicated that the values were back to what they were at the end of 2019.

Even though RMDs have been waived for 2020, the qualified charitable distribution is still permitted up to 100k per spouse. The key benefit is the distribution comes out tax free but please do not claim the QCD as an itemized deduction too (you can't have tax free withdrawal AND an itemized deduction as that would be like getting 2 slices of pizza for the price of one).  

See, I've been telling people not to panic. My retirement account is close to where it was pre-March too. But I still know there is a long road ahead for the economy to fully recover and still millions of people are out of work, which may still impact the stock market in months to come. 

I'm coming toward the end of a mortgage refinance process (lower rate, shorter payoff), and I'm facing a question. Do I roll the refinance costs into the refi or not? I've managed to build up my reserves to pay for the refi over the months this has taken. So I can afford it. And yes, less debt is better. But my plan B is to use that money to pay off the remains of my grad school education loan instead. They are about the same cost (~$5-6K). The ed loan has a slightly higher interest rate, but I'm not sure that ends up saving much money. Maybe it's 6 of one 1/2 dozen of the other, but I like the thought of getting down to only one outstanding loan.

How about this. Roll the refi cost into the mortgage. Pay off the student loans. Then make principal payments on the mortgage to bring it down so that you aren't paying interest on the refinancing costs for the life of the loan. And if you can keep making principal payments you continue to cut the cost of the mortgage. 

So if I received less than $1200 based on my 2019 income, but had to take a pay cut this spring due to the shutdown, I will be able to recoup the rest of the money since my 2020 income will be so much lower than last year? Will the IRS explain how this will work once we're closer to 2020 tax season?

That is a great question! If you did not receive the maximum stimulus payment based on 2018/2019 tax returns. You have another opportunity to claim the rest when filing your 2020 tax return. I have not seen what the tax form looks like to claim this amount but do expect to receive more guidance as tax season approaches next year. 

Hi Michelle. Earlier this year, I received a stimulus payment. Because I made more than the threshold (single person, $75k) I received a partial payment ($800). Fast forward two months: job eliminated, so 2020 income likely to be considerably less than $75k. Did I read somewhere that I may be eligible to receive the other $400 in 2021? Every little bit helps, right? Thanks.

Eric just answered this question. Yes, you have another chance to get the rest of the stimulus money when you file next year. 

A bank did this a few years ago. I hadn't used the card in years. My credit is excellent, and the only thing I noticed was a slight dip because my available credit went down and I had a couple of high ticket purchases that I paid off on time. It went right back up. Don't sweat it!

Exactly. Thanks for the real life example. 

Converting regular IRAs to Roths has huge tax implications. It might be smart for some people sometimes, but it's not something to suggest casually, especially for somebody who is already in retirement. Some advisors would say it's smarter to let the money grow untaxed, then pay the taxes when you have to, rather than take a big tax hit to make a conversion. Ric Edelman has an article about the issues. It's long. 

I agree. This is a depends situation. For example, my company started allowing ROTH 401k contributions. But putting money in the ROTH meant our income would go up. We were saving aggressively for the children's college fund and wanted to take the tax break now so we had more money in your accounts to make the 529 monthly payments. People are so obsessed with paying less taxes that they often don't realize that it might not make that much difference, now or later, especially if you stay pretty much in the same tax bracket. 

We are grateful that our mortgage was paid off in April. Except for credit card charges that are paid off monthly, we have no debt, so I HAD a perfect 850 credit score for some time..BUT credit score dropped to 830 after mortgage paid off...but I'll take no debt vs 850 score any day!. But I'm curious, is there any way to have perfect score if you are debt free.

I've put this question to the FICO people a number of times and they can't really explain why someone's score goes down after paying off a major debt. The best I can get from them is that your credit score is a mix the various types of credit you use. When you eliminate a type of debt from the mix -- a mortgage - the scoring system only has credit card usage to predict how much of a risk you may or may not be. So as you point out sure you got kick out of the 850 club (a member myself) but who cares. Anything over 750 is golden. 

As you point out I rather be DEBT FREE than brag about having a perfect credit score! 

I inherited my late husband's sep IRA after his death in 2008. I let it sit until this year when I turned 70 1/2. Am I right that the taxable part of this is what has been earned by the accounts since 2008? His estate was so small that I did not receive the full spouse amount. This was in mutual funds, so the increase has been significant....and how do I find out what the amount was in 2008?

My condolences to your family. I think what you may be referring to is a "step up" in cost basis which normally applies to stocks/bonds/etfs/mutual funds when someone passes away. However, the step up rules do not apply to retirement account. Assuming that all of the funds in the SEP were pre-tax, any distributions to the beneficiary would be fully taxable. However, it is possible that part of the SEP does include after-tax contributions that might have been made while your husband was alive. You would want to check to see if a Form 8606 was ever filed and these after-tax contributions (if actually made) would carryover to you as the beneficiary which would make part of the current distributions tax free.

I didn't realize that. My wife is an NJ State employee who has been furloughed 12 days this month and just filed for unemployment. She realizes she is lucky to be employed, though she is contemplating retirement (she's 68) when they get the call to return to the office. And I'm a retired CSRS Fed, so thankfully no worries financially.

Didn't know that. Pays to double check these things.

So how often do you have to use a card to keep it from being cancelled? I have several cards that I don't use regularly, but since they don't cost me anything I don't see any reason to close them -- or let them be closed.

There is no hard and fast rule. And such cancellations most often happen at times like this when there is an economic downturn. Otherwise, companies are happy to have the cards out there and open with the hope that you use them. Even if you don't pay interest because you pay your bill off every month, they earn exchange fees from merchants. 

If you filed 2018 taxes late (on 7/15/20) and also filed 2019 taxes on 7/15, when do you receive your stimulus check? Or do you just wait and get the tax credit when you file 2020 taxes in 2021?

 It is possible that the IRS may send your stimulus check this summer. However, since you 2018/2019 tax returns were not filed until July 2020, it is possible that you may have to wait until you file your 2020 tax return to claim your economic stimulus payment.

I am 70, retired and have not had to file for years. I get and live on mainly my Social Security which is auto deposited to my bank every month. The IRS site seems to indicate I need do nothing extra to receive my $1200 Stimulus Payment. Which has never appeared in any form. (I am 99% sure I did not throw away or ever receive a meta-bank card.) The IRS “Get My Payment” website always says: “Payment status not available“. When I start to use the IRS tool: “Non-filers: enter payment info here“, it tells me the tool is Not for people who receive Social Security. With no savings, the $1200 would be a great help! What can I do? Thanks for any guidance you can provide! 

Right now you may just be in line with millions of others still waiting because the IRS is just booting back up to full staff. You do not have to do anything. But it may take several more weeks I'm afraid. 

Read: A timeline of IRS stimulus payment glitches

 

I mailed my Federal Income tax mid March, married filing, with a large refund to be direct deposited to my credit union. After trying at least a dozen times both by phone and internet, I have been unable to talk to anyone and the only message I get is "We can't help you". Usually I get a refund quickly. What am I to do? Don Snyder

The IRS has ~10 million pieces of unopened mail and many IRS employees have not been operating at full capacity due to the pandemic. I empathize with your situation and hope they can start processing the backlog of returns and be able to answer more phone calls. There is some hope at the moment that this will improve post-July 15th. 

My father died in 2020. He had no property but he did have various investments for which I was the beneficiary. I received this money. I calculated his taxes and found he owes both state and federal taxes. But I considered that his estate has no funds since the accounts all had me as the beneficiary and there was nothing to pass to the estate. I paid for his funeral expenses. I understood that the beneficiary arrangement is before the will or estate. Is that right? Am I responsible for his tax debt? Thanks

Beneficiaries are typically not responsible for debts of the decedent. However, there is a concept called "transferee liability" which does allow the IRS to pursue decedent liabilities from the beneficiary up to what they received as an inheritance. These are some complex legal/tax issues and I would suggest consulting with a tax attorney to assess your particular situation. 

I still haven't received my stimulus check, although I did receive a letter announcing it. When I called the IRS to trace it, they said it was "diverted" and the only reason any stimulus check could be diverted was child support.  Here's the thing: Neither I nor my late husband, who died in May 2019, had any children. No children, no child support order, nothing like this ever. Should I call the IRS fraud hotline

You may need to put a trace on your payment. 

I wrote about this. 

Read: Didn’t get your stimulus payment? Here’s how to find it.

 

Hello, Thanks Michelle for having Eric. Do you have any resources for tax tip. We are contributing abt 10% each of our income to 401k but still end up having to pay taxes at end. how to avoid this

I love your great savings habits. Contributing 10% to 401k is a great start. Have you also considered automatic increases to your contribution percentage every year? Have you also considered a Traditional or Roth IRA? If you end up owing the IRS every year, you may want to consider making adjustment to your W-4 to change your withholding. The IRS has a withholding calculator where you input your income/deductions and will pre-fill in a W-4 so you can sign and submit to your employer.

Is there any rhyme or reason to why the scoring variance between agency models can be 50-60 points? I know the score can go up or down a few points between periods, but this kind of variance is odd, especially when you can be sure a lender will use the lowest one.

It could be that one bureau has more information than the other. Some creditors may not report your payment history to all three bureaus. Scores vary because lenders or the system you are using to generate a score is using different scoring models from different years. 

Believe me, NJ makes up for it with high property tax, high sales tax, and high inheritance tax!!

Always a catch, right?

Ask yourself, does it matter if your score changes over this? Are you applying for a loan sometime soon? If not, doesn't really matter what your score is.

Very true. 

(original poster) thanks for the response. I have had a side gig in the past which generated extra income on an irregular basis. With the pandemic, that side gig income is non-existent so I will make a small adjustment this time and see where I come out.

Thanks for more clarification. 

I know you've talked about this before, but wanted to chime in with my recent experience with renting. I know a lot of people feel like if you rent you're just throwing away your money since you don't own your home. On the other hand, since the start of covid, my garbage disposal (and by extension my kitchen sink), my only toilet, and my dishwasher have all broken. I've had the garbage disposal replaced, a part in the toilet replaced, and a new dishwasher is on order. Because I rent, none of that was my problem or came out of my pocket. While I would eventually like to own my own place one day, for now it's really nice to not have to think about footing the bill for all of that, especially in such an uncertain time.

I hate it when people say when you rent you are throwing away money or that you aren't getting any thing for it. You are. A roof over your head and someone else responsible for fixing your toilet. 

Thank you all for joining me to today. And thanks again to Eric Bronnenkant from Betterment for always helping to explain taxes in a easy to understand way. 

Folks, I'm taking a needed vacation next week. Next chat will be July 23. (Just doing a staycation). 

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.

Read recent columns
Subscribe to Michelle's newsletter
Color of Money Q&A Archive
Eric Bronnenkant
Eric is the head of tax at Betterment. His 15 years of experience include working for Ernst & Young, Fidelity, and as an adjunct tax professor at Seton Hall University.
Recent Chats
  • Next: