Photography by: corrinely

Tax day is here! Luckily we filed our taxes this past weekend, so we won’t have to worry about staying up late to get them done tonight. Hopefully yours are done too.

There are bound to be questions while finishing your taxes. Over the last couple weeks readers submitted some last minute tax questions to take advantage of the gracious offer from our local IRS agent. Here’s some of the highlights.

I have a rental home that was damaged last year from a drunk driver. I had to have the house repaired with insurance funds. Can I write off the repairs that were covered by the insurance funds? I was told that insurance monies cannot be taxed, is that correct?Submitted by John

You cannot deduct the amounts that you repaired with insurance funds. For example let’s say the repairs cost $10,000 and the insurance received was $9,500. You do not have to report the insurance funds received as income and you can only deduct the difference ($10,000 – $9,500) $500 on Schedule E as rental expenses.

We had a family medical emergency during a complicated tax year and ended up not completing a return in 2005 (for tax year 2004). Since then, we’ve meant to complete returns including those past ones and just keep putting it off for whatever reason (Stupidity! Embarrassment! Fear! No money!)

How do we go about cleaning up this mess? It is likely that there are payments due. Do we start with the current tax year and then just work our way backwards? Can we set up a payment plan if it spans more than one tax year?Submitted by a reader

I would start with the current year and get it filed timely. Then go to the oldest unfilled year and get it prepared and filed. Then the subsequent year and so on until all are filed. Keep a copy of all the returns. When you get the bills for the years you owe money on, go to the nearest IRS office during office hours (usually M-F 8:30 to 4:30 closed from noon to 1 pm) and ask to set up an installment plan covering all the years for which you owe money. Take a copy of all the returns you have just filed.

There will be interest due, late filing penalties, late payment penalties and a fee to set up the installment plan. In addition, if your return for 2004 would have generated a refund, you’ll want to file that this year. Otherwise you’ll lose your chance to get the refund. See How Long Does it Take to Get Your Tax Refund Back?

Because of our high taxable income this year (due to an inheritance), Turbo Tax told us we needed to make estimated tax payments for 2008 and included vouchers for the payments with the printout of our return.

Now I know we aren’t going to have a high income this year, so I’m pretty confident we aren’t going to owe estimated taxes. Can I just ignore the vouchers? Or is the IRS going to be looking for estimated taxes from me?Submitted by Lynnae

Yes, you can ignore the vouchers! They’re trying to help you by assuming that you will continue to make that much again this year. Your only obligations are to have enough withheld, however you choose to do it. You can meet the withholding minimums through one of the following requirements:

  • Withhold at least 90% of the tax for the current year.
  • Withhold 100% of the tax shown on the return for the prior year (if you make less than $150,000).
  • Owe less than $1,000 for the current year.

Special thanks to the IRS agent for lending your expertise to our readers. We look forward to you helping answer questions again next tax season.

Have you found yourself in a situation where you need to complete an IRA recharacterization? Here is everything you need to know to understand how to get it done on time and report it on your taxes correctly.

What is a Recharacterization?

After you make a contribution to an IRA, you can later change the contribution to a different type of IRA. The change takes place as though it was originally made to the second IRA. For example, if you contributed to a traditional IRA, you can later recharacterize the contribution to a Roth IRA.

In addition, a recharacterization also includes reversing a prior conversion. For example, if you converted money in a traditional IRA to a Roth IRA you can “unconvert” it back to a traditional IRA.

Why You Might Need a Recharacterization

Here are a few examples of situations where you might find yourself needing to recharacterize your IRA.

  • You exceeded the income limits. You originally planned to meet an income limit for your taxes, but were bumped over the threshold after you made a contribution or conversion to your IRA. This situation commonly arises when receiving a large bonus at the end of the year.
  • You changed your mind about the type of contribution you wanted to make. Maybe you contributed to a traditional IRA, but have since realized that a Roth IRA would be better for your situation.
  • You want to lower your adjusted gross income to be eligible for certain tax credits. This is the situation that we found ourselves in this year.

How to Recharacterize

Steps you need to take:

  • You must inform your trustee to complete a trustee-to-trustee transfer.
  • The transfer must include any net income (or loss) from the original date of the contribution.
  • Report the recharacterization on your taxes (Form 8606).
  • Use the date of the original contribution.


Often you will not need to calculate the net income (or loss) of the investment since the original contribution (or conversion). You will only need to specify the dollar value of the original amount. The trustee will calculate the earnings and report the recharacterization to you on a form 1099-R and the amount for the changed IRA on form 5498.

When is the Recharacterization Deadline?

The recharacterization is due the same time as your taxes are due for the prior year, April 15 (or October 15 for an extension). Contact the trustee of your IRA to find out their specific instructions for the recharacterization.

Waiting Period for Conversions

After completing a conversion and subsequent recharacterization, you cannot convert it again until the latter of:

  • The year after it was converted.
  • Thirty days after the recharacterization.

For additional information, see IRS Publication 590.

Article featured in: Carnival of Personal Finance #147: Q1 Financial Advice Edition.

The tax clock is ticking! Congress straightened out the AMT and the VITA sites are open. Hopefully you are getting your paperwork organized and you’ve read about the free online efiling available to many people.

Question StampOf course it wouldn’t be tax time without questions! Here’s more answers to reader questions from our local IRS agent. If you didn’t get a chance, be sure to read the first set of questions in the interview with an IRS agent.

I am in the middle of an IRS audit. Does the IRS charge the taxpayer that is being audited a fee? If so what are the charges? – Submitted by Julia

We do not charge a fee for the audit. If we find that you owe additional taxes, we charge interest and sometimes penalties in addition to the taxes due. If you choose to pay those amounts by an installment agreement we have a fee for setting up an installment agreement.

I have an issue with an inheritance my husband and I received. My father-in-law had the money in an annuity that was transferred to my husband and his sister upon his death. We consulted an accountant before cashing it out, and he told us that we would only be responsible for paying taxes on the interest the annuity had earned since my father-in-law had put the money in. We got the tax form in the mail recently and it says the entire amount is taxable. Who’s right? The accountant or the form? Submitted by Lynnae at Being Frugal

Normally in a tax deferred annuity only the earnings are taxable since the principal was after tax money that was invested. If it was an IRA that was put in and a deduction taken then everything is taxable. There is probably a communication problem here. First thing I would do is call the bank and get an explanation of what the payment was and the facts.

Feel free to contact me if you have more tax questions you can’t find the answers to. I’ll do my best to track down the answer for you!

I’ve come up with an easy strategy to take the pain out of doing our taxes. We have lots of accounts, but doing our taxes is actually relatively easy based on some simple organization techniques.

Replacing all the forms and data with one list makes the process quick and easy. Here’s how I organize our tax work from beginning to end.

Make a Master List. The easiest way to begin organizing for tax preparation is to pull out your return from last year. Look at all the companies, forms and statements that you reported on and make a list.

Here’s an example list from my taxes last year:

  • W2
  • Interest 1099-INT
  • Dividends 1099-DIV
  • Capital Gains
  • K-1
  • Schedule C
  • State Tax Refund
  • IRA Distributions 1099-R
  • Student Loan Interest Deduction
  • Energy Credit

Itemized Deductions

  • Mortgage Interest
  • State Taxes
  • Real Estate Tax
  • Investment Interest Expense
  • Charitable Donations – Cash
  • Charitable Donations – Goods

State Deductions

  • 529 Contributions

For each line I list the companies or banks that I’m expecting a statement from. For example:

  • W2
    • Company 1
    • Company 2
  • Interest 1099-INT
    • Bank 1
    • Bank 2
    • Bank 3

Adjust the master list. Add new companies and review the list for any companies you no longer have a need to report on. The first year you make the list it takes a little longer. Next year it will be fast, just pull out this year’s list and make adjustments.

I keep a running list of new companies and new strategies that will have tax consequences throughout the year; I can then quickly add them to the list at tax time.

Check off each company. As tax documents start arriving in the mail, check the company off on the list. It’s a quick way to see if you have all the documents needed to file.

Cross check numbers. I print one of the tax transaction spreadsheets from Microsoft Money. Review each form and cross-check the numbers with those on the spreadsheet. This helps to spot errors and get them resolved if needed.  

Enter Data. Once I know I have all the forms and all the data is correct, I can quickly enter the information in TaxCut.


In a recent carnival roundup, Steward mentioned that the IRS is offering free efiling for those who made less than $54,000 in 2007.

Here’s some details about the program from the IRS: 

You may access free commercial online tax preparation and electronic filing services through the IRS website. Eligible taxpayers may prepare and file their federal income tax returns using commercial online software provided by the Free File Alliance companies – not the IRS.

Free File is only available to taxpayers who have a 2007 Adjusted Gross Income (AGI) of $54,000 or less. Individual company offers may be limited to specific states and include other criteria. Carefully review the Free File offer criteria before selecting the company. Each participating software company sets its own eligibility requirements.

I actually used the program a few years ago to complete a basic return for a family member. It was easy to use and I would do it again.


I have mentioned before that I have completed tax returns for Volunteer Income Tax Assistance (VITA). If your are wondering what it is all about, here’s more information about the program:

Summary from the IRS website:

The VITA Program offers free tax help to low- to moderate-income (generally, $40,000 and below) people who cannot prepare their own tax returns. Certified volunteers sponsored by various organizations receive training to help prepare basic tax returns in communities across the country. VITA sites are generally located at community and neighborhood centers, libraries, schools, shopping malls, and other convenient locations. Most locations also offer free electronic filing. To locate the nearest VITA site, call 1-800-829-1040.


Many sites partner with local organizations or revenue departments and maintain an online list of VITA sites. Here are some I found:


The IRS also sponsors a Tax Counseling for the Elderly (TCE) Program for people age 60 and older. The idea behind both programs is to help people navigate through the difficult tax law and get money back into the hands of those who need it the most. For example those who qualify for the earned income credit, homestead credit, or Elderly Tax Credit. Without these programs, many filers who are due to get money back simply would not file.

My Experience

Our local site offers free efiling. We do not have an income limit at our site, but rather a requirement that the returns be straightforward. We target those who cannot afford paid assistance. However, we don’t want to keep volunteers idle either; often on slow days we will prepare other returns. When you call to find your local site, ask about the requirements.


If you have a basic knowledge of taxes, it is also a great organization to volunteer for:

  • During training, you review the new tax law changes for the year.
  • You learn about commonly missed items to watch for.
  • Often you can efile your own return during downtime. (This is encouraged during our training session to give you a dry run).
  • Tax returns are filed using Tax Wise software.

Many sites are beginning training sessions now and open in January and early February for filing. It’s a great organization to check out whether you want to use the service or volunteer!

Here’s the 2007 tax limits, credits, exemptions, deductions, phase-out and exclusion numbers all in one place! It is a good reference and will come in handy at tax time. Thanks to a reader, Sam, for the initial list.

Exemptions $ 3,400
Standard Deduction
Single $ 5,350
Married Filing Jointly $ 10,700
Married Filing Separately $ 5,350
Head of Household $ 7,850
Dependent $ 850
Exemption Phase-out (limited to 2/3)
Single $ 156,400
Head of Household $ 195,500
Married Filing Jointly $ 234,600
Schedule A Phase-out (limited to 2/3)
All except Married Filing Separately $ 156,400
Married Filing Separately $ 78,200
Child Tax Credit $ 1,000
Hope Credit $ 1,650
Lifetime Learning Credit $ 2,000
Elective Deferrals (401k, 403b, 457, Roth 401k)
Maximum $ 15,500
Catch-up > 50 years old $ 5,000
IRA Contributions (Traditional, Roth)
Maximum $ 4,000
Catch-up 50 and over $ 1,000
Simple IRA Contributions
Maximum $ 10,500
Catch-up 50 and over $ 2,500
Charitable $ 0.14
Business $ 0.485
Medical/Moving $ 0.20
Depreciation $ 0.19
Car Depreciation Maximums
Year 1 $ 3,060
Year 2 $ 4,900
Year 3 $ 2,850
Year 4 $ 1,775
Sale of Residence Exclusion
Single $ 250,000
Married $ 500,000
Self Employment
SE/FICA Maximum Wages for 12.4% $ 97,500
SE/FICA Maximum Wages for 2.9% No Limit
Tax Deduction 50%
Health Insurance Deduction 100%
Earned Income Credit Maximums
No children $ 12,590
1 child $ 33,241
2 or more children $ 37,783
Add if married filing jointly $ 2,000
Estate Tax Exclusion $ 2,000,000
Annual Gift Tax Exclusion $ 12,000
Long Term Capital Gain Holding Period 12 months
Social Security Benefits Tax Maximum 85%
IRC 179 Deduction $ 125,000

In Roth IRA Conversion Rules Highlighted Russ commented that his employer is starting a Roth 401k plan.

The Roth 401k plans are relatively new and many people haven’t heard of them yet. Employers are slowly starting to offer them to employees.

Let’s explore how the Roth 401k works, the benefits over the Roth IRA, and why it is taking time for employers to offer them!


What is a Roth 401k?

The Roth 401k is a great retirement savings vehicle with many of the same benefits as a Roth IRA including:

  • Tax free growth.
  • Ideal for investors currently in a low tax bracket, but anticipate being in a higher tax bracket in retirement. This is the case for many younger workers.
  • Offers the ability to diversify accounts against tax treatment using a combination of regular 401k and Roth 401k. A great idea because of the uncertainty of taxes in the future.

In addition, for those who are interested but restricted from participating in a Roth IRA, the Roth 401k makes sense. Additional benefits over the IRA include:

As always, there are other points to consider including the investment options and expenses of the investments when deciding whether or not to participate in a Roth 401k.

Why Employers are Slow to Implement

The Roth 401k didn’t have a lot of employers that immediately put it into place because the original legislation made it only a temporary plan existing from 2006-2010. That changed in 2006 when the Pension Protection Act was signed making the Roth 401k permanent. Employers may still be reluctant because they have to account for the following:

  • Keeping the highly paid employees contributions in line with the others to keep the plan qualified.
  • Additional education needed to help employees make the right choice between the traditional pre-tax option and the new after-tax option.
  • And of course the plan sponsor would charge additional fees.

Other Roth 401k Tidbits

  • Employer matching funds will still be deposited into the pre-tax 401k account.
  • Further advantages for proprietors of owner-only businesses are detailed in an old article from Investment Advisor.

Ask Your Employer to Offer a Roth Option

If your employer doesn’t offer a Roth option in your 401k, ask for it. At my old job, I campaigned for access to the Roth 401k. I emailed my HR department numerous times and encouraged other coworkers to do the same. We eventually got the option for a Roth 401k (It probably had nothing to do with our emails, but it is fun to think it did!)

If your company doesn’t offer a Roth 401k there are strategies that you can use to get extra money into a Roth IRA.

And don’t forget, if you have both, you can contibute to a Roth 401k and a Roth IRA at the same time.

Roth 401k Q&A

Here are some questions I received about the Roth 401k from a reader, Julie:

If I switch to the Roth 401k versus the regular 401k will my income reported on my tax statements be higher for the year?

Yes, it will. The Roth 401k uses contributions with after-tax money. Therefore your income will be higher on your W-2 (Wage and Tax Statement) than it was using a regular 401k.

If so, it’s even harder to qualify for the Roth IRA, correct?

Yes. If you were nearing the income phaseouts and limits for the Roth IRA, contributing to the Roth 401k could make you ineligible to contribute to the Roth IRA. However, the contribution limits are higher for a Roth 401k, so depending how close you are you could come out ahead. In addition, you could implement a strategy using a combination of the traditional and Roth 401k to keep your eligibility.

How do you figure out if it’s worth it or not to switch?

Dinkytown offers a great calculator to help determine which option is better. Of course the calculator does not take into account other considerations that may impact the decision.

Can you have a Roth 401k and a Roth IRA at the same time?

You sure can. Here are details on contributing to a Roth 401k and a Roth IRA at the same time.

For a deeper look at the pros and cons of a Roth 401k see To Roth 401k or Not to Roth 401k?

More Roth Topics

As the end of the year approaches, it’s time to think about any last minute tax strategies. At the same time, I have a checklist of things to prepare for the upcoming year. It’s more efficient to do them at the same time as many of the strategies impact calculations for next year.

Tax Planning

I just finished cleaning out my closet to make donations of clothing and wedding attire by year end for tax deductions. Here’s some other strategies that I work on at year end:

  • Tax loss harvesting: I go through our taxable accounts and sell stock that I am carrying at a loss. See more on how to harvest tax losses.
  • Maximizing any tax deferral options still available in 401k, 403b and 457 plans.
  • Having any extra dental work done, prescriptions refilled, etc. to use remaining flexible spending account dollars.
  • Conversion of IRAs to Roth IRAs to maximize the rest of our tax bracket.
  • Moolanomy highlights some additional strategies in 22 Money Maximizing Moves You Can Do Today.

Finance Checklist

I also complete the following paperwork for the upcoming year:

  • Enroll in dependent care and flex spending account.
  • Determine correct amount of withholding based on projected income.
  • Evaluate net worth and determine if additional umbrella insurance is needed.
  • Rebalance our portfolios to match our selected asset allocation.
  • Check for appropriate deductibles and limits of car, home and life insurance.
  • Evaluate income phase outs for planned deductions; refigure taxes if needed.
  • Update our list of assets in the house and financial papers and place in safe deposit box.
  • Measure progress on our dollar plan.
  • Look up value of cars and decide whether or not to carry comprehensive and collision coverage.
  • Start a new tax folder to gather paperwork in throughout the year.
  • Fireplace maintenance. (Not really a financial item, but it’s on my yearly list anyways).

wedding-flowers.jpgHave you been to a wedding lately? Or better yet been in a wedding? If you itemize your deductions and have gotten married or been part of a wedding party this deduction is for you!

That’s it. Because of the latter condition, most women probably have a section of the closet devoted to a pile of dresses. Only worn once, and usually in such a color that they can’t really be worn again, the bridesmaid dresses will likely never see the outside of the closet again.

Get Rich Slowly recently had a guest post Beating the High Cost of Weddings: How We Did It, and How You Can Too. It made me think about one of the costs that is hard to beat: being an attendant in a wedding. It’s a great honor, and I have truly enjoyed being in lots of weddings, but it is a cost that you cannot really control once you accept. Bridesmaid dresses have the hefty pricetag of a formal gown, but not much use besides the wedding itself.

Dress Donation

I wasn’t sure what to do with the dresses until I found Brides Against Breast Cancer. They accept donations of wedding gowns that they resell. The money raised is used to grant wishes for terminally ill breast cancer patients. The dresses (including shipping cost) are tax-deductible.

Last year I donated my wedding dress*. This year I’d like to box up the bridesmaid dresses and send those off too. In fact, I might just have all the women that attend our yearly holiday party bring their dresses and we’ll send them all off. Readers, I encourage you to send off your (or your wife’s) dresses too!

They currently accept the following:

  • Contemporary wedding gowns (1995 to now)
  • Bridesmaid, mother of the bride and flower girl dresses
  • Wedding specific items such as veils, shoes, purses, slips, bras, etc….

Stop by when I raid the rest of my closet!

*Technically I kept the dress I wore on my wedding day as a keepsake. But I had two dresses due to a “bridezilla moment” two weeks before my wedding. I donated the one I didn’t wear.