Friday, February 25, 2022

Tax Filing: Paper or Ether?

True confession time! I am one of the 10 million or so tax filers that the IRS probably hates. Why? I continue to file my taxes on paper. It’s not that I haven’t tried to use fillable forms. I have. But the process is cumbersome and it is so much easier for me- as an admitted frugal tax geek- to fill out paper forms, double check my math, and priority mail my tax return.



Yes, I could hire someone or buy $100 software to complete my tax return but, as I said, I actually like filling out tax forms. It is like piecing together a quilt. I'm also frugal. So why spend the money? By preparing my own tax return, I also help keep personal information private (although nothing is foolproof, as noted below). In addition, there is no better insight (other than a net worth statement) into a person’s finances than preparing your own tax return. Free e-filing or assistance from a VITA volunteer who could e-file forms is not an option for me.

 

The IRS is encouraging e-filing this year and I seriously considered it to help out a beleaguered federal government agency with a backlog of some 6 million unprocessed tax returns from last year. My original plan was to do a paper return, as I usually do, and then transfer the numbers to forms required for e-filing. When I started reading the e-file instructions, however, my eyes glazed over. I thought, “why go through hours of additional work when my taxes are already done?” I have no refund to process quickly or get stolen so, once again, I am paper filing.

 

Based on my experiences as a life-long paper tax filer and a review of articles about different tax-filing methods, below is a brief summary of some of the pros and cons of paper and electronic income tax return filing:

 

Paper Filing Advantages

 

¨     It is (Almost) Free- Paper tax filing does not require the purchase of any software or tax preparation services. The only cost is paper and ink to print out downloaded tax forms and postage for mailing the tax return, preferably using priority mail with a tracking number. Of course, current knowledge of tax laws and tax forms is a pre-requisite.

 

¨     It Feels “Comfortable”- Paper tax forms are familiar to many long-time “do-it-yourselfers” and don’t require computer access (other than downloading forms), e-filing expenses, or a “learning curve” to figure out how to use software or e-file IRS forms.

 

Paper Filing Disadvantages

 

¨     Refunds Take Longer- The IRS says refunds take around 3 weeks for electronic returns and two months for paper returns, if there are no issues that delay processing. Of course, this is a moot point if someone owes additional tax and there is no refund to wait for. About 75% of Americans get refunds so this means that about one in four do not so wait time is a non-issue.

 

¨     Security and Privacy Issues- There are risks of exposing personal data during the mailing process and the handling of paper returns received by the IRS. However, personal data could also be compromised by dishonest tax preparers who e-file someone’s tax returns or via a computer hacking. Bottom line: no tax-filing method is 100% secure.

 

Electronic Filing Advantages

 

¨     Processing Speed and Accuracy- Electronic tax returns are more likely (than paper returns) to be processed by the IRS before an identity thief can steal someone’s refund. Again, a moot point if a taxpayer owes the IRS additional tax and there is no refund (at least, the victim’s own money) for fraudsters to steal. Software used for e-filing can catch data entry errors that paper filers might make mistakes with. IRS data transcribers can also make mistakes that taxpayers cannot control. Keep a copy of your paper return.

 

¨     Immediate Confirmation- When e-filers hit the submit button, they receive a message that their tax return has been received by the IRS. Paper filers, on the other hand, can only confirm IRS receipt of their tax return through a USPS tracking number (if priority mailed), when their check (if they owe tax) has cleared, or via the IRS website “Where’s My Refund?” tool.

 

Electronic Filing Disadvantages

 

¨     Cost- Many taxpayers can e-file for free but software (e.g., H&R Block Tax Software, TurboTax®, TaxSlayer®, TaxAct®) costs money. Prices vary among vendors and the complexity of users’ taxes (e.g., capital gains, business income) but are often $50 to $100. Similarly, tax preparers with e-filing capabilities charge according to the complexity of someone's taxes.

 

¨     Limitations- Certain tax situations require paper returns (e.g., amended tax returns, rejected e-filed returns, and identity theft victims). Completing a paper tax return can be intimidating to taxpayers who always have e-filed.


Bottom Line: Use the tax filing method that works best for you. Key factors to consider are time availability, knowledge of federal and state tax laws, cost, security concerns, access to free tax-filing programs and/or community resources, and tax preparation experience. Reach out for help, when needed.

This post provides general personal finance information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 


Thursday, February 17, 2022

Savings Soundbites for ASW 2022

The week of February 21-25, 2022 is America Saves Week (ASW), an annual event (since 2007) that encourages Americans to save money and build wealth. Part of the America Saves program, ASW encourages people to take an online pledge to save money, set personal savings goals, and create an action plan to save money. 

The theme for ASW is “Building Financial Resilience,” i.e., the capacity to handle financial “shocks” such as income loss or emergency repairs.

Below are eight insights about savings that I gleaned from the America Saves program and government data sources:

 

Savings Rates Dropped in 2021- The U.S. personal savings rate was 33.8% in April 2020 as pandemic lockdowns  took hold. Many people could not spend money so they saved it. By January 2021, as vaccines started to roll out, the savings rate was 19.9%. In April, July, and December 2021, savings rates were 12.6%, 10.6%, and 7.9%, respectively. As people began to spend more on travel, entertainment, and other discretionary expenses, savings rates were back in single digits.

 

Repaying Debt is a Form of “Savings”- Debt is one of the biggest barriers to savings because payments for loans, credit cards, and other obligations suck up available income. Paying down debt usually pays a higher “return” than earnings on a savings account or investments. For example, compared to paying off the balance on a credit card with an 18% APR (interest), where else could you get a guaranteed, risk-free, 18% return? That said however, it is wise for people with debt to have emergency savings and retirement savings, especially with employer match. Ideally, try to do all three things.

 

Automated Savings is Powerful- At America Saves forums in past years, financial institutions and fintech firms reported success with round-up apps for saving money. People can accumulate significant sums over time by rounding up their purchases to the nearest dollar. For example, if you spend $5.25 with a debit or credit card for coffee and a bagel, the extra 75 cents gets put into savings. Examples of round-up apps include Acorns, Chime, Qoins, and Keep the Change.®

 

Pre-commitments Encourage Savings- People save more money when they commit today to increased savings in the future (e.g., when they receive a raise or promotion). This is typically done in employer retirement savings plans with an auto-escalation feature that automatically increases an employee’s contribution amount by a specific percentage of pay. Research has shown that auto-escalation at the time of a pay raise minimizes feelings of “loss” because people can save more money without decreasing their take-home pay. It also uses inertia positively because most workers do not opt out.

 

Vivid Goals Are Powerful and Motivational- Saving for something specific is easier than saving for savings sake. Vivid goals can be specific dollar amounts or tangible items such as a certain make/model car. Anything people can do to make savings vivid is a good idea. Examples: posting photos of goals in prominent places (e.g., fridge) and online calculators and apps to break a goal down into a series of steps and progress points. Another strategy is to set up savings accounts for specific goals and name the accounts (e.g., “2022 vacation fund”) so you are less likely to spend the money elsewhere.

 

Emergency Savings is Vital- While financial experts recommend three to six months expenses for emergency funds, any amount of savings is better than none. Emergency funds reduce stress and worry about unexpected events (e.g., loss of income) and expenses (e.g., a car repair). Start with small steps…first $100, second $100…etc. and gradually work up to higher amounts. According to America Saves, research shows that low-income families with at least $500 in an emergency fund were better off financially than moderate-income families with less than this amount.

 

Most People Can Save Something- Research studies have found that most low- and moderate income consumers can save something, especially if they receive supportive services such as employer savings match, financial coaching, and individual development account (IDA) program financial education and savings match. Financially-strapped individuals can start their savings journey very simply by saving their loose change in a jar or completing a simple savings challenge. Once people save small dollar amounts, they develop confidence and pride and often go on to save larger amounts.

 

An Optimistic Mindset Helps- Pessimism is a big barrier to savings. If people have had no savings role models, negative savings experiences, or don’t think they can save money, they are unlikely to try. This is why financial coaches and culturally relevant financial education can be so useful to break down pessimism and convince people that they can save. The key is to get savings on your radar and adopt positive savings habits. What people think about, they bring about. 


Happy America Saves Week 2022. Take time to consider your savings goals and if you are on track to achieve them.

 

This post provides general personal finance information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 




Thursday, February 10, 2022

Simplifying Your Financial Life

After work, commuting, eating, sleeping, and/or exercise, many people have less than five hours on a typical weekday to manage everything in their life, including personal finances. Weekends are even more hectic with household chores and family activities. 

How do you take charge of your finances when time is at a premium? With “low-maintenance” strategies to simplify financial tasks and investment decision-making.  

Below are 13 time-saving financial management strategies:


Automate Everything You Can- Consider automated bill-paying for insurance premiums and utility service (e.g., phone, electric, water) and other recurring bills and automated deposits into saving and investment accounts.

 

Invest Automatically at Work- Participate in a tax-deferred employer retirement plan (e.g. 401(k), 403(b), 457, or TSP).  Contribute as much as you can afford and increase your contribution whenever you receive a raise.

 

Consider a Target-Date Fund (TDF)- Look for mutual funds with a future date in their title, such as “2040 Fund.” TTDFs use a retirement age-based asset allocation and automatically becomes more conservative as you get older.

 

Consider an Index Fund- Index funds are well-diversified portfolios of stocks, bonds, and other investments that track a major market benchmark index such as the Standard and Poor’s 500. Fund managers select fund securities.

 

Reinvest Automatically- Choose the option to automatically reinvest mutual fund and DRIP stock dividends and capital gains into additional shares instead of taking a cash distribution.

 

Set Up Holding Accounts- Plan proactively for periodic household expenses, such a property taxes and water bills, by dividing the annual cost by 12 and setting that amount aside monthly in savings until the bill comes due.

 

Make Payments Less Frequently- Pay insurance premiums annually or semi-annually instead of quarterly or monthly.  Not only will you write fewer checks but you’ll also save money on service charges and postage.

 

Get Organized- Invest a few hours to set up an organized filing system so you can find things when you need them and have a place to put tax receipts and important family records. Also complete a digital assets inventory.

 

Handle Mail Once- File, shred, or act on (e.g., pay bills) mail, including financial documents, as soon as it arrives instead of laying it aside in piles and having to re-read them.

 

Reduce Junk Mail- Lessen the volume of “financial junk mail” you receive by contacting the Direct Marketing Association (DMA) at www.DMAchoice to request that your name be removed from mailing lists. For more information about stopping junk mail, see https://www.consumer.ftc.gov/articles/how-stop-junk-mail.

 

Use Customized Financial Templates- Create Microsoft Excel spreadsheets to track your finances or use the templates for net worth, asset allocation, and spending plan (budget) calculations found in the “Resources” section of the Rutgers Cooperative Extension website https://njaes.rutgers.edu/money/. Simply insert your personal data into the template files, which contain all the required formulas. One you enter initial data, updates will be quick and easy.

 

Use Digital Money Management Tools- Consider using software programs or apps or financial record-keeping.  There’s a learning curve, of course, and time required for data entry but, over the long term, many users praise their ability to manipulate data and prepare customized reports.

 

Designate a Day- Select one day a year as your personal “financial planning day.” Just do it.  Calculate your net worth and cash flow, check your credit report, add up tax receipts, and review your will, insurance policies, and investment performance. Many people do this during the winter when they are stuck indoors and tax records start arriving.

 This post provides general personal finance information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.


Thursday, February 3, 2022

A Two-Year Retrospective on COVID

 

Two years ago this month, we all knew something really bad was coming. On February 2, 2020, global air travel was restricted and, on February 3, a public health emergency was declared in the U.S. three days after the World Health Organization (WHO) did the same. 

By February 25, 2020, a CDC official was predicting that COVID-19 was heading toward pandemic status, which was officially declared by the WHO a few weeks later on March 11.

Below are ten Barbservations about what I’ve noticed and experienced since COVID-19 took hold in February 2020:


New Mindsets About Priorities- Many people have adopted a new “life is too short” mentality, which is informing decisions about retirements, job changes, relationships, and more. We have all collectively seen that, despite our best efforts, plans can “blow up” and life during a pandemic is incredibly uncertain. Many people are making major life changes so they do not waste their precious time. I can count dozens of colleagues who have quit jobs and moved on.

Transferrable Job Skills- It has been interesting to watch colleagues “move on” to new careers. Just like I parlayed my knowledge, skills, and contacts from four decades at Rutgers University to a full-time financial education company so, too, they transferred their talents. A former journal editor now creates content for a large financial planning advisor group and a former Cooperative Extension financial educator develops content for a growing fintech firm for financial planners.

End of Life Planning Salience- Salience is when something is particularly noticeable and stands out. The death of almost 1 million Americans due to COVID-19 is certainly an example of  so-called “mortality salience,” an awareness that death is inevitable. The Wall Street Journal reported that more young adults (Millennials) have been prompted to write wills, citing unease about the pandemic. It could happen to any of us! COVID-19 has sparked, even normalized, conversations about end-of-life planning as people of all ages realize that “It’s always too early until it’s too late.”

The Only Constant is Change- We all hoped that, with effective vaccinations, COVID-19 would be a distant memory by now. It is not. Delta and Omicron variants, and responses to them, have shown us that anything can change. Flexibility is the name of the game. Employer policies, tax laws, school masking rules, and government rules can change quickly. This has highlighted the need for “Plan B Thinking” (i.e., “What’s your Plan B?”) and “If/Then Thinking” (i.e., “If [X] happens, then I’ll do [Y]”).

Hesitancy to Plan- I, like many people, am hesitant to spend money on advance deposits for events that may be cancelled. Why wait for a refund and face the uncertainty of rebooking? Hence, I am currently running an $18,000 tab for a 14-day cruise/land package and first class airfare to Alaska this fall. Payment is due in June. If I don’t feel comfortable traveling, or Canada closes its border to Vancouver again, I’ll simply walk away.

Workarounds and Substitutes- We have all heard the words “supply chain issues” and “labor issues” frequently during 2021 and have gotten used to disruptions. This has changed people’s expectations and behaviors. Some people decided to go back to stores to shop rather than take a chance that shipped items ordered online would be delayed. Others sought out thrift shops and peer-to-peer shopping platforms, such as Facebook Marketplace and eBay, to buy available items.

More Time for Healthy Habits- Living a healthy lifestyle is the best thing that people can do to control their health care costs. Fortunately, COVID-19 gave many people the “gift of time” as working at home replaced long, time-sucking commutes. This provided an opportunity for a “lifestyle reset.” According to Consumer Reports, some of the healthier habits that we adopted include proper hand-washing, more home-cooked meals, and virtual activities to stave off isolation.

Tough Times Prompt Big Changes- In challenging environments like the past two years, organizations often make big structural changes. Often, but not always, these large bursts of change are positive. Recently, we’ve seen advances in the speed of vaccine development, artificial intelligence innovations, higher wages dues to millions of available jobs, and employers paying more attention to workers’ work-life balance, workplace stressors, and burnout. Pandemic-related changes that were originally meant to be temporary (e.g., telecommuting) may prove “sticky” over the long term.

Risk Perception is Stressful- For two years, we've had to risk-calibrate so many personal decisions. Do you wear a mask to an indoor party and awkwardly not eat or drink (much), take your chances and go mask-less, or just not go at all? It has been mentally exhausting trying to process how likely different events are versus how scary they seem, on a daily basis.

Limited-Time Opportunities- Opportunities opened up for some people to profit financially from COVID-19 impacts. Companies that provided “just in time” products and services (think Zoom, Instacart, and Clorox) for example. I personally observed retirees increase their nest egg by well over $100k by selling their house at peak prices and downsizing. Inflation-adjusted Series I bonds paying 7.12% from 11/1/21 to 4/30/22 are another limited-time opportunity example.

This post provides general personal finance information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.


An Introduction to IRMAA

Full disclosure: this blog post is written from a place of privilege for older adults with higher-than-average incomes and/or assets. Many a...