Many homeowners refinanced to a sub-3% mortgage when interest rates were low a couple of years ago. The mortgage interest most people pay isn’t large enough to make them itemize their deductions. They just take the standard deduction. Those who can still deduct their mortgage interest tend to have a large mortgage.

Limit on Deduction

The Tax Cuts and Jobs Act of 2017 reduced the limit on the mortgage balance on which you can deduct the mortgage interest from $1 million to $750,000. The lower limit applies to homes acquired after December 15, 2017. The large increase in home prices in recent years makes recently bought homes in high-price areas more likely to exceed the $750,000 limit.

However, lenders still report 100% of the mortgage interest paid on the 1098 form without adjusting for either the old $1 million limit or the new $750,000 limit. If your mortgage balance is over the limit, deducting the mortgage interest is more complicated than just using the number from the 1098 form.

It isn’t simply multiplying $750,000 by your interest rate either when your mortgage balance started above $750,000 and ended below $750,000 or when you took out the loan in the middle of the year.

Average Mortgage Balance

A key concept is your average mortgage balance during the year. When your average mortgage balance exceeds the limit, your deductible mortgage interest is:

Loan Limit / Average Mortgage Balance * Actual Mortage Interest Paid

If you paid $30,000 in mortgage interest on an average mortgage balance of $1,000,000 and you’re subject to the $750,000 limit, your deductible mortgage interest is pro-rated to:

$750,000 / $1,000,000 * $30,000 = $22,500

IRS Publication 936 gives several ways to calculate your average mortgage balance:

• Average of first and last balance method
• Interest paid divided by interest rate method
• Mortgage statements method

The first method is simpler and it gives you a slightly larger deduction but you can use it only if you didn’t prepay more than one month’s principal during the year.

Here’s how it works in TurboTax, H&R Block, and FreeTaxUSA tax software.

TurboTax

The screenshots below are taken from TurboTax Deluxe downloaded software. The TurboTax downloaded software is both less expensive and more powerful than TurboTax online software. If you haven’t paid for your TurboTax online filing yet, you can buy TurboTax download from Amazon, Costco, Walmart, and many other places and switch from TurboTax online to TurboTax download (see instructions for how to make the switch from TurboTax).

Find the mortgage interest topic in the Your Home section under Federal Taxes -> Deduction & Credits.

Form 1098

When it asks you to enter information from your 1098 form, enter the numbers as they appear on your form. If Box 2 is blank on your 1098, enter the mortgage balance at the beginning of the year (or your beginning loan balance if you took out the loan during the year).

You get to this summary after you answer a few more questions. Click on Done but you’re not done yet.

Purchase Date and Ending Balance

The purchase date of the home determines whether you have a $1 million limit or a $750,000 limit for the mortgage interest deduction. If this mortgage was from a refinance, you still enter the date when you originally bought the home.

TurboTax asks for the balance as of January 1 of the following year because it uses the “average of first and last balance method” to calculate your average mortgage balance for the year. This works when you didn’t make extra principal payments during the year.

TurboTax calculates a deduction using the “average of first and last balance method” but you can’t legally use that method if you prepaid more than one month’s principal during the year. You must calculate your average mortgage balance in a different way and give the pro-rated deductible mortgage interest to TurboTax.

If You Prepaid Principal

If you had the mortgage for all 12 months and your interest rate didn’t change during the year, which is the case for most people with a fixed-rate mortgage, you can use the “interest paid divided by interest rate method” to calculate your average mortgage balance. Suppose you paid $30,000 in mortgage interest and your rate is 2.875%, your average mortgage balance is:

$30,000 / 0.02875 = $1,043,478

Your deductible mortgage interest is:

$750,000 / $1,043,478 * $30,000 = $21,562

If your interest changed during the year, you’re better off using the “mortgage statements method.” Download the monthly statements from your lender. Add up your balance from January to December and divide by 12. That’s your average mortgage balance during the year. Use that number to calculate your pro-rated deductible mortgage interest and give it to TurboTax:

Loan Limit / Average Mortgage Balance * Actual Mortage Interest Paid

Verify on Schedule A

To confirm how much mortgage interest deduction you’re getting, click on Forms on the top right and find Schedule A in the list of forms in the left panel.

Scroll down to the middle and find Line 8. You’ll see the mortgage interest deduction.

H&R Block

Mortgage interest deduction works differently in the H&R Block software.

Find “Home Mortgage Interest (Form 1098)” under Federal -> Deductions.

1098 Entries

H&R Block offers a Home Mortgage Assistant. Click on that.

After saying we have a 1098 form and entering the name of the lender, we come to this form to enter the numbers on the 1098 form.

Wrong!

After answering some more questions about points and mortgage insurance premiums, which we don’t have, H&R Block says we can deduct 100% of the mortgage interest paid.

This can’t be right. We entered a beginning balance above $1 million on the 1098 form. H&R Block didn’t ask for the home purchase date to see whether the limit is $1 million or $750,000. It didn’t ask for the ending balance or the interest rate to calculate the average mortgage balance. H&R Block just uses the interest paid number from the 1098 form as if the loan limit doesn’t exist.

Calculate It Yourself

We go back to the 1098 entries to see if we missed anything. See there’s a Learn More link next to Box 2? What’s that?

There’s our answer. It says at the end:

If a limit applies to you, visit www.irs.gov and see Publication 936 Home Mortgage Interest Deduction. You’ll need to use the Worksheet To Figure Your Qualified Loan Limit and Deductible Home Mortgage Interest for the Current Year to calculate your deductible interest and limit your entry to that amount.

Translation: You’re on your own when your mortgage is over $750,000. Calculate it yourself and put the result here.

Granted that TurboTax doesn’t cover all situations but at least it makes an attempt to cover the most common scenario (only regular payments without extra principal payments). H&R Block just washes its hands and puts it all on you when your mortgage is above the limit. That’s lazy. Although only a small percentage of people deduct their mortgage interest now, among those who can still deduct, many have a mortgage above the limit.

It’s bad enough that the software doesn’t do the necessary work to help you calculate, but it’s inexcusable that it doesn’t warn you more conspicuously you’re on your own. Many people won’t notice the information hidden behind a subtle Learn More link.

So what do you do if you’re using the H&R Block software? Do what TurboTax does. First, calculate your average mortgage balance:

• If you didn’t prepay more than one month’s principal, get the beginning balance and the ending balance. Take an average.
• If you made extra principal payments and your interest rate didn’t change, divide the interest paid by your interest rate.

Then, calculate your deductible mortgage interest:

Loan Limit / Average Mortgage Balance * Actual Mortage Interest Paid

FreeTaxUSA

I also checked how the online tax software FreeTaxUSA does it.

Similar to H&R Block, FreeTaxUSA puts a small question mark link next to the mortgage interest entry. Clicking on the question mark opens a pop-up window, which says toward the end:

If your debt is higher than the limits, use Publication 936 to figure out your deductible home mortgage interest amount and reduce the mortgage interest you enter accordingly.

You’re also on your own when you use FreeTaxUSA. It also doesn’t tell you clearly that you must do some extra work.

***

H&R Block tax software is less expensive than TurboTax but this isn’t the only case where it punts and asks you to read the IRS instructions and come back with the answer yourself. See another example in How to Enter 2022 Foreign Tax Credit Form 1116 in H&R Block. You really have to know where it cuts corners when you use H&R Block software. It works well only when those cut corners don’t affect you. The same also applies to FreeTaxUSA.

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News came last Friday that Silicon Valley Bank was taken over by the FDIC after it had a bank run. Silicon Valley Bank was the 16th largest bank in the country with over $200 billion in assets. Such a big bank failing so suddenly was a shock to the financial system.

Silicon Valley Bank primarily served business customers, not individual retail customers. The FDIC insurance limit of $250,000 isn’t very meaningful to a business. As a result, over 90% of the deposits at Silicon Valley Bank were over the FDIC insurance limit. The government rushed to make an exception and guaranteed all deposits at Silicon Valley Bank to reduce systemic risks.

Most of us don’t have over $250,000 lying around in cash. Even if we need to keep more than $250,000 in cash at times, it’s easy to spread the money over several banks to keep it fully insured. The money is safe as long as you stay under the FDIC insurance limit.

The news of Silicon Valley Bank’s failure also affected Charles Schwab. The stock price of Charles Schwab dropped over 20% at one point today. Charles Schwab has a banking arm — Schwab Bank. Schwab Bank also has uninsured deposits and unrealized losses in long-term bonds on its balance sheet. Many people do have more than $250,000 in Schwab brokerage accounts. Just the other day a reader asked whether it’s safe to buy Treasuries in a brokerage account.

Customer Assets at a Broker

There’s a big difference between having money at a bank and having money at a broker such as Charles Schwab, Vanguard, or Fidelity. Money at a broker isn’t insured by the FDIC but it isn’t like uninsured deposits at a bank.

When you have money at a bank, you have a lender-borrower relationship with the bank. The bank borrows money from you and lends money to others. As George Bailey explained in It’s a Wonderful Life, the bank doesn’t have your money in a safe. It’s in “Joe’s house, and Kennedy’s house, and a hundred others.” Or in Silicon Valley Bank’s case, it’s in long-term bonds that the bank intended to hold to maturity but lost value after interest rates went up sharply.

When you have money at a broker, the broker is only buying and keeping things for you. There is an exact mapping between what the broker says you have in your account and what the broker keeps for you. Your money is in stocks, bonds, mutual funds, ETFs, etc. The broker doesn’t invest your money in long-term bonds for itself.

Money Market Fund

When you have cash in a money market fund at a broker, the money market fund invests in very short-term bonds. When you’re getting a 4.5% yield in a money market fund, the yield is coming from the underlying holdings of the money market fund. It’s not coming from the broker.

The safety of a money market fund depends on the safety of its underlying holdings. The money market fund isn’t FDIC-insured but its underlying holdings may be issued by government entities. If the broker goes down, you still have shares in the money market fund and the money market fund still has its holdings.

The safest money market fund holds only Treasuries and other government bonds. Vanguard, Fidelity, and Charles Schwab all have a money market fund that invests only in Treasuries and government bonds. See my Guide to Money Market Funds.

Buy Treasuries

If you can commit to a set term (the equivalent of buying a CD at a bank), you can also buy Treasuries in a brokerage account. You don’t need FDIC insurance when you buy Treasuries because Treasuries are issued by the federal government.

The big-3 brokers Charles Schwab, Vanguard, and Fidelity all make it very easy to buy Treasuries with no fee. See How To Buy Treasury Bills & Notes Without Fee at Online Brokers and How to Buy Treasury Bills & Notes on the Secondary Market.

Madoff and MF Global

People lost money at brokers when the broker didn’t maintain the exact mapping between what it said customers had in their accounts and what the broker kept for the customers. Two recent examples are Bernie Madoff and MF Global.

Madoff falsified account records. He said he bought this and that for the customers but he really didn’t. It was a fraudulent scheme.

MF Global breached the legal separation between customer assets and broker assets. It “borrowed” from customer assets to cover failed speculations elsewhere. Customers were eventually made whole after MF Global went bankrupt but it took five years.

SIPC Insurance

Brokerage accounts are insured by SIPC up to $500,000 but the insurance doesn’t cover the payback from your investments. It only covers missing assets if the broker goes down.

If you don’t suspect that Charles Schwab, Vanguard, or Fidelity will act illegally as Madoff or MF Global did, the safety of your money at these brokers doesn’t depend on the financial health of Charles Schwab, Vanguard, or Fidelity.

Most of my money is in brokerage accounts. I don’t worry about whether the account is over the SIPC insurance limit. Money at a broker is safer than uninsured deposits at a bank.

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The previous post Opt Out of Underpayment Penalty in TurboTax covered how TurboTax calculates an underpayment penalty that the IRS may not actually assess. You have to take an extra step to decline the penalty calculated by TurboTax. Here’s another example of TurboTax providing unwanted help that requires work to reverse.

Print or Save to PDF

When you’re done entering everything into TurboTax, it’s a good idea to print the tax forms or create a PDF file with all the forms as a draft. You should review the forms carefully and compare them with the previous year before you file. After you review everything and e-file, you should save the final filing to a PDF file for your records. TurboTax download software has a handy menu option for that: File -> Save to PDF.

Estimated Tax Payment Vouchers

TurboTax automatically includes 4 filled-out estimated tax payment vouchers (Form 1040-ES) when you print or save a PDF. This confuses many people. Most people pay their taxes during the year through withholding. Having the estimated tax payment vouchers printed out or included in the PDF doesn’t mean you must pay estimated taxes now.

The estimated tax payment vouchers are also a relic of the past. Even if you’re required to pay estimated taxes, sending a check with those vouchers by snail mail isn’t the best way to do it anyway. You’re better off paying electronically on the IRS website using either Direct Pay or EFTPS.

Direct Pay doesn’t require setting up an account but you can’t pre-schedule payments. EFTPS requires setting up an account but subsequent payments are easier and faster and you can pre-schedule payments.

When you use Direct Pay or ETFPS, you get a confirmation from the IRS of your payment immediately and you know that the payment will be credited to your account accurately. You have more chances of delay and errors if you send a check by mail with one of those estimated tax payment vouchers. I use EFTPS.

Exclude from Print or PDF

Having estimated tax payment vouchers printed out confuses you. Having them included in your tax filing PDF clutters up your file. If you’d like to avoid confusion, here’s how you can stop TurboTax download software from including them.

Click on Forms on the top right.

Scroll down and click on “Est Tax Options” near the bottom of the list of forms on the left.

Scroll down on the right to find the heading “Prepare Estimated Tax Payment Vouchers” in the middle of the form. Check the option “No, do not prepare estimated tax payment vouchers.”

Click on Step-by-Step on the top right to get back to where you were.

Now save to PDF or print your forms. It won’t have those useless estimated tax payment vouchers.

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When you do your taxes in tax software, the software sometimes calculates an underpayment penalty. It thinks you owe the penalty when your tax withholding plus any estimated tax payments were below a certain threshold (the “safe harbor“):

• Within $1,000 of your tax obligation; or
• 90% of your current year’s tax obligation; or
• 100% of your previous year’s tax obligation (110% if your AGI in the previous year was $150,000 or more)

If your income was uneven throughout the year, you can try to get out of paying the underpayment penalty through a complicated exercise using the “Annualized Income Installment Method.” It basically comes down to doing your taxes four times by separating your income and deductions into four sub-periods within the year and calculating your taxes for each sub-period.

I don’t know about you but I don’t have any appetite for doing my taxes four times.

There’s a much better way. The tax software is only trying to be helpful in calculating the underpayment penalty for you. You can decline its help and let the IRS calculate the penalty and bill you if they decide to assess a penalty.

The IRS actually often doesn’t assess a penalty when the tax software thinks you owe a penalty. You don’t have to volunteer the penalty now.

Here’s how to opt out of calculating the underpayment penalty in TurboTax and H&R Block software.

TurboTax

I’m using TurboTax downloaded software. TurboTax downloaded software is both more powerful and less expensive than TurboTax online software.

Find “Underpayment penalties” under Federal Taxes -> Other Tax Situations. Click on Start.

If TurboTax says you have a penalty for underpayment. Click on Continue.

TurboTax asks you about farming or fishing, which doesn’t apply to most people.

You can continue the confusing interview with more hoops to jump through but it’s much quicker if you switch to the Forms mode now by clicking on Forms on the top right.

TurboTax opens a form. Check the box next to item C to have the IRS calculate the penalty and send a bill if necessary. Chances are they won’t.

The underpayment penalty calculated by TurboTax is removed immediately after you check that box. Note in our example the tax owed meter dropped from $1,308 to $1,262 after we checked the box.

Click on Step-by-Step to return to the interview.

You’re back to the screen about farming and fishing. Click on “Other Tax Situations” in the sub-menu to exit this section.

H&R Block

It’s much more straightforward in the H&R Block downloaded software. H&R Block download is also both more powerful and less expensive than H&R Block online software.

Find “Underpayment Penalty” under Federal -> Taxes. Click on Go To.

H&R Block offers the option to let the IRS calculate the penalty right away. The option is selected by default.

H&R Block explains that it won’t cost you any more to have the IRS calculate the penalty. It actually will cost you less when the IRS doesn’t assess a penalty.

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The post Opt Out of Underpayment Penalty in TurboTax and H&R Block appeared first on The Finance Buff.

The previous post State Tax-Exempt Treasury Interest from Mutual Funds and ETFs covered how to get state income tax exemption on the portion of mutual fund and ETF dividends that are attributed to interest from Treasuries. This post covers how to do the same on the portion of fund dividends attributed to muni bond interest.

Muni Bond Funds and ETFs

Investors in higher tax brackets often invest in muni bonds in their taxable accounts. Although muni bonds typically have a lower yield than Treasuries and corporate bonds, they often still pay more after-tax when the investor is in a high tax bracket.

Most people invest in muni bonds through muni bond funds and ETFs. The broker reports fund dividends attributed to muni bond interest separately in Box 12 on a 1099-DIV form.

Your tax software knows about this special box. Whether you import your 1099 forms or enter them manually, the tax software will automatically mark the amount as tax-exempt for federal income tax.

Federal Tax-Exempt vs. State Tax-Exempt

It’s a different story for state income tax.

How a state taxes muni bond interest varies by state. Some jurisdictions such as Washington DC exempt interest from all muni bonds. Most states usually exempt interest only from muni bonds issued by entities within the state or in U.S. territories (Puerto Rico, Guam, Virgin Islands, and American Samoa). Some states have a reciprocal arrangement — “We don’t tax interest from your muni bonds if you don’t tax interest from our muni bonds.”

You need to know how much of the federally tax-exempt dividends on the 1099-DIV form is also state tax-exempt. Your tax software doesn’t know it only by the number on the form.

The broker supplies a breakdown of the tax-exempt dividends by source. It’s up to you to determine how much of the federal tax-exempt dividends from each source came from state tax-exempt muni bonds.

Suppose you own two funds in a taxable brokerage account that paid $2,500 in total tax-exempt dividends as reported in Box 12 of the 1099-DIV form. Your goal is to fill out a table like this with the percentage of state tax-exempt dividends for each fund and calculate your total state tax-exempt dividends:

When you give the result to your tax software, it then knows to exempt that portion of the federal tax-exempt dividends from state income tax.

State % from Fund Managers

Although the 1099-DIV form and the dividend breakdown by funds are provided by the broker, you’ll have to get the number for the “% State Tax-Exempt” column from the managers of your mutual funds and ETFs.

If you own Vanguard mutual funds or ETFs in a Fidelity brokerage account, you get this information from Vanguard, not from Fidelity. Similarly, if you own iShares ETFs in a Charles Schwab brokerage account, you get the information from iShares, not from Charles Schwab.

Google “[name of fund management company] tax center” to find the information from the fund manager.

For instance, the Vanguard document shows that dividends from Vanguard New York Municipal Money Market Fund are 100% tax-exempt in New York in 2022, and 24.24% of the dividends from the Vanguard Tax-Exempt Bond Index Fund came from New York muni bonds.

Vanguard

Vanguard publishes the information in its Tax Season Calendar. Look for “Tax-exempt interest dividends by state.”

Fidelity

Fidelity publishes the information in Fidelity Mutual Fund Tax Information. Look for “Tax-Exempt Income From Fidelity Funds.”

Charles Schwab

Charles Schwab Asset Management publishes the information in its Distributions and Tax Center. Look for “[20xx] Supplementary Tax Information.”

iShares

iShares publishes the information in its Tax Library. Look for “[20xx] Tax Exempt Interest by State.”

State-Specific Requirements

Be sure to read the fine print. Just because a fund lists a percentage for your state doesn’t mean that percentage of dividends from the fund is state tax-exempt. Some states have additional requirements before you can claim the tax exemption.

For instance, the Vanguard tax-exempt income document includes these footnotes:

California and Minnesota require funds to meet in-state minimum threshold to be exempt from state tax. The funds in Table 2 do not meet this criteria [sic].

Illinois does not exempt the portion of dividends from state or local obligations held indirectly through a mutual fund.

This means even though the table shows that 15.23% of the dividends from Vanguard Tax-Exempt Bond Index Fund came from California muni bonds, California exempts none of it because the fund didn’t meet the state’s additional requirements. If you live in Illinois, you can’t claim any Illinois tax exemption on muni fund dividends, period.

Tax Software

You need to give the result to your tax software after you get the “% State Tax-Exempt” for each fund and calculate your State Tax-Exempt dividend with a table like this:

TurboTax

If you enter your 1099-DIV form manually, be sure the check the box for additional inputs to enter tax-exempt dividends in Box 12.

Unless your tax-exempt dividends came from a state-specific fund that’s 100% tax-exempt in your state, check the box “I earned tax exempt dividends in more than one state” and break it down between your state and “More Than One State.” TurboTax will claim the portion for your state as tax-exempt on your state income tax return.

H&R Block

After you enter the tax-exempt dividends in Box 12 of a 1099-DIV form, H&R Block asks you how much of it is also state tax-exempt.

FreeTaxUSA

After you enter the tax-exempt dividends in Box 12 of a 1099-DIV form, FreeTaxUSA asks you how much of it is also state tax-exempt.

***

Most of the work in calculating the amount of fund dividends exempt from state taxes is in hunting down the percentage of state tax-exempt income for each fund and ETF in your taxable brokerage account. Tax software doesn’t know it only from the tax forms.

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When you earn interest from U.S. Treasuries in a taxable account, the interest is exempt from state and local taxes. How the interest is reported on tax forms depends on whether you hold Treasuries directly or through mutual funds and ETFs.

Interest from Treasury Bills and Notes

When you buy Treasuries in a brokerage account — see How To Buy Treasury Bills & Notes Without Fee at Online Brokers and How to Buy Treasury Bills & Notes On the Secondary Market — you’ll see the interest reported on a 1099-OID form for Treasury Bills or a 1099-INT form for Treasury Notes and Bonds.

Interest from Treasury Bills is reported separately in Box 8 on a 1099-OID form.

Interest from Treasury Notes and Bonds is reported separately in Box 3 on a 1099-INT form.

Your tax software knows about these special fields in the tax forms. Whether you import the tax forms from your broker or enter them manually, the software will automatically mark the interest as exempt from your state income tax.

Treasuries in Mutual Funds and ETFs

When you invest in a mutual fund or an ETF that holds Treasuries, the interest earned from Treasuries by the mutual fund or the ETF is passed on to you in the fund’s dividends together with any other income earned by the fund. When you have multiple mutual funds or ETFs in a taxable brokerage account, the broker reports dividends received from all sources on one 1099-DIV form.

Many money market funds and bond funds hold Treasuries. If you have money market funds and bond funds in a taxable brokerage account, a good part of their dividends may have come from Treasuries. The portion of fund dividends attributed to interest from Treasuries isn’t qualified dividends. It’s taxed at normal tax rates for federal income tax but it’s still exempt from state and local taxes.

The broker supplies a breakdown of the dividends by source. It’s up to you to determine how much of the dividends from each source came from Treasuries. Suppose you own four funds in a taxable brokerage account that paid $6,500 in total dividends. Your goal is to fill out a table like this with the percentage of dividends from Treasuries for each fund and calculate your total dividends from Treasuries:

Government % from Fund Managers

Although the 1099-DIV form and the dividend breakdown by funds are provided by the broker, you’ll have to get the number for the “% from Treasuries” column from the managers of your mutual funds and ETFs.

If you own Vanguard mutual funds or ETFs in a Fidelity brokerage account, you get this information from Vanguard, not from Fidelity. Similarly, if you own iShares ETFs in a Charles Schwab brokerage account, you get the information from iShares, not Charles Schwab.

Google “[name of fund management company] tax center” to find the information from the fund manager.

Vanguard

Vanguard publishes the information in its Tax Season Calendar. Look for “U.S. government obligations information.”

Fidelity

Fidelity publishes the information in Fidelity Mutual Fund Tax Information. Look for “Percentage of Income From U.S. government securities.”

Charles Schwab

Charles Schwab Asset Management publishes the information in its Distributions and Tax Center. Look for “[20xx] Supplementary Tax Information.”

iShares

iShares publishes the information in its Tax Library. Look for “[20xx] U.S. Government Source Income Information.”

CA, NY, and CT Residents

California, New York, and Connecticut have additional requirements for exempting fund dividends earned from Treasuries. The fund management company will note in its published information whether a fund met the requirements of CA, NY, and CT. If a fund didn’t meet the requirements, the Treasuries percentage is treated as 0% for CA, NY, and CT residents.

For example, Vanguard Federal Money Market Fund earned 37.79% of its income from U.S. government obligations in 2022. Because it didn’t meet the requirements of CA, NY, and CT, investors in these three states must still pay state income tax on 100% of this fund’s dividends. People in other states pay state income tax on only 62.21% of this fund’s dividends.

Tax Software

You need to give the result to your tax software after you get the “% from Treasuries” for each fund and calculate your dividend from Treasuries with a table like this:

It’s easy to miss the entry point for this input unless you really look for it.

TurboTax

After you import or enter the 1099-DIV form, you need to check a box to say that a portion of the dividends is U.S. Government interest. It’s easy to miss because TurboTax says it’s uncommon, which isn’t true.

Now you enter the amount you calculated in your table.

H&R Block

H&R Block software shows a checkbox at the bottom of the 1099-DIV entries. This field doesn’t come in the import. It’s easy to miss because it’s at the bottom of a long form. You have to really look for it.

Instead of asking about the dollar amount, H&R Block goes by percentage. It forces you to do a bit of math. In our example, $3,550 from Treasuries divided by $6,500 total ordinary dividends is 54.62%. So we enter 54.62.

FreeTaxUSA

FreeTaxUSA has a radio button at the bottom of the 1099-DIV entries. It’s easy to miss because it’s at the bottom of a long form. You have to really look for it.

***

Most of the work in calculating the amount of fund dividends exempt from state and local taxes is in hunting down the percentage of income from Treasuries for each fund and ETF in your taxable brokerage account. You need to give the calculated amount to your tax software, which doesn’t make it obvious where the number should go.

A similar process also applies to muni bond funds and ETFs. A portion of the fund dividends is exempt from your state income tax (“double tax-free”). I’ll cover that topic in a separate post.

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When you do a direct rollover from the pre-tax account in a workplace retirement plan to a Traditional IRA, you’ll get a 1099-R form after the end of the year that shows the rollover isn’t taxable. When you do a rollover from the pre-tax account to a Roth account, you’ll get a 1099-R form after the end of the year that shows a taxable amount.

Both of these 1099-R forms are straightforward. It’s either taxable or not taxable. You enter the 1099-R form in your tax software and tell it whether the rollover went to a Traditional account or a Roth account.

Combined 1099-R for Mixed Rollovers

When you do a mix of two or more rollovers in the same year — one to Traditional and one to Roth — your plan administrator may issue a combined 1099-R form for both rollovers. The combined 1099-R form shows that only a portion of your rollovers is taxable.

Example: Suppose you rolled over $30,000 to a Traditional IRA and $20,000 to a Roth account from the pre-tax account in your workplace retirement plan. You may get a 1099-R form that looks like this:

This 1099-R form is correct. It shows that a total of $50,000 came out of the plan. $20,000 is taxable because it went into a Roth account and the other $30,000 isn’t taxable because it was rolled over to a Traditional IRA.

Split 1099-R Form for Tax Software

Tax software such as TurboTax, H&R Block, or FreeTaxUSA has difficulty in dealing with a combined 1099-R form like this. The software assumes that a rollover went into either a Traditional IRA or a Roth account but not both on the same 1099-R form.

The trick to deal with this deficiency in the tax software is to split the combined 1099-R form into two — one for the rollover to the Traditional IRA and another for the rollover to the Roth account. Use the same payer name, address, and tax ID for both 1099-R forms.

You enter this 1099-R form for the rollover to a Traditional IRA:

You tell the software that this rollover went to a Traditional IRA. The software will make it not taxable.

Then you enter another 1099-R form for the rollover to a Roth account:

You tell the software that this rollover went to a Roth account. The software will make it taxable.

If your combined 1099-R form has a number in Box 5 because you made non-Roth after-tax contributions (“mega backdoor Roth“), include it on the applicable 1099-R form depending on whether the non-Roth after-tax contributions were rolled over to a Traditional IRA or a Roth account.

The two split 1099-R forms added together have the same numbers as the original combined 1099-R form. You’re splitting it only because the tax software isn’t smart enough to handle the combined 1099-R. The numbers are combined again on your 1040 tax form. It will show that you’re paying tax on only the portion that you rolled over from a pre-tax account to a Roth account.

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The post One 1099-R for Two Rollovers in TurboTax and H&R Block appeared first on The Finance Buff.

Many people bought I Bonds as a gift and kept them for the future when I Bonds had a good interest rate last year. These bonds started earning the good rate while they were held in a “gift box.” They are eligible for delivery to the registered recipient now.

No Change in Terms

Delivering a gift bond moves the bond from one account to another. It doesn’t change the terms of the bond — how much interest the bond earns, when the bond can be cashed out, or when the early withdrawal penalty will stop. Those terms were set on the bond itself at the time it was originally purchased. The bond carries the same terms as it moves from one account to another. It doesn’t matter which account the bond resides in.

Limit Resets by Calendar Year

Receiving a gift counts against the recipient’s annual limit in the calendar year of the receipt. Because the annual limit resets on January 1 each year, you can deliver a gift early in the year even though you bought it last October. You don’t have to wait 12 months.

Reason to Postpone

If the gift recipient wants to preserve the annual limit for their own purchase, they may want you to postpone the gift delivery but it doesn’t matter between spouses because you can always buy a new gift and hold it in the gift box again.

When you deliver the current gift and buy a new gift to replace it, the gift recipient has a bond and you have a bond in the gift box. If the gift recipient were to buy directly, the new bond has to wait 12 months before it can be cashed out, whereas the 12-month clock on your gift bond already started last year.

Postponing delivery to preserve the annual limit makes sense only when you’re unwilling to buy a new gift.

Delivering the gift now clears the gift out of your gift box. It closes the loop. You will have one less thing hanging in the air. Unless you have a good reason to postpone, just deliver the gift and move on.

Full Delivery

The principal value of the received gift counts against the recipient’s annual limit. The interest earned doesn’t count against the limit. You can deliver a $10,000 bond in full to the recipient even though the bond is worth more than $10,000 at the time of delivery because it earned some interest.

To deliver the gift, log in to your TreasuryDirect account and click on Gift Box on the right in the menu at the top.

Go into the bond in the list and click on Deliver. Choose the option “Deliver full amount.”

You need the recipient’s TreasuryDirect account number. The name on their TreasuryDirect account and the name on your gift must match exactly including the use of the middle initial versus the full middle name.

Edit Registration

The gift bond moves into the recipient’s account as soon as you click on Submit to deliver the gift.

The rightful owner of the gift takes full control of it now. If you made yourself the beneficiary when you bought the gift, the owner can edit the registration to make you the second owner and grant you the transact rights now. Or they can put a different second owner or beneficiary on the bond. See How to Add a Joint Owner or Change Beneficiary on I Bonds and How To Grant Transact or View Right on Your I Bonds.

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The post Deliver I Bonds Bought as a Gift in TreasuryDirect appeared first on The Finance Buff.

If your employer offers an Employee Stock Purchase Program (ESPP), you should max it out. You come out ahead even if you sell the shares as soon as you can. See Employee Stock Purchase Plan (ESPP) Is A Fantastic Deal.

After you sell the shares from the ESPP, part of the income will be included on your W-2. However, the 1099-B form you receive from the broker still reflects your discounted purchase price. This post shows you how to make the necessary adjustment on your tax return using FreeTaxUSA.

Don’t pay tax twice!

If you use other tax software, please read:

• How To Report ESPP Sales In TurboTax
• How to Report ESPP Sales in H&R Block Software

When to Report

Before you begin, be sure to understand when you need to report. You report when you sell the shares you bought under your ESPP. If you only bought shares but you didn’t sell during the tax year, there’s nothing to report yet.

Wait until you sell, but write down the full per-share price (before the discount) when you bought. If you purchased multiple times, write down for each purchase:

• The purchase date
• The closing price on the grant date
• The closing price on the purchase date
• The number of shares you bought

This information is very important when you sell.

Let’s use this example:

You bought 1,000 shares under your ESPP on 9/30/20xx. The closing price on the purchase date was $12 per share. The closing price on the grant date six months before was $10 per share. You bought at $8.50 per share with the discount.

You would write down:

Keep this information until you sell.

1099-B From Broker

When you sell, you will receive a 1099-B form from the broker in the following year. You will report your gain or loss using this 1099-B form and the information you accumulated for each purchase. Some brokers will supply supplemental information for your purchases.

Let’s continue our example:

You sold 1,000 shares from your purchase above on 10/5/20xx at $11.95 per share. After commission and fees, you netted $11,925. You received a 1099-B form from your broker showing a sales proceed of $11,925 in the following year. The 1099-B form shows the cost basis as $8,500, which reflects your discounted purchase price.

Because you didn’t hold it for two years after the grant date and one year after the purchase date, your sale was a “disqualifying disposition.” The discount is added as income to your W-2. This raises your cost basis. If you just accept the 1099-B as-is, you will be double-taxed!

FreeTaxUSA

Now let’s do it in FreeTaxUSA.

Find “Stocks or Investments Sold (1099-B)” in the “Common Income” section under “Income” in the menu. Click on “Add an Investment Sale.”

Choose “One at a time.”

Enter the numbers on your 1099-B as they appear. The cost basis on your 1099-B was reported to the IRS but it was too low. 

Don’t make any changes here. Your broker sent this information to the IRS. It has to match.

Adjust Cost Basis

You have this opportunity to make an adjustment. Check the “Yes” radio button and the box for “The basis shown in Box 1e is incorrect.”

Enter your purchase cost plus the amount added to your W-2. When you did a “disqualifying disposition” your cost basis was the full value of the shares on the date of the purchase. The market price was $12 per share when you purchased those 1,000 shares at $8.50 per share. Your employer added the $3,500 discount as income to your W-2. Therefore your true basis is $8,500 + $3,500 = $12,000.

If you didn’t sell all the shares purchased in that batch, multiply the number of shares you sold by the discount price on the date of purchase and add the discount included on your W-2. For example, if you sold only 500 shares and your employer added $1,750 to your W-2, your corrected cost basis is:

$8.50 * 500 + $1,750 = $6,000

If you had a wash sale, your 1099-B form would indicate it as such. We didn’t have a wash sale in our example.

We’re done with one ESPP sale. Repeat if you sold more than once during the year.

Verify on Form 8949

We can verify that the adjustment makes it all the way to the tax form.

Click on “View Form 1040” on the right.

Scroll down to find Form 8949 in the popup. You see the negative adjustment in column (g).

If you didn’t make the adjustment and you just accepted the 1099-B as-is, you will pay capital gains tax again on the $3,500 discount you are already paying taxes through your W-2. Remember to make the adjustment!

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The post How To Enter 2022 ESPP Sold In FreeTaxUSA: Adjust Cost Basis appeared first on The Finance Buff.

[Updated on January 21, 2023 with updated screenshots from H&R Block software for 2022 tax filing.]

When mutual funds and/or ETFs that invest in foreign countries receive dividends or interest, they have to pay taxes to those countries. These mutual funds and/or ETFs report to your broker after the end of the year how much they paid in foreign taxes on your behalf.

When you invest in these mutual funds and/or ETFs outside a tax-advantaged account, your broker will report to you the total foreign taxes you paid through all your funds and/or ETFs. The IRS allows a tax credit for the taxes you paid indirectly to foreign countries.

Form 1116

The foreign taxes paid is reported in Box 7 on the 1099-DIV form you receive from your broker. It’s easy to handle when the total foreign taxes paid from all your 1099-DIV forms is no more than a certain amount — $300 for single and $600 for married filing jointly. You enter the 1099-DIV forms into your tax software and the software will automatically put the total on your tax form (Schedule 3, Line 1).

When your total foreign taxes paid from all your 1099-DIV forms are over the $300/$600 threshold, you’ll need to include Form 1116 in your tax return. I’ll show you how to do this in H&R Block software.

Use H&R Block Download

The following screenshots came from H&R Block downloaded software. The downloaded software is both less expensive and more powerful than H&R Block’s online software.

If you haven’t paid for your H&R Block Online filing yet, consider buying H&R Block download software from Amazon, Walmart, Newegg, and many other places. If you’re already too far in entering your data into H&R Block Online, make this your last year of using H&R Block Online. Switch over to H&R Block download software next year.

I’ll use the same example:

You received a 1099-DIV from your broker. Box 7 “Foreign Tax Paid” on the 1099-DIV shows $700. 100% of this $700 came from a mutual fund or ETF. You only have this one 1099-DIV that has a number in Box 7.

1099-DIV Entries

If you import your 1099-DIV forms, double-check the import to make sure all the numbers match your downloaded copies. If you’re entering the 1099-DIV forms manually, type the numbers as shown on your forms.

H&R Block doesn’t say anything about the foreign tax paid or needing a Form 1116 after you enter the 1099-DIV forms. Just continue with your other entries.

Foreign Tax Credit

Foreign Tax Credit comes up much later in the Credits section under Foreign Tax Credit.

Click on “Add Form 1116.”

AMT Simplified Election

If this is the first year you’re claiming the Foreign Tax Credit, H&R Block software asks upfront about the simplified election. Select “Yes” for the simplified election.

Foreign-Source Income

Dividend income falls under “passive income.”

The “learn more” popup says you should choose “RIC” as the country when your foreign income came through mutual funds and/or ETFs. “RIC” is the last item in the country dropdown.

You get the foreign income from the supplemental information in your 1099 package from your broker. If you have multiple 1099-DIV forms that reported foreign tax paid in Box 7, you’ll have to add up the foreign income numbers from the respective supplemental information.

Don’t overlook the small note under the gross income input. It says you might need to adjust the amount if it includes foreign capital gains or qualified dividends. When you’re reporting foreign taxes paid from mutual funds and ETFs, the income sure does include qualified dividends. H&R Block doesn’t do the adjustment for you. It asks you to read the IRS instructions, learn how to adjust, and report the adjusted income here. That’s lazy.

Adjustment Exception

Fortunately, many people qualify for an adjustment exception. From the IRS Form 1116 Instructions:

You qualify for the adjustment exception if you meet both of the following requirements.

1. Line 5 of the Qualified Dividends and Capital Gain Tax Worksheet doesn’t exceed:
a. $340,100 if married filing jointly or qualifying widow(er),
b. $170,050 if married filing separately,
c. $170,050 if single, or
d. $170,050 if head of household.

2. The amount of your foreign source capital gain distributions, plus the amount of your foreign source qualified dividends, is less than $20,000.

The dollar amounts in the first requirement correspond to the top of the 24% bracket. You are spared from figuring out how to adjust if your taxable income minus your qualified dividends and long-term capital gains isn’t in the 32% tax bracket or above, and your foreign source capital gain distributions and qualified dividends aren’t $20,000 or more.

If you’re eligible for the adjustment exception and you decide to take the easy route of not adjusting your foreign-source income, you need to claim a corresponding adjustment exception on your total income.

Click on Forms on the top right. Open Form 1116. Scroll down and find Mini-Worksheet for Line 18 just above Line 18. Check the box for using the adjustment exception.

Close the form and return to the interview.

If you don’t qualify for the adjustment exception, good luck learning how to adjust from the Form 1116 instructions. You’re better off switching to TurboTax, which does the adjustment for you when you need it.

We leave this blank because we don’t have any interest expenses.

We leave this blank because we don’t have any other deductions either.

We don’t have any direct expenses either.

We have no losses to adjust.

Yes, our 1099-DIV was reported in U.S. dollars.

Foreign Taxes

I chose the simpler “paid” method. Enter the end of the year as the date paid. Enter the total foreign tax paid into the Dividends box.

If you have multiple 1099-DIV forms that reported foreign tax paid in Box 7, you’ll have to add up those numbers yourself. I wish the software did the math and auto-populated this field.

All our foreign taxes paid were through mutual funds and ETFs. RIC is the only country to use. We don’t have foreign income from any other countries.

Fortunately, we don’t have any carryover or carryback. If we can’t get 100% credit for the foreign taxes paid this year, we’ll have to create a carryback or carryover, which means we can’t e-file with H&R Block.

We don’t have any reduction either.

We don’t know what the foreign tax rate was. We’re leaving this blank.

We don’t know how to adjust. We’re leaving it blank again.

This is getting ridiculous. All I want is to get the foreign tax credit!

We’re finally done with Form 1116. Are we getting the credit?

Verify on Schedule 3

Click on Forms on the top. Double-click on Form 1040 and Schedules 1-3.

Scroll down to Schedule 3. Line 1 shows our foreign tax credit. You can also look at Form 1116. It looks awfully complicated.

Excess Foreign Tax Credit

We received 100% of the foreign taxes paid as a tax credit in our example. If you paid higher foreign taxes on a lower US income, you may not be able to take 100% of the credit. You’ll have to wait until next year to take the rest of it.

Carrying over part of the credit to the following year requires filing a Form 1116 Schedule B. H&R Block doesn’t have this form in their program. H&R Block tells you to download the form from the IRS website, complete it yourself, and attach it to your paper return. That’s ridiculous.

Summary

H&R Block software works when you paid more in foreign taxes than the $300/$600 threshold that requires a Form 1116. You’ll have to gather the foreign income and the foreign dividends from the 1099 supplemental information from your brokers. After it’s all said and done, you’re getting a tax credit for taxes you paid to foreign countries through your mutual funds and/or ETFs.

H&R Block asks you to add up the foreign tax numbers yourself. It asks you to make any necessary adjustments to the foreign-source income, which is quite difficult. The option to activate the adjustment exception is hidden in the Forms mode. You’re on your own when you don’t qualify for the adjustment exception. It also asks you to handle any carryover yourself.

TurboTax does a better job of handling the foreign tax credit than the H&R Block software. See Foreign Tax Credit Form 1116 in TurboTax.

It’s better to avoid the complicated Form 1116 altogether next year by putting your international mutual funds and ETFs in a tax-advantaged account. See Too Much Hassle in Claiming Foreign Tax Credit on IRS Form 1116.

Learn the Nuts and Bolts

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The post How to Enter 2022 Foreign Tax Credit Form 1116 in H&R Block appeared first on The Finance Buff.

[Updated on January 16, 2023 with screenshots from H&R Block tax software for 2022 tax filing.]

If your employer offers an Employee Stock Purchase Program (ESPP), you should max it out. You come out ahead even if you sell the shares as soon as you can. See Employee Stock Purchase Plan (ESPP) Is A Fantastic Deal.

After you sell the shares from the ESPP, part of the income will be included on your W-2. However, the tax form you receive from the broker still reflects your discounted purchase price. This post shows you how to make the necessary adjustment on your tax return using H&R Block tax software.

Don’t pay tax twice!

If you use other software, please read:

• How to Report ESPP Sale In TurboTax

When to Report

Before you begin, be sure to understand when you need to report. You report when you sell the shares you bought under your ESPP. If you only bought shares but you didn’t sell during the tax year, there’s nothing to report yet.

Wait until you sell, but write down the full per-share price (before the discount) when you bought. If you purchased multiple times, write down for each purchase:

• The purchase date
• The closing price on the grant date
• The closing price on the purchase date
• The number of shares you bought

This information is very important when you sell.

Let’s use this example:

You bought 1,000 shares under your ESPP on 9/30/20xx. The closing price on the purchase date was $12 per share. The closing price on the grant date six months ago was $10 per share. You bought at $8.50 per share with the discount.

You would write down:

Keep this information until you sell.

1099-B From Broker

When you sell, you will receive a 1099-B form from the broker in the following year. You will report your gain or loss using this 1099-B form and the information you accumulated for each purchase.

Let’s continue our example:

You sold 1,000 shares from your purchase above on 10/5/20xx at $11.95 per share. After commission and fees, you netted $11,925. You received a 1099-B form from your broker showing a sales proceed of $11,925 in the following year. The 1099-B form shows the cost basis as $8,500, which reflects your discounted purchase price.

Because you didn’t hold the shares for two years after the grant date and one year after the purchase date, your sale was a “disqualifying disposition.” The discount is added as income to your W-2. This raises your cost basis. If you just accept the 1099-B as-is, you will be double-taxed!

Now let’s account for it in the H&R Block software.

Use H&R Block Download

The screenshots below are from H&R Block Deluxe downloaded software. The downloaded software is both less expensive and more powerful than online software. If you haven’t paid for your H&R Block online filing yet, you can buy H&R Block download from Amazon, Walmart, and many other places. If you’re already too far along, make this year your last year of using the online service.

Enter 1099-B Form

Click on Federal -> Income. Scroll down to find the Investments section. Click on the “Go To” link next to “Sale of Stocks, Bonds, Mutual Funds, and Other Securities (1099-B).”

Import your 1099-B if you’d like. I’m adding it manually.

Give your account a description. Suppose this is from the ESPP account at E*Trade.

Now we add a sale.

We don’t want to add sales as a group because we need to make an adjustment.

Enter a description. Enter the dates and numbers from the 1099-B form as they appear. Make sure to match the type of gain or loss reported on your 1099-B form. It was short-term on my form.

The cost basis on your 1099-B was reported to the IRS but it was too low. Don’t change it here directly.

Scroll down and check the box for “The basis was reported to the IRS.” Enter your purchase cost plus the amount added to your W-2 as your correct basis amount.

When you did a “disqualifying disposition” your cost basis was the full value of the shares on the date of the purchase. The market price was $12 per share when you purchased those 1,000 shares at $8.50 per share. Your employer added the $3,500 discount as income to your W-2. Therefore your true basis is $8,500 + $3,500 = $12,000.

If you didn’t sell all the shares purchased in that batch, multiply the number of shares you sold by the discount price on the date of purchase and add the discount included on your W-2. For example, if you sold only 500 shares and your employer added $1,750 to your W-2, your corrected cost basis is:

$8.50 * 500 + $1,750 = $6,000

You are done with this entry. The summary gives the impression that you are paying tax again on a large gain, but don’t panic. We’ll verify it’s done correctly in the next section.

This shows a summary of the 1099-B form.

Verify on Form 8949

Click on the “Forms” button in the toolbar. Find Form 8949 and double-click on it.

Find your sale in either Part I or Part II depending on whether it was short-term or long-term on your 1099-B form.

You see the negative adjustment in column (g). If you didn’t make the adjustment and you just accepted the 1099-B as-is, you will pay capital gains tax again on the $3,500 discount you are already paying taxes through your W-2. Remember to make the adjustment!

Learn the Nuts and Bolts

I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action. Read Reviews

The post How to Do 2022 ESPP Sales In H&R Block: Don’t Pay Tax Twice! appeared first on The Finance Buff.

[Updated on January 16, 2023 with screenshots from TurboTax for 2022 tax filing.]

A Mega Backdoor Roth means making non-Roth after-tax contributions to a 401k-type plan and then moving it to the Roth account within the plan or taking the money out (with earnings) to a Roth IRA. It’s a great way to put additional money into a Roth account without having to pay much additional tax. Not all plans allow non-Roth after-tax contributions but some estimated that 40% of people can do it.

Suppose your plan allows it and you executed a Mega Backdoor Roth. You will receive a 1099-R from the plan in the following year. You will need to account for it on your tax return. Here’s how to do it in TurboTax.

Use Downloaded Software

You should do it in TurboTax Deluxe downloaded software. The downloaded software is both less expensive and more powerful than online software. If you haven’t paid for your TurboTax Online filing yet, you can buy TurboTax from Amazon or Costco and switch from TurboTax Online to TurboTax download (see instructions for how to make the switch from TurboTax).

If you use other tax software, please see:

• How To Enter Mega Backdoor Roth In H&R Block Tax Software or
• How To Enter Mega Backdoor Roth in FreeTaxUSA

Within the Plan Or To Roth IRA

You can do the Mega Backdoor Roth in two ways — convert within the plan or withdraw to a Roth IRA. Converting within the plan is much easier, and many plans automate this process. Transferring to a Roth IRA also works. See the previous post Mega Backdoor Roth: Convert Within Plan or Out to Roth IRA?

Here’s the scenario we’ll use as an example:

You contributed $10,000 as non-Roth after-tax contributions to your 401(k). By the time the money was converted to the Roth account within the plan or transferred to your Roth IRA, your contributions earned $200. You converted $10,200 to your Roth account.

I’m using 401(k) as a shorthand. It works the same in a 403(b). Now the entries into TurboTax.

1099-R Entries

Go to Federal Taxes -> Wages & Income -> IRA, 401(k), Pension Plan Withdrawals (1099-R).

When you come to the Retirement Income section, answer Yes because you received a 1099-R from your 401(k) plan.

Yes, you received a 1099-R form. Import the 1099-R if you’d like. I’m typing it myself here.

You have a normal 1099-R.

If you import the 1099-R, check the import carefully to make sure it matches your copy exactly. If you type the 1099-R, be sure to type it exactly. The earnings portion should be in box 2a. Box 2b “Taxable amount not determined” should NOT be checked. The after-tax non-Roth contributions (the “principal”) should be in box 5. Box 7 should show a code G. Finally, the box “The IRA/SEP/SIMPLE box is checked on my copy of the 1099-R” should NOT be checked.

TurboTax wants to make sure the IRA/SEP/SIMPLE checkbox is not checked.

Rollover Destination

If you converted to Roth within the plan, answer Yes here. If you took the money out of the plan to a Roth IRA, answer No.

If you answered No to the previous question, confirm that the money went to a Roth IRA.

After-Tax Contributions

Answer Yes to confirm that you made after-tax non-Roth contributions to your plan.

TurboTax pulls up the amount of your after-tax non-Roth contributions from Box 5 of your 1099-R. If your 1099-R isn’t correct, you should work with your 401(k) administrator to have it corrected.

Not a public safety officer, unless you actually are one.

Not due to a disaster.

The summary shows your 1099-R entries. Repeat and add any additional 1099-Rs you may have.

Verify on Form 1040

Now let’s confirm you’re only paying tax on the $200 earnings, not on your $10,000 non-Roth after-tax contributions.

Click on Forms on the top right.

Find “Form 1040” in the left navigation pane. Scroll up or down in the right pane to lines 5a and 5b. Line 5a includes the $10,200 gross distribution amount. Line 5b only includes the $200 taxable amount. With a Mega Backdoor Roth, you got an extra $10k into your Roth account. After paying tax on this $200, the future earnings on the $10,200 will be tax-free.

When you’re done examining the form, click on Step-by-Step on the top right to get back to the interview.

Learn the Nuts and Bolts

I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action. Read Reviews

The post How To Enter 2022 Mega Backdoor Roth in TurboTax (Updated) appeared first on The Finance Buff.

[Updated on January 16, 2023 with screenshots from H&R Block tax software for 2022 tax filing.]

A Mega Backdoor Roth is different from a regular Backdoor Roth. It’s done by making non-Roth after-tax contributions to a 401k-type plan and then moving it to the Roth account within the 401k-type plan or taking the money out (with earnings) to a Roth IRA. It’s a great way to put additional money into a Roth account without having to pay much additional tax. Not all plans allow non-Roth after-tax contributions but some estimated that 40% of people can do it.

Suppose you did a Mega Backdoor Roth last year. You should have received a 1099-R form from your 401k plan provider. You’ll need to account for it on your tax return. Here’s how to do it in H&R Block downloaded software. If you use other software, please read:

• How to Report Mega Backdoor Roth in TurboTax
• How to Report Mega Backdoor Roth in FreeTaxUSA

Use H&R Block Download

H&R Block is in general less expensive than TurboTax. It has a downloaded version and an online version. The downloaded version is both less expensive and more powerful.

The downloaded Deluxe + State edition (or the Deluxe Federal-Only edition when you live in a state without an income tax) can handle pretty much everything. It often goes on sale for $20-25 on Amazon, Walmart, or Newegg, sometimes for under $20. It includes five federal e-filing. State e-filing costs extra but you can simply print and mail or file directly with your state on their website (see Free E-File State Tax Return Directly on the State’s Website).

In-Plan Rollover

You can do the mega backdoor Roth in two ways — converting within the plan or withdrawing to a Roth IRA. Converting within the plan is much easier, and many plans automate the process. Withdrawing to a Roth IRA also works. See the previous post Mega Backdoor Roth: Convert Within Plan or Out to Roth IRA?

Let’s first look at converting to the Roth account within the plan. Here’s the scenario we’ll use as an example:

You contributed $10,000 as non-Roth after-tax contributions to your 401(k). By the time you converted the money to the Roth account within the plan, your contributions earned $200. You converted $10,200 to your Roth 401(k) account.

I’m using 401(k) as a shorthand. It works the same in a 403(b). Now here are the entries into H&R Block software.

Go to Federal -> Income -> IRA and Pension Income (Form 1099-R). You can import the 1099-R or enter it manually. I’m showing manual entries.

Our 1099-R is a normal 1099-R. Enter the numbers from your 1099-R as-is. Ours looks like this:

The gross amount converted to the Roth 401k account shows up in Box 1. The earnings are in Box 2a. If you didn’t have earnings in your rollover, Box 2a is zero. “Taxable Amount Not Determined” under Box 2b is left unchecked. The amount of your non-Roth after-tax contributions shows in Box 5. Box 7 has code G.

The IRA/SEP/SIMPLE box in Box 7 on your 1099-R should NOT be checked.

We’re not a retired public safety officer.

We moved the money within the plan. The Roth 401k account is officially a “designated Roth account” in the plan.

That’s it. It’s as simple as that. Now we verify we’re taxed only on the $200 in earnings, and not on the $10,000 non-Roth after-tax contributions. Click on “Forms” in the top menu bar. Double-click on “Form 1040 and Schedules 1-3” in the forms list.

Scroll down to find Line 5. The gross amount transferred to the Roth 401k account shows on Line 5a. Line 5b shows you’re taxed only on the earnings. If you didn’t have earnings, Line 5b will be zero.

Rollover to Roth IRA

It’s just as easy to report the mega backdoor Roth if you took the money out of the 401k plan and sent it to a Roth IRA. We’ll use the same example as above except you did the rollover to a Roth IRA instead of to the Roth 401k account within the plan.

Enter your 1099-R as-is in the same way as above.

The IRA/SEP/SIMPLE box is still unchecked.

We’re still not a retired public safety officer.

The only difference is we rolled over to a Roth IRA this time.

Now we verify we’re taxed only on the $200 in earnings, and not on the $10,000 non-Roth after-tax contributions. Click on “Forms” in the top menu bar. Double-click on “Form 1040 and Schedules 1-3” in the forms list.

Scroll down to find Line 5. The gross amount transferred to the Roth 401k account shows on Line 5a. Line 5b shows you’re taxed only on the earnings. If you didn’t have earnings, Line 5b will be zero.

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The post How To Report 2022 Mega Backdoor Roth In H&R Block (Updated) appeared first on The Finance Buff.

[Updated on January 16, 2023 with screenshots from FreeTaxUSA for 2022 tax filing.]

A Mega Backdoor Roth means making non-Roth after-tax contributions to a 401k-type plan and then moving it to the Roth account within the plan or taking the money out (with earnings) to a Roth IRA. It’s a great way to put additional money into a Roth account without having to pay much additional tax. Not all plans allow non-Roth after-tax contributions but some estimated that 40% of people can do it.

Suppose your plan allows it and you did a Mega Backdoor Roth. You’ll receive a 1099-R form from your plan in the following year. You’ll need to account for it on your tax return.

It’s quite straightforward. Here’s how to do it in the inexpensive online tax software FreeTaxUSA. If you use other tax software, please read:

• How To Report Mega Backdoor Roth in TurboTax or
• How To Report Mega Backdoor Roth In H&R Block Tax Software

In-Plan Rollover

You can do the Mega Backdoor Roth in two ways — convert within the plan or withdraw to a Roth IRA. Converting within the plan is much easier, and many plans automate the process. Withdrawing to a Roth IRA also works. See the previous post Mega Backdoor Roth: Convert Within Plan or Out to Roth IRA?

Let’s first look at converting to the Roth account within the plan. Here’s the scenario we’ll use as an example:

You contributed $10,000 as non-Roth after-tax contributions to your 401(k). By the time you converted the money to the Roth account within the plan, your contributions earned $200. You converted $10,200 to your Roth 401(k) account.

I’m using 401(k) as a shorthand. It works the same in a 403(b).

1099-R Entries

Now the entries into FreeTaxUSA. Go to Income -> Common Income -> Retirement Income (1099-R). Enter the numbers from your 1099-R as-is. Ours looks like this:

The gross amount converted to the Roth 401k account shows up in Box 1. The earnings are in Box 2a. If you didn’t have earnings in your conversion, Box 2a is zero. “Taxable Amount Not Determined” under Box 2b is left unchecked. The amount of your non-Roth after-tax contributions (“the principal”) should be in Box 5. Box 7 has code “G” and the IRA/SEP/SIMPLE box is unchecked.

Leave the rest at default unless your 1099-R has values in other boxes.

When it asks whether it was a rollover to a Roth 401(k) account, we say yes.

That’s it. It’s as simple as that.

Verify on Form 1040

Now we verify we’re taxed only on the $200 in earnings, and not on the $10,000 non-Roth after-tax contributions.

Click on the “View Form 1040” link on the right-hand side.

A draft 1040 form pops up. Look at Line 5. Line 5a shows the gross amount transferred to the Roth 401k. Line 5b shows we’re taxed only on the $200 in earnings. If you didn’t have earnings in your rollover, Line 5b will be zero.

Rollover to Roth IRA

It’s just as easy to report the Mega Backdoor Roth if you took the money out of the 401k plan and sent it to a Roth IRA. We’ll use the same example as above except you did the rollover to a Roth IRA instead of to the Roth 401k account within the plan.

Enter your 1099-R as-is in the same way as above.

When it asks how we did the rollover, answer “No” to the first question and “Yes” to the second question. That’s it.

Verify that you’re taxed only on the earnings in the same way as above. Click on View Form 1040 on the right.

Look at Line 5 in your draft 1040 form. Line 5a shows the gross amount. Line 5b shows the amount you’re paying tax on.

Learn the Nuts and Bolts

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The post How to Enter 2022 Mega Backdoor Roth in FreeTaxUSA (Updated) appeared first on The Finance Buff.

[Updated on January 16, 2023 with screenshots from FreeTaxUSA for 2022 tax filing.]

TurboTax and H&R Block are the two major tax software for filing personal tax returns. A low-cost alternative to TurboTax and H&R Block software is FreeTaxUSA. FreeTaxUSA isn’t only for simple returns. It can still handle more complex transactions, such as the Backdoor Roth.

Just as a refresher, a Backdoor Roth involves making a non-deductible contribution to a Traditional IRA followed by converting from the Traditional IRA to a Roth IRA. Both the contribution and the conversion need to be reported in the tax software. For more information on Backdoor Roth, please read Backdoor Roth: A Complete How-To.

What To Report

You report on the tax return your contribution to a Traditional IRA *for* that year, and you report the conversion to Roth *during* that year.

For example, when you are doing your tax return for year X, you report the contribution you made *for* year X, whether you actually did it during year X or the following year between January 1 and April 15. You also report the conversion to Roth *during* year X, whether the contribution was made for year X, the year before, or any previous years. Therefore a contribution made during the following year for year X goes on the tax return for year X. A conversion done during year Y after you made a contribution for year X goes on the tax return for year Y.

You do yourself a big favor and avoid a lot of confusion by doing your contribution for the current year and finishing your conversion in the same year. I called this a “planned” Backdoor Roth — you’re doing it deliberately. Don’t wait until the following year to contribute for the previous year.  Contribute for year X in year X and convert it during year X. Contribute for year Y in year Y and convert it during year Y. This way everything is clean and neat.

If you are already off by one year, catch up. Contribute for both the previous year and the current year, then convert the sum during the same year. See Make Backdoor Roth Easy On Your Tax Return.

Here’s the scenario we’ll use as an example:

You contributed $6,000 to a traditional IRA in 2022 for 2022. Your income is too high to claim a deduction for the contribution. By the time you converted it to Roth IRA, also in 2022, the value grew to $6,200. You have no other traditional, SEP, or SIMPLE IRA after you converted your traditional IRA to Roth. You did not roll over any pre-tax money from a retirement plan to a traditional IRA after you completed the conversion.

If your scenario is different, you will have to make some adjustments to the screens shown here.

Before we start, suppose this is what FreeTaxUSA shows:

We’ll compare the results after we enter the Backdoor Roth.

Convert From Traditional IRA to Roth

The tax software works on income items first. Even though the conversion happened after the contribution, we enter the conversion first.

When you convert from Traditional IRA to Roth, you will receive a 1099-R. Complete this section only if you converted *during* the year for which you are doing the tax return. If you only converted during the following year and you don’t have a 1099-R yet, skip to the next section: Traditional IRA Contribution. You’ll complete this section next year.

In our example, by the time you converted, the money in the Traditional IRA had grown from $6,000 to $6,200.

Click on “Add a 1099-R” when it asks you about the 1099-R.

It’s just a regular 1099-R.

Enter the 1099-R exactly as you have it. Pay attention to the code in Box 7 and the checkboxes. It’s normal to have the same amount as the taxable amount in Box 2a, when Box 2b is checked saying “taxable amount not determined.”  Pay attention to the distribution code in Box 7. My 1099-R has code 2, and the IRA/SEP/SIMPLE box is also checked.

Right after you enter the 1099-R, you will see the refund number drop. Here we went from a $1,540 refund to $264. Don’t panic. It’s normal and temporary. The refund number will come up when we finish everything.

It’s not an inherited IRA.

It asks you about Roth conversion. Answer Yes to conversion and enter the converted amount. This whole 1099-R is the result of a Roth conversion.

You are done with this 1099-R. Repeat if you have another 1099-R. If you’re married and both of you did a Backdoor Roth, pay attention to whose 1099-R it is when you enter the second one. You’ll have problems if you assign both 1099-R’s to the same person when they belong to each spouse.

It asks you about the basis carried over from previous years. If you did a clean “planned” backdoor Roth every year, although technically the answer is Yes, you have nothing to carry over from year to year. In our simple example, we don’t have any. If you do, answer Yes and get the number from line 14 of Form 8606 from your previous year’s tax return.

We didn’t take any disaster distribution.

Now continue with all other income items until you are done with income. Your refund meter is still lower than it should be, but it will change soon.

Traditional IRA Contribution

Find the IRA Contributions section under the “Deductions / Credits” menu.

Answer Yes to the first question and enter your contribution. Leave the answer to “Did you recharacterize” at No. In our example, you contributed $6,000 directly to a Traditional IRA. If you originally contributed to a Roth IRA and then you recharacterized the contribution as traditional contributions, enter the amount in the Roth IRA box and choose Yes below when it asks you whether you recharacterized.

Your refund number goes up again! It was a refund of $1,540 before we started. It went down a lot and now it’s back to $1,496. The $44 difference is due to paying tax on the $200 earnings before we converted to Roth.

We didn’t contribute to a SEP, SIMPLE, or solo 401k plan in this example. Answer Yes if you did.

Withdrawal means pulling money out of a Traditional IRA back to your checking account. Converting to Roth is not a withdrawal. Answer ‘No‘ here.

In our example, we don’t have any basis carried over from the previous years. We don’t have any money in traditional, SEP, or SIMPLE IRAs as of the end of the year (we already converted to Roth by then). Our contribution was made during the year in question, not in the following year.

It tells us we don’t get a deduction. We know. It’s because our income was too high. That’s why we did the Backdoor Roth to begin with.

If you only contributed *for* last year but you didn’t convert until the following year, remember to come back next year to finish the conversion part.

Taxable Income from Backdoor Roth

After going through all these, let’s confirm how you’re taxed on the Backdoor Roth. Click on “View 1040” on the right-hand side.

Look for Line 4 in Form 1040.

It shows $6,200 in IRA distributions in line 4a and only $200 is taxable in line 4b. If you are married filing jointly and both of you did a backdoor Roth, the numbers here will show double.

Tah-Dah! You got money into a Roth IRA through the backdoor when you aren’t eligible to contribute to it directly. You will pay tax on a small amount in earnings if you waited between contributions and conversion. That’s negligible relative to the benefit of having tax-free growth on your contributions for many years.

Troubleshooting

If you followed the steps and you are not getting the expected results, here are a few things to check.

W-2 Box 13

Make sure the “Retirement plan” box in Box 13 of the W-2 you entered into the software matches your actual W-2. If you are married and both of you have a W-2, make sure your entries for both W-2’s match the actual forms you received.

When you are not covered by a retirement plan at work, such as a 401k or 403b plan, your Traditional IRA contribution may be deductible, which also makes your Roth conversion taxable.

Self vs Spouse

If you are married, make sure you don’t have the 1099-R and the IRA contribution mixed up between yourself and your spouse. If you inadvertently assigned two 1099-Rs to one person instead of one for you and one for your spouse, the second 1099-R will not match up with a Traditional IRA contribution made by a spouse. If you entered a 1099-R for both yourself and your spouse but you only entered one Traditional IRA contribution, you will be taxed on one 1099-R.

Learn the Nuts and Bolts

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The post How to Report 2022 Backdoor Roth In FreeTaxUSA (Updated) appeared first on The Finance Buff.

[Updated on January 16, 2023 with screenshots from TurboTax for 2022 tax filing.]

If your employer offers an Employee Stock Purchase Program (ESPP), you should max it out. You come out ahead even if you sell the shares as soon as you can. See Employee Stock Purchase Plan (ESPP) Is A Fantastic Deal.

After you sell the shares from the ESPP, part of the income will be included on your W-2. However, the 1099-B form you receive from the broker still reflects your discounted purchase price. This post shows you how to make the necessary adjustment on your tax return using TurboTax.

Don’t pay tax twice!

If you use other tax software, please read:

• How to Report ESPP Sales in H&R Block Software

If you’re looking for a guide on doing taxes on RSU sales, please read Restricted Stock Units (RSU) and TurboTax: Net Issuance.

When to Report

Before you begin, be sure to understand when you need to report. You report when you sell the shares you bought under your ESPP. If you only bought shares but you didn’t sell during the tax year, there’s nothing to report yet.

Wait until you sell, but write down the full per-share price (before the discount) when you bought. If you purchased multiple times, write down for each purchase:

• The purchase date
• The closing price on the grant date
• The closing price on the purchase date
• The number of shares you bought

This information is very important when you sell.

Let’s use this example:

You bought 1,000 shares under your ESPP on 9/30/20xx. The closing price on the purchase date was $12 per share. The closing price on the grant date six months before was $10 per share. You bought at $8.50 per share with the discount.

You would write down:

Keep this information until you sell.

1099-B From Broker

When you sell, you will receive a 1099-B form from the broker in the following year. You will report your gain or loss using this 1099-B form and the information you accumulated for each purchase.

Let’s continue our example:

You sold 1,000 shares from your purchase above on 10/5/20xx at $11.95 per share. After commission and fees, you netted $11,925. You received a 1099-B form from your broker showing a sales proceed of $11,925 in the following year. The 1099-B form shows the cost basis as $8,500, which reflects your discounted purchase price.

Because you didn’t hold it for two years after the grant date and one year after the purchase date, your sale was a “disqualifying disposition.” The discount is added as income to your W-2. This raises your cost basis. If you just accept the 1099-B as-is, you will be double-taxed!

Now let’s account for it in TurboTax.

Use TurboTax Download

The screenshots below are from TurboTax Deluxe downloaded software. The downloaded software is way better than online software. If you haven’t paid for your TurboTax Online filing yet, you can buy TurboTax downloaded software from Amazon, Costco, Walmart, and many other places and switch from TurboTax Online to TurboTax download (see instructions for how to make the switch from TurboTax).

Enter 1099-B

Go to “Federal Taxes” -> “Wages & Income” -> “Investment Income” and find “Stocks, Mutual Funds, Bonds, Other.”

Answer “Yes” because you did sell stocks.

TurboTax offers an upgrade but we don’t need it. TurboTax Deluxe handles ESPP sales just fine.

We did receive a 1099-B form.

Import your 1099-B if you’d like. I’ll type it myself here.

Select or enter the financial institution. Suppose it’s E*Trade.

Choose to enter one sale at a time. Fill in the boxes from your 1099-B form. Look carefully at which category the sale belongs to on your 1099-B form. It was Box A on my form. It could be a different one on your form.

The cost basis on your 1099-B was reported to the IRS but it was too low. Don’t change it here directly.

We don’t have any of these fields on our 1099-B form.

Correct Cost Basis

Check the box for “The cost basis on my statement is incorrect.” Enter your purchase cost plus the amount added to your W-2. When you did a “disqualifying disposition” your cost basis was the full value of the shares on the date of the purchase. The market price was $12 per share when you purchased those 1,000 shares at $8.50 per share. Your employer added the $3,500 discount as income to your W-2. Therefore your true basis is $8,500 + $3,500 = $12,000.

If you didn’t sell all the shares purchased in that batch, multiply the number of shares you sold by the discount price on the date of purchase and add the discount included on your W-2. For example, if you sold only 500 shares and your employer added $1,750 to your W-2, your corrected cost basis is:

$8.50 * 500 + $1,750 = $6,000

Repeat if you have more sales to enter. We only had one sale in our example.

You get a summary of the sales you entered.

You get a summary of your net gain and loss. We have a net loss because we received less money after selling the shares and paying the commission and fees than our discounted purchase plus the income added to our W-2.

Verify on Schedule D

We can verify that the adjustment makes it all the way to the tax form. Click on “Forms” at the top right.

Find “Schedule D” in the left navigation pane.

Scroll up or down to find line 1b, 2, 3, 8b, 9, or 10 depending on the sale category on your 1099-B form.

You see the negative adjustment in column (g). If you didn’t make the adjustment and you just accepted the 1099-B as-is, you will pay capital gains tax again on the $3,500 discount you are already paying taxes through your W-2. Remember to make the adjustment!

Learn the Nuts and Bolts

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The post How To Enter 2022 ESPP Sales In TurboTax: Don’t Pay Tax Twice! appeared first on The Finance Buff.

Updated on January 16, 2023 with screenshots from TurboTax Deluxe downloaded software for 2022 tax filing. If you use H&R Block tax software, please read:

• Self-Employed ACA Health Insurance Subsidy In H&R Block Software

Many self-employed business owners buy health insurance through the ACA healthcare marketplace (healthcare.gov or a state-specific exchange). If your estimated income qualifies for a subsidy, the marketplace will pay part of the premium directly to the insurance company.

However, the advance subsidy is only an estimate based on the income estimate you provided when you signed up. As self-employed people know full well, the actual income from self-employment can vary greatly from year to year. After the year is over, you have to square up and calculate the actual subsidy you really qualify for. If your business didn’t do as well as you anticipated, you may qualify for a higher subsidy. If you had a great year, you may have to pay back some of it.

If you’re self-employed, you also qualify for a tax deduction for the health insurance premium. If you qualify for both a subsidy and a deduction, they form a circular relationship.

The IRS prescribed a method to calculate the split between the subsidy and the deduction. It’s difficult to calculate by hand but tax software will take care of it for most people.

Use TurboTax Download

The screenshots below are from TurboTax Deluxe downloaded software. The downloaded software is way better than online software. If you haven’t paid for your TurboTax Online filing yet, you can buy TurboTax download from Amazon, Costco, Walmart, and many other places and switch from TurboTax Online to TurboTax download (see instructions for how to make the switch from TurboTax).

We will use this scenario as an example:

You are single, self-employed, with no dependent. You had health insurance through the ACA healthcare marketplace for all 12 months in the year. The full unsubsidized preimium for the second lowest cost Silver plan was $600/month. The full unsubsidized premium for the plan you chose was $500/month. Based on your estimated income, you got a $150/month advance credit. You paid net $350/month.

Enter 1095-A

Go to Federal Taxes -> Deductions & Credits. Scroll down and find Affordable Care Act (Form 1095-A) under Medical.

You should have a Form 1095-A from the ACA healthcare marketplace. If you didn’t get it in the mail, log in to your online account and look for a document download.

Enter the month-by-month numbers from your Form 1095-A. It’s tedious to repeat for all 12 months but TurboTax makes you do it. The first column is the full unsubsidized monthly premium for your plan. The middle column is the full unsubsidized premium of the second lowest-cost Silver plan, which is used to calculate your subsidy. The last column is the advance subsidy the ACA marketplace already paid on your behalf to the insurance company.

This is important but easy to miss. Even though TurboTax knows you’re self-employed and you have the 1095-A form from the ACA healthcare marketplace, you still must check this box.

Associate the health insurance with your self-employment and say during which months it applied.

If you have more than one Form 1095-A, repeat and add them all. We only have one in our example.

TurboTax crunches the numbers in a split second. It says we’re eligible for more tax credit than the ACA healthcare marketplace already paid directly to the insurance company. We’ll get the difference in our tax refund. If you qualify for less subsidy than the advance already paid, you’ll pay back the difference, subject to a cap (see Cap On Paying Back ACA Health Insurance Subsidy Premium Tax Credit).

Self-Employed Health Insurance Deduction

We’re also eligible for a tax deduction for the portion not covered by the premium tax credit.

To see your self-employed health insurance deduction, click on Forms on the top right. Find Schedule 1 in the left navigation pane. Look at Line 17. It shows we’re getting a $1,388 tax deduction for self-employed health insurance.

Premium Tax Credit

To see the subsidy you qualify for based on your actual income, find Form 8962 in the forms list navigation pane. Scroll down and look at Line 24. When you’re done looking for the form, click on Step-by-Step on the top right to get back to the interview.

$1,388 in self-employed health insurance tax deduction plus $4,612 in premium tax credit equals $6,000 ($500/month), which is the full unsubsidized premium for our health plan (plus any dental and vision insurance premium, which we didn’t have in our example). The numbers add up! TurboTax figured out the split between the tax deduction and the tax credit. It also matched the result from H&R Block software for the same example.

Edge Cases

TurboTax works for most cases but it doesn’t work for everyone. You know you’re running into one of the edge cases for which the software doesn’t work when the numbers from the software fail this equation (except for a small difference due to rounding):

Self-Employed Health Insurance Deduction + Premium Tax Credit = Unsubsidized Health Insurance Premium (including any dental and vision premiums)

When this happens, you need a better calculator. See When TurboTax and H&R Block Give Self-Employed Wrong ACA Subsidy.

Learn the Nuts and Bolts

I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action. Read Reviews

The post 2022 Self-Employed ACA Health Insurance Subsidy In TurboTax appeared first on The Finance Buff.

[Updated on January 16, 2023 with updated screenshots from TurboTax and H&R Block software for 2022 tax filing.]

When mutual funds and/or ETFs that invest in foreign countries receive dividends or interest, they have to pay taxes to those countries. After the end of the year, these mutual funds and/or ETFs report to your broker how much they paid in foreign taxes on your behalf. When you invest in these mutual funds and/or ETFs outside a tax-advantaged account, your broker will report to you the total foreign taxes you paid through all your funds and/or ETFs. The IRS allows a tax credit for the taxes you paid indirectly to foreign countries.

The foreign taxes paid is reported in Box 7 on the 1099-DIV form you receive from your broker. It’s easy to handle when the total foreign taxes paid from all your 1099-DIV forms is no more than a certain amount — $300 for single, $600 for married filing jointly. You enter the 1099-DIV forms into your tax software and the software will automatically put the total on your tax form (Schedule 3, Line 1).

When your total foreign taxes paid from all your 1099-DIV forms are over the $300/$600 threshold, you’ll need to include Form 1116 in your tax return. I’ll show you how to do this in TurboTax and H&R Block software.

I start with TurboTax. Please jump to the next section if you use H&R Block software.

TurboTax

The screenshots below came from TurboTax Deluxe downloaded software. The downloaded software is way better than online software. If you haven’t paid for your TurboTax Online filing yet, you can buy TurboTax download from Amazon, Costco, Walmart, and many other places and switch from TurboTax Online to TurboTax download (see instructions for how to make the switch from TurboTax).

I’ll use this simple scenario as an example:

You received a 1099-DIV from your broker. Box 7 “Foreign Tax Paid” on the 1099-DIV shows $700. 100% of this $700 came from a mutual fund or ETF. You only have this one 1099-DIV that has a number in Box 7.

Enter 1099-DIV

If you’re entering your 1099-DIV manually, you have to check a box on the 1099-DIV entry screen to reveal the additional input fields. Then you put the foreign tax paid number into Box 7. If you imported your 1099’s, double-check that all the numbers from the import match your downloaded copy.

We don’t have any of these uncommon situations.

After you’re done with one 1099-DIV, continue with your other 1099-DIV forms. We only have one 1099-DIV form in our example.

Foreign-Source Income

At a much later point, TurboTax will ask you about the foreign tax paid under Deductions & Credits -> Estimates and Other Taxes Paid -> Foreign Taxes.

After a brief introduction, the first question is whether you’d like to take a tax deduction or a tax credit. The “help you decide” popup says in general you’re better off taking the credit. So click on “Take a Credit.”

Next, TurboTax asks you which countries you received dividend income from. A small note says select RIC for any income received from a mutual fund or other Regulated Investment Company. U.S.-based mutual funds and ETFs fall into this category. RIC is the first item in the country dropdown.

Then you report income received from country “RIC.” Click on Report Income.

Now you say foreign tax paid from which 1099-DIVs were paid to country RIC. If all your foreign taxes paid were from mutual funds and/or ETFs, select all your 1099-DIV’s that have a number in Box 7.

TurboTax asks you how much of the dividend on your 1099-DIV was from foreign countries. This information isn’t on the 1099-DIV itself. Your broker may have included supplemental information with the 1099-DIV. For instance, Fidelity provides the breakdown of total foreign income in its 1099 package.

TurboTax asks whether you’d like to review the 1099-DIV forms you entered before. We answer “No” here because we already entered the 1099-DIV forms correctly.

Simplified Limitation for AMT

Now it asks you about a “simplified foreign tax limitation election.” If this is the first year you encounter this, choose the first option.

TurboTax suggests you should elect the simplified method. Click on Elect Simplified Calculation.

If you used TurboTax last year and you already elected the simplified method, TurboTax reminds you that you should continue with the simplified method. Answer “Yes” here.

Foreign Taxes Paid

We don’t have any other foreign income, expenses, or adjustments. Click on Yes.

TurboTax auto-filled these. No changes are necessary for us.

We don’t have any carryover from previous years. A carryover is created when you paid more in foreign tax than the tax credit you’re allowed. Your leftover foreign tax paid is first carried back to the previous year and then carried over to the following year.

After going through all these, we’re getting 100% credit for the $700 foreign tax paid. Woo-hoo!

Verify on Schedule 3

You can verify that you’re getting the foreign tax credit by clicking on Forms at the top right. Find Schedule 3 in the left navigation pane and look at the number on Line 1. You can also look at Form 1116. It looks awfully complicated.

Excess Foreign Tax Credit

We received 100% of the foreign taxes paid as a tax credit in our example. If you paid higher foreign taxes on a lower US income, you may not be able to take 100% of the credit. TurboTax will tell you that you’ll have to wait until next year to take a portion of the credit.

Carrying over part of the credit to the following year requires filing a Form 1116 Schedule B. TurboTax will automatically generate Schedule B when you need it.

H&R Block Software

The following screenshots came from H&R Block downloaded software. The downloaded software is way better than online software. If you haven’t paid for your H&R Block Online filing yet, consider buying H&R Block download software from Amazon, Walmart, Newegg, and many other places. If you’re already too far in entering your data into H&R Block Online, make this your last year of using H&R Block Online. Switch over to H&R Block download software next year.

I’ll use the same example:

You received a 1099-DIV from your broker. Box 7 “Foreign Tax Paid” on the 1099-DIV shows $700. 100% of this $700 came from a mutual fund or ETF. You only have this one 1099-DIV that has a number in Box 7.

Enter 1099-DIV

If you’re entering the 1099-DIV form manually, type the numbers as shown on your form. If you import, double-check the import to make sure all the numbers match your downloaded copy. H&R Block doesn’t say anything about the foreign tax paid or needing a Form 1116 after you enter the 1099-DIV. Just continue with your other entries.

Foreign Tax Credit

It’ll come up much later in the Credits section under Foreign Tax Credit.

Click on Add Form 1116.

AMT Simplified Election

If this is the first year you’re claiming the Foreign Tax Credit, H&R Block software asks upfront about the simplified election. Select Yes for the simplified election.

Foreign-Source Income

Dividend income falls under passive income.

The “learn more” popup says you should choose “RIC” as the country when your foreign income came through mutual funds and/or ETFs. “RIC” is the last item in the country dropdown. You get the foreign income from the supplemental information in your 1099 package from your broker. If you have multiple 1099-DIV’s that reported foreign tax paid in Box 7, you’ll have to add up the foreign income numbers from the respective supplemental information.

Don’t overlook the small note under the gross income input. It says you might need to adjust the amount if it includes foreign capital gains or qualified dividends. When you’re reporting foreign taxes paid from mutual funds and ETFs, the income sure does include qualified dividends. H&R Block doesn’t do the adjustment for you. It asks you to read the IRS instructions, learn how to adjust, and report the adjusted income here. That’s lazy.

Adjustment Exception

Fortunately, many people qualify for an adjustment exception. From the IRS Form 1116 Instructions:

You qualify for the adjustment exception if you meet both of the following requirements.

1. Line 5 of the Qualified Dividends and Capital Gain Tax Worksheet doesn’t exceed:
a. $340,100 if married filing jointly or qualifying widow(er),
b. $170,050 if married filing separately,
c. $170,050 if single, or
d. $170,050 if head of household.

2. The amount of your foreign source capital gain distributions, plus the amount of your foreign source qualified dividends, is less than $20,000.

The dollar amounts in the first requirement correspond to the top of the 24% bracket. You are spared from figuring out how to adjust if your taxable income minus your qualified dividends and long-term capital gains isn’t in the 32% tax bracket or above, and your foreign source capital gain distributions and qualified dividends aren’t $20,000 or more.

If you’re eligible for the adjustment exception and you decide to take the easy route of not adjusting your foreign-source income, you need to claim a corresponding adjustment exception on your total income. Click on Forms on the top right. Open Form 1116. Scroll down and find Mini-Worksheet for Line 18 just above Line 18. Check the box for using the adjustment exception.

Close the form and return to the interview.

If you don’t qualify for the adjustment exception, good luck learning how to adjust from the Form 1116 instructions. You’re better off switching to TurboTax, which does the adjustment for you when you need it.

We leave this blank because we don’t have any interest expenses.

We leave this blank because we don’t have any other deductions either.

We don’t have any direct expenses either.

We have no losses to adjust.

Yes, our 1099-DIV was reported in U.S. dollars.

Foreign Taxes

I chose the simpler “paid” method. Enter the end of the year as the date paid. Enter the total foreign tax paid into the Dividends box. If you have multiple 1099-DIV’s that reported foreign tax paid in Box 7, you’ll have to add up those numbers yourself. I wish the software should’ve done the math and auto-populated this field.

All our foreign taxes paid were through mutual funds and ETFs. RIC is the only country to use. We don’t have foreign income from any other countries.

Fortunately, we don’t have any carryover or carryback. If we can’t get 100% credit for the foreign taxes paid this year, we’ll have to create a carryback or carryover, which means we can’t e-file with H&R Block.

We don’t have any reduction either.

We don’t know what the foreign tax rate was. We’re leaving this blank.

We don’t know how to adjust. We’re leaving it blank again.

This is getting ridiculous. All I want is to get the foreign tax credit!

We’re finally done with one Form 1116. Are we getting the credit?

Verify on Schedule 3

Click on Forms on the top. Double-click on Form 1040 and Schedules 1-3.

Scroll down to Schedule 3. Line 1 shows our foreign tax credit. You can also look at Form 1116. It looks awfully complicated.

Excess Foreign Tax Credit

We received 100% of the foreign taxes paid as a tax credit in our example. If you paid higher foreign taxes on a lower US income, you may not be able to take 100% of the credit. You’ll have to wait until next year to take the rest of it.

Carrying over part of the credit to the following year requires filing a Form 1116 Schedule B. H&R Block doesn’t have this form in their program. H&R Block tells you to download the form from the IRS website, complete it yourself, and attach it to your paper return. That’s ridiculous.

Summary

Both TurboTax and H&R Block software work when your total foreign taxes paid exceeds the $300/$600 threshold that requires a Form 1116. Either way, you’ll have to gather the foreign income from the 1099 supplemental information from your brokers. After it’s all said and done, you’re getting a tax credit for taxes you paid to foreign countries through your mutual funds and/or ETFs.

TurboTax is more integrated with the 1099-DIV forms you already entered. H&R Block asks you to add up the foreign tax numbers yourself. Because you have to add up the foreign income anyway, you can add up the foreign tax numbers at the same time. H&R Block software asks you to make any necessary adjustments to the foreign-source income, which is quite difficult. The option to activate the adjustment exception is hidden in the Forms mode. You’re on your own when you don’t qualify for the adjustment exception. It also asks you to handle any carryover yourself. TurboTax does a better job of handling the foreign tax credit than the H&R Block software.

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I came to know the Fidelity retirement planning calculator three years ago when I met with a Fidelity employee at their branch office. Her title was Vice President, Financial Consultant. She explained to me that, at the VP level, she didn’t have a requirement of having clients use Fidelity’s paid wealth management services. A part of her role was to help clients with financial planning.

Retirement Planning Tool

Her primary tool was the retirement planning tool in Fidelity’s Planning and Guidance Center, which is available for free to all Fidelity customers. Non-customers can also register a guest login and use it for free.

You can run the tool on your own without working with someone at a Fidelity branch office. Fidelity employees there help people run the tool and look for up-selling opportunities.

Fidelity’s Planning and Guidance Center also has tools for other goals such as saving for college and buying a home. I only used the retirement planning tool. The basic idea is that you have some income, some investments, and some expenses, and the tool tells you how well your income and investments will cover your planned expenses.

I played with the retirement planning tool three years ago. I used it again recently, and here’s an update on how well it works.

To get started, click on “Planning & Advice” at the top, and then “Retirement.”

Find the “Get started” button in the middle of that page.

If it’s the first time you’re using the tool, it’ll ask you a series of questions: age, gender, when you plan to retire, life expectancy, income, expenses, etc. It jumps into your existing plan after you use it once.

Income

If you’re still working, the employment income is assumed to continue until your planned retirement age. If you’re self-employed, reduce your income by 1/2 of the self-employment tax to account for the higher taxes.

You can also add one-time and episodic income sources such as an inheritance, downsizing your home, part-time work, rentals, etc.

If you aren’t receiving Social Security yet, you need to tell the calculator when you’ll claim Social Security and what your benefits will be in today’s dollars. See Retiring Early: Effect On Social Security Benefits for how to get your earnings data from Social Security and feed them into other tools to calculate your benefits.

Investments

All the investment accounts you have in Fidelity Full View will be automatically populated in the retirement planning tool. See the previous post Fidelity Full View & GPS: Track Your Portfolio Across All Accounts. You can exclude some accounts by unchecking them if they’re not intended for retirement.

You can add accounts manually in the retirement planning tool itself without using Full View, but it’s better to add non-Fidelity accounts in Full View because accounts in Full View will be automatically updated daily. If you add accounts manually in the retirement planning tool, you must refresh them one by one to the current value when you run the retirement planning tool next time.

These accounts should only be financial assets that can be liquidated partially. If you’re planning to sell a rental or a business to fund your retirement, enter the anticipated sale in the income section.

Expenses

If you give just one number as your estimated expenses in retirement, the planning tool assumes it’ll be that number every year adjusted for inflation. It’s adequate if you’re far away from retirement but it’s probably too simplistic when you’re close to retirement or already retired.

Choosing “Detailed Expenses” opens up a worksheet.

The detailed expense worksheet is broken into too many categories in my opinion. You lose sight of the big picture when you’re bogged down by whether your utilities are really $200 a month or $250 a month.

I suggest only using the healthcare portion and then going to “Custom Expenses.”

You still fill out the healthcare portion because the planning tool gives healthcare expenses a higher inflation adjustment than it does for other expenses.

I would put in just two custom expenses besides healthcare: Essentials ex-Healthcare and Discretionary Expenses. These are the base expenses that will last throughout retirement.

Then you can add your spike and one-time expenses, such as home improvement, college tuition, extra budget for travel in the initial years of retirement, helping children with a down payment, etc. These expenses have a start year and an end year.

Taxes

This planning tool only uses an estimated tax rate based on the projected gross taxable income for a given year, the filing status, and the state of residence. It doesn’t perform detailed tax calculations. Nor does it perform Roth conversions to take advantage of low tax years.

There’s an input field for local taxes, which you can repurpose to model higher taxes.

Projections

After you enter all the information, the retirement planning tool will run 250 simulations based on historical returns. By default, it uses the current asset allocation in your accounts.

The Hypothetical Assets chart is more interesting to me. It gives three scenarios for market returns: Significantly Below Average, Below Average, and Average. Significantly Below Average says 90% of historical returns will end up above this number. Below Average is 75%, and Average is 50%.

The tool suggests you look at the Significantly Below Average scenario for conservative planning. If your income and assets are sufficient to cover your planned expenses when the future returns are above the bottom 10% of historical returns, your income and investments have a good likelihood to cover your planned expenses.

You should save a report before you explore further. This will be your baseline scenario.

Explore What-If’s

Whether your baseline says you’ll end up with $15 million when you die or you’ll have a shortfall, you should explore some what-if’s to see how different inputs affect your outcome.

The point of the exercise is to understand how much leeway you have in each input. If you see you have a lot of leeway in one area, you can relax a bit and not worry too much about it. If you see you have very small leeway in another area, that’s where you should pay close attention.

You reach a happy medium by trial and error in altering your inputs. Your goal is not to leave too much money behind when you die but also to have sufficient money to cover your expenses when you live long.

I suggest using age 100 as the time horizon but only looking at the asset value at a more reasonable old age, say 88. Investment returns compound exponentially over a long time horizon. The end asset value easily grows to a huge number at age 100. The value at age 88 is more realistic.

You save another PDF report when you find your happy medium. That’s your improved plan over your initial baseline.

Asset Allocation

By default, the planning tool uses your actual asset allocation from the holdings in your accounts. You can also make it use one of nine model portfolios ranging from 100% short-term investments to 100% stocks.

This becomes another what-if variable. You observe how investing differently affects your retirement. If it doesn’t make that much difference whether you invest 50% in stocks versus 60% in stocks, maybe you won’t need to obsess about your exact asset allocation.

Soft Sell on Annuity

The last section of the retirement planning tool suggests using a portion of your portfolio to buy an income annuity.

The theory is that when more of the planned expenses are covered by guaranteed income streams, a portfolio can handle more withdrawals when returns are low. The theory isn’t necessarily wrong but an automated recommendation based on only rough estimates looks like a soft sell to me.

I would ignore the Income Strategy section at the end.

What It Doesn’t Do

I would call this a retirement modeling tool. It’s useful to model different inputs but don’t treat the output as an action plan that guides your retirement.

It doesn’t tell you when you can retire if you’re still working. You can’t say I’d like to cover 120% of my planned expenses (giving some margin for error), tell me when I can stop working. You’d have to do trial-and-error to derive it.

It doesn’t tell you how much you can spend. If your planned expenses are low, the tool will show that you will have a lot of money left at the end. You’d have to dial your expenses up and down by trial and error and see how much you can spend without leaving too much money behind or risking running out of money.

It doesn’t suggest an asset allocation. You can change the target asset allocation and see what difference it makes but the tool won’t tell you that given your assets this asset allocation will cover the highest expenses when future returns will be significantly below average.

It doesn’t change the asset allocation over time. This planning tool assumes that the asset allocation will stay the same for all years. It doesn’t apply a glide path to reduce your risk as you move along.

It doesn’t model inflation. The planning tool assumes 2.5% inflation for all expenses except healthcare. You can’t change that assumption.

It doesn’t model dynamic spending. The planning tool will use the given expenses adjusted for inflation regardless of the market condition. It won’t reduce your withdrawals when the market is down.

It doesn’t manage withdrawals for taxes. The tool follows a preset order of withdrawals from different types of accounts (taxable first, then pre-tax, and finally Roth). It doesn’t manage the withdrawals to smooth out taxes.

It doesn’t model Roth conversions. You can’t tell the tool to add an amount for Roth conversions between year X and year Y.

To the extent that you can withdraw less when the market is down or manage your taxes better through withdrawal sequencing or Roth conversions, your result will be better than the tool shows.

Conclusion

This free retirement modeling tool from Fidelity can be useful in showing you how much leeway you have and what moves the needle and what doesn’t. Through some rounds of trial and error, you can make it show you when you can retire for a given expense budget or how much expense your assets can cover for a given retirement date in different market conditions. You can also see the effect of portfolio asset allocation by picking different target allocations. It’s useful to establish some high-level boundaries.

It isn’t designed to give you year-by-year tactical guidance in structuring your retirement withdrawals or Roth conversions.

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Although every financial institution would like to have us use them for everything, most people have accounts at multiple places. It helps to consolidate, but no one institution does the best in everything. Vanguard has some good funds not available anywhere else. Fidelity has good customer service. Bank of America has a good credit card rewards program; the best way to qualify for it is through a Merrill Edge account.

It’s helpful to have a holistic view of all your investments in different accounts at different places. Some brokers offer functionality to track investments held elsewhere. I use the Full View feature from Fidelity.

Many bloggers recommend Personal Capital because Personal Capital pays bloggers for referrals. I’m not paid by Fidelity to write this. I’m only writing as a Fidelity customer.

Hosted by eMoney

Fidelity’s Full View feature is hosted by eMoney. eMoney is a popular financial planning software used by financial advisors, with the highest market share according to one survey. Because financial advisors need to see the full picture of a client’s investments in multiple accounts before they give advice, eMoney has built features to pull in account and holdings information from a wide array of sources. It analyzes the aggregated data for financial advisors.

Fidelity bought eMoney some years ago. When you activate the Full View feature in your Fidelity online account, Fidelity basically creates a limited account for you on the eMoney platform through single sign-on. Because eMoney already has the account aggregation and portfolio analysis functionality and eMoney maintains it on an ongoing basis for financial advisors anyway, Fidelity gets the features for retail investors at no additional cost.

Full View is hosted by eMoney but the financial planning features of eMoney aren’t accessible in Full View unless you work with a Fidelity advisor.

If you don’t have a Fidelity account, you can open a small account or register a guest login to use Full View.

Activate Full View

To activate or access Full View, click on Accounts & Trade in the top menu and then Full View.

You’ll be asked to agree to the terms and conditions. You can unsubscribe from Full View in Settings on the top right if you don’t like it after you try it.

(Optional) Add Spouse

If you’re married, you can choose to add an entry for your spouse in Full View. This way you can differentiate accounts owned by you, your spouse, and joint accounts. Skip this part if you don’t care to differentiate account ownership.

Click on Organizer in the menu and then click on your name.

Click on Edit next to Basic Info and change your Marital Status to Married. Then you’ll see a link to add your spouse.

Link Account

Fidelity accounts are automatically populated in Full View, including accounts that you’re authorized to access. If you’re married and you’d like to track accounts owned by both of you, it’s best to get authorization from your spouse in Fidelity first. See How to Manage a Family Member’s Fidelity Accounts.

You can link non-Fidelity accounts or you can add them manually. Linking accounts is the most convenient but it depends on where you have your other accounts.

Some financial institutions treat eMoney as an approved application to pull information through a secure read-only interface. Because eMoney is widely used by financial advisors, these financial institutions have vetted eMoney’s security and they’re comfortable providing special access to eMoney.

Choose “I have an online login to this account” to link an account.

When you search for the name of the financial institution, if it says “via Direct Web Service” or “via Direct Web API” it means the accounts can be linked through a special back channel. Charles Schwab and Vanguard fall into this camp. I linked my Vanguard accounts in Full View.

You enter your username and password once in Full View. eMoney pulls data through a secure special channel. Vanguard and Charles Schwab don’t require two-factor authentication (2FA) from eMoney because they treat eMoney as a trusted aggregation service.

When your non-Fidelity accounts are linked in Full View, any changes in the accounts are automatically reflected in Full View. Try linking your accounts first. eMoney has built connections to many financial institutions.

Add Account Manually

If you only see “via Direct Web Access” when you search for the financial institution for linking, it means the institution doesn’t provide a special back channel to eMoney.

In that case eMoney logs in online with your username and password. This is problematic when your account requires a security code. It works once but it stops working the next time because eMoney can’t get your security code.

Merrill Edge falls into this camp. I had to add my Merrill Edge account manually.

You can also choose to always add your account manually if you aren’t comfortable entering your password in eMoney.

Choose “I don’t have an online login to this account” when you add an account manually.

Leave these values blank if you want to use the portfolio analysis feature to look into the holdings in this account.

Click on the account you just added and then click on Holdings. Now you can add holdings with the ticker symbols and the numbers of shares. eMoney will update the account values with daily share prices but if the holdings and the numbers of shares change, you’ll have to update them manually, whereas linked accounts are automatically updated daily.

(Optional) Link Spending Accounts

Full View also supports linking bank accounts and credit cards to track spending. Because most people don’t go to a financial advisor for advice on budgeting and spending, I suspect these features aren’t a high priority in eMoney. It works, but don’t expect bells and whistles.

I linked my credit cards from Bank of America just to see how it works. Full View pulls in my credit card transactions and puts them into spending categories (groceries, gas, travel, …). Sometimes it categorizes correctly; sometimes it doesn’t. You can correct the category for a transaction and define a rule to help it categorize correctly next time.

You get a pie chart and a list of how much you spent in each category in a set time period. The spending transactions only live in eMoney. Fidelity personnel can’t see your spending data.

Linking spending accounts is completely optional. It doesn’t affect the portfolio tracking part.

Net Worth Statement

After you add all your accounts, head over to Reports in the menu.

The Net Worth Statement report shows the values of all your accounts grouped by account type (taxable, pre-tax, Roth, HSA) and by ownership (you, spouse, joint).

This report gives a good summary of your accounts. If some accounts aren’t categorized correctly, you can go back to the list of accounts and edit the account type and ownership.

You can also add real estate and loan accounts in Full View to have them included in this Net Worth Statement report.

I print this report to give my wife a global view of our accounts.

Asset Allocation

Now go to Investments in the menu.

The Summary tab shows the total portfolio value and a breakdown by account.

eMoney categorizes each of your holdings into one or more asset classes. The Allocation tab shows a pie chart and a table of your asset allocation by asset class.

I print the asset allocation page to show my wife how our money is invested.

Fidelity GPS

The limited analysis features exposed in Full View are good for a broad view. You get a summary by account type and ownership, and you get your asset allocation by asset class. More portfolio metrics are back in Fidelity proper, which reads from Full View.

Click on Accounts & Trade -> Portfolio to get back to your Fidelity online account.

Click on the Analysis tab to the right of Summary, Positions, … If you’re using the Beta view, Analysis is under the More tab.

This sends you to Fidelity GPS, which stands for Guided Portfolio Summary. Fidelity GPS analyzes all investment accounts you have in Full View. This makes it worthwhile to add your non-Fidelity accounts in Full View.

The analysis is only based on holdings. It doesn’t include personal investment performance.

Stock Analysis

Stock Analysis shows you a Morningstar Instant X-Ray type of style box breakdown compared to the total stock market.

Fixed Income Analysis

Fixed Income Analysis shows your bond holdings by sector.

GPS Report

There are a number of other metrics in Fidelity GPS. You can click on the different menu items for more analysis or you can click on Reports on the right to generate a 30-page PDF report that includes all the analysis.

Review the report at your leisure and share it with your spouse.

***

It’s great to have a global view of all your accounts. If your accounts can be linked, having them automatically updated in Full View saves time. Fidelity GPS provides a more in-depth analysis of your entire portfolio, including both Fidelity accounts and non-Fidelity accounts you have in Full View.

Having all accounts in Full View also feeds into Fidelity’s retirement planning tool. I wrote about that tool three years ago. I’ll provide an update shortly.

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