Harry Sit's Blog, page 20
April 5, 2022
How To Buy Treasury Bills & Notes Without Fee at Online Brokers
[Updated and rewritten on April 5, 2022.]
When you’d like to invest for a guaranteed return, I Bonds are no doubt the best deal right now (see How to Buy I Bonds). However, the government imposes an annual purchase limit on I Bonds. After you buy all the I Bonds you can buy, if you still would like to invest a sum of money for a fixed term, buying CDs directly from a bank or credit union used to be the answer but that’s not the case today.
Table of ContentsTreasuries Beat CDs NowOrder WindowYield Determined by AuctionSellingTaxesFidelityVanguardCharles SchwabMerrill EdgeE*TradeTreasuries Beat CDs NowWhen the Fed started raising interest rates, the financial markets responded right away. Banks and credit unions are still slow to raise the rates they pay on savings accounts and CDs because they don’t need more deposits and they rely on people’s inertia and ignorance of the going rates.
I read this headline from DepositAccounts.com — Latino Community Credit Union Unveils Very Competitive Super Jumbo CDs. These super jumbo CDs require a minimum deposit of $200,000 and they pay the top rates of all CDs tracked by DepositAccounts.com. However, those rates were much lower than the yields on Treasuries of comparable maturities on the date the CDs came out.
Super Jumbo CDTreasury Note12-month1.1%1.7%24-month1.8%2.4%36-month2.1%2.6%48-month2.15%2.6%In addition, Treasuries require a minimum investment of only $1,000, the interest is exempt from state and local taxes, and you can buy them in your existing brokerage account. Why in the world would someone buy these CDs from this credit union?
Because people don’t know they can buy Treasuries so easily for a higher yield than CDs at this moment.
When you already have a TreasuryDirect account for I Bonds, you can use the same account to buy regular Treasuries but it’s easier to buy them in a brokerage account. You can buy new-issue Treasuries through the top 3 brokerage firms Fidelity, Vanguard, and Charles Schwab with no fee whatsoever.
Order WindowYou only have to know when the U.S. government will sell a new batch of Treasuries next time. Right now the government sells shorter maturities weekly and longer maturities monthly. You don’t have to wait long for the next sale.
MaturitySale Frequency4-week, 8-week, 13-week, 26-weekweekly52-week, 2-year, 3-year, 5-yearmonthlyThe exact dates are published in the Tentative Auction Schedule from the U.S. Treasury. The schedule lists three dates — the Announcement Date, the Auction Date, and the Settlement Date. You only need to pay attention to the first two dates to know the window for placing your order.
You place your order between the afternoon of the Announcement Date and the night before the Auction Date. For example, if you’d like to invest a sum of money for two years, the schedule shows a 2-year note will be announced on Thursday, April 21 and it will be auctioned on Tuesday, April 26. You will see it offered in your brokerage account on the afternoon of the Announcement Date (April 21). You should have your order in by the night before the Auction Date (April 26).
So check the sale schedule and set a calendar reminder for yourself to place the order within the order window.
Yield Determined by AuctionThe actual yield you’ll receive is determined by an auction but you don’t have to worry about any bidding. You only say how much you’d like to buy in your order. The banks will do the bidding and you are just tagging along. You get the same yield for your tiny $1,000 purchase as a bank buying $100 million. You can get a feel of where the yield might land by checking Daily Treasury Par Yield Curve Rates (click on the first link on the webpage).
Treasury bills (1-year or shorter) are sold at a discount to face value. You pay slightly less than $1,000 for each $1,000 bill. When the bill matures you receive the full $1,000 in your brokerage account. The difference is your interest. Treasury notes (2-year and above) are sold at slightly less than face value. You receive interest payments in your brokerage account every six months.
SellingIf you hold the Treasury to its maturity, you don’t have to do anything extra. The face value will magically appear in your account after it matures.
Some brokers offer an optional “auto roll” feature. If you enable the “auto roll” feature when you buy the Treasury, the broker will automatically use the money from the matured Treasury to buy another new-issue Treasury of the same face value and the same term.
If you decide to sell before the Treasury matures, you can sell it online at any time through the broker. The price will be at the market price at that time, which may be higher or lower than your original purchase price.
TaxesWhen you buy Treasuries in a taxable brokerage account, the brokerage firm will send you the necessary tax form for your taxes after the end of the year. The interest earned on Treasuries is exempt from state and local taxes.
FidelityHere are the steps for placing an order for new-issue Treasuries with Fidelity.

Under News & Research on the top, click on Fixed Income, Bonds & CDs.

Click on the New Issues tab. You pay no extra fee only when you buy a new issue.

You’ll see a list of upcoming issues in the Treasury section. If you don’t see anything for the term you’d like to buy, check the calendar from U.S. Treasury and come back within your order window.
You’ll see the maturity date of each issue and the expected yield. The expected yield is only an estimate. You’ll know the actual yield only after your order executes but you can be sure you’ll always get the best yield determined by the market. Click on Trade to buy the issue you are interested in.
You may see either the “old” order entry screen or the “new” order entry screen next. Either one works. Only the look and feel are different.


Treasuries are sold in $1,000 increments in a brokerage account. Enter a quantity of 1 if you’d like to buy $1,000 worth. It will cost slightly less than $1,000 when it’s all said and done. Fidelity lets you set up Auto Roll to automatically buy another Treasury of the same term and the same amount when this Treasury matures. It’s convenient when you’re investing in short-term Treasury Bills.
If you turn on Auto Roll, when it’s time to roll to the next one, you may receive an email saying you don’t have enough cash in your account to cover the new purchase. Don’t worry. The matured Treasury will cover the new purchase just in time. See comments from Mapleton Reader.
Again, there is no fee whatsoever from Fidelity when you buy new-issue Treasuries. Have cash ready in your account. You’ll have Treasuries when the auction settles.
VanguardHere are the steps to buy new-issue Treasuries in a Vanguard brokerage account.

Click on the Transact dropdown next to your account and scroll to the bottom. Click on Trade bonds or CDs.

Click on the Treasuries tab and then the Auction radio button. Be sure to select “Auction.” You pay no extra fee only when you buy a new issue.

You will see a list. The Treasuries available for accepting orders will have a Buy link. If you don’t see a Buy link for the term you’d like to buy, check the calendar from U.S. Treasury and come back within your order window.

Vanguard goes by the face amount on the order page. Your order amount must be in $1,000 increments with a minimum of $1,000 and a maximum of $5 million. Vanguard doesn’t offer the Auto Roll feature. Similar to Fidelity, there is no fee whatsoever from Vanguard when you buy new-issue Treasuries.
Charles SchwabYou can buy new-issue Treasuries at Charles Schwab as well. There is also no fee whatsoever from Schwab. I don’t have an account with Schwab but a reader sent me these screenshots from their account.

Click on Trade in the top menu and then Find Bonds & Fixed Income.

Click on New Issues.

Choose Treasury Auctions in the Bond Type dropdown.

You will see a list of issues available for new orders. If you don’t see anything for the term you’d like to buy, check the calendar from U.S. Treasury and come back within your order window.

Your order must be in $1,000 increments. If you turn on the Auto-Rollover feature, Schwab will automatically enter a new order for the same term and the same amount when this Treasury matures. If you leave the Auto-Rollover feature off, you’ll just have cash when this Treasury matures.
Merrill EdgeMerrill Edge doesn’t support buying new-issue Treasuries online. Placing an order through a representative by phone costs $30. You can buy Treasuries on the secondary market online but the price quote includes a markup.
E*TradeE*Trade’s commission schedule says their fee is $0 for buying new-issue Treasuries but I don’t have screenshots for how to do it because I don’t have an account with E*Trade.
***
Buying new-issue Treasuries in a brokerage account come down to:
Check the current rates and decide how long you will invest the money.Check the auction schedule to see when the next sale for your desired term will come up.Set a calendar reminder to place your order within the order window.Have cash ready to go in your account.Place your order. Wait for the auction and settlement.Automatically receive interest in your account every six months (only 2-year Treasury Notes and up). Automatically receive the face value when it matures.You can also buy “pre-owned” Treasuries on the secondary market but you’ll have to pay a bid/ask spread there. You’re better off waiting for a new issue unless the term you want to buy isn’t available as a new issue (for example, no 9-month or 4-year terms are offered as a new issue), or for some reason you must buy them today.
Learn the Nuts and Bolts
The post How To Buy Treasury Bills & Notes Without Fee at Online Brokers appeared first on The Finance Buff.
How To Buy Treasury Bills Without Fee at Fidelity or Vanguard
[Updated and rewritten on April 5, 2022.]
When you’d like to invest for a guaranteed return, I Bonds are no doubt the best deal right now (see How to Buy I Bonds). However, the government imposes an annual purchase limit on I Bonds. After you buy all the I Bonds you can buy, if you still would like to invest a sum of money for a fixed term, buying CDs directly from a bank or credit union used to be the answer but that’s not the case today.
When the Fed started raising interest rates, the financial markets responded right away. Banks and credit unions are still slow to raise the rates they pay on savings accounts and CDs because they don’t need more deposits and they rely on people’s inertia and ignorance of the going rates.
Treasuries Beat CDs NowI read this headline from DepositAccounts.com — Latino Community Credit Union Unveils Very Competitive Super Jumbo CDs. These super jumbo CDs require a minimum deposit of $200,000 and they pay the top rates of all CDs tracked by DepositAccounts.com. However, those rates were much lower than the yields on Treasuries of comparable maturities on the date the CDs came out.
Super Jumbo CDTreasury Note12-month1.1%1.7%24-month1.8%2.4%36-month2.1%2.6%48-month2.15%2.6%In addition, Treasuries require a minimum investment of only $1,000, the interest is exempt from state and local taxes, and you can buy them in your existing brokerage account. Why in the world would someone buy these CDs from this credit union?
Because people don’t know they can buy Treasuries so easily for a higher yield than CDs at this moment.
When you already have a TreasuryDirect account for I Bonds, you can use the same account to buy regular Treasuries but it’s easier to buy them in a brokerage account. You can buy new-issue Treasuries through the top 3 brokerage firms Fidelity, Vanguard, and Charles Schwab with no fee whatsoever.
Order WindowYou only have to know when the U.S. government will sell a new batch of Treasuries next time. Right now the government sells shorter maturities weekly and longer maturities monthly. You don’t have to wait long for the next sale.
MaturitySale Frequency4-week, 8-week, 13-week, 26-weekweekly52-week, 2-year, 3-year, 5-yearmonthlyThe exact dates are published in the Tentative Auction Schedule from the U.S. Treasury. The schedule lists three dates — the Announcement Date, the Auction Date, and the Settlement Date. You only need to pay attention to the first two dates to know the window for placing your order.
You place your order between the afternoon of the Announcement Date and the night before the Auction Date. For example, if you’d like to invest a sum of money for two years, the schedule shows a 2-year note will be announced on Thursday, April 21 and it will be auctioned on Tuesday, April 26. You will see it offered in your brokerage account on the afternoon of the Announcement Date (April 21). You should have your order in by the night before the Auction Date (April 26).
So check the sale schedule and set a calendar reminder for yourself to place the order within the order window.
Yield Determined by AuctionThe actual yield you’ll receive is determined by an auction but you don’t have to worry about any bidding. You only say how much you’d like to buy in your order. The banks will do the bidding and you are just tagging along. You get the same yield for your tiny $1,000 purchase as a bank buying $100 million. You can get a feel of where the yield might land by checking Daily Treasury Par Yield Curve Rates (click on the first link on the webpage).
Treasury bills (1-year or shorter) are sold at a discount to face value. You pay slightly less than $1,000 for each $1,000 bill. When the bill matures you receive the full $1,000 in your brokerage account. The difference is your interest. Treasury notes (2-year and above) are sold at slightly less than face value. You receive interest payments in your brokerage account every six months.
When you buy in a taxable brokerage account, the brokerage firm will send you the necessary tax form for your taxes.
FidelityHere are the steps for placing an order for new-issue Treasuries with Fidelity.

Under News & Research on the top, click on Fixed Income, Bonds & CDs.

Click on the New Issues tab. You pay no extra fee only when you buy a new issue.

You’ll see a list of upcoming issues in the Treasury section. You’ll see the maturity date of each issue and the expected yield. The expected yield is only an estimate. You’ll know the actual yield only after your order executes but you can be sure you’ll always get the best yield determined by the market. Click on Trade to buy the issue you are interested in.

Treasuries are sold in $1,000 increments in a brokerage account. Enter a quantity of 1 if you’d like to buy $1,000 worth. It will cost slightly less than $1,000 when it’s all said and done. Fidelity lets you set up Auto Roll to automatically buy another Treasury of the same term when this Treasury matures. It’s convenient when you’re investing in short-term Treasury Bills.
Again, there is no fee whatsoever from Fidelity when you buy new-issue Treasuries. Have cash ready in your account. You’ll have Treasuries when the auction settles.
VanguardHere are the steps to buy new-issue Treasuries in a Vanguard brokerage account.

Click on the Transact dropdown next to your account and scroll to the bottom. Click on Trade bonds or CDs.

Click on the Treasuries tab and then the Auction radio button. Be sure to select “Auction.” You pay no extra fee only when you buy a new issue.

You will see a list. The Treasuries available for accepting orders will have a Buy link. If you don’t see a Buy link for the term you’d like to buy, check the calendar from U.S. Treasury and come back within your order window.

Vanguard goes by the face amount on the order page. Vanguard doesn’t offer the Auto Roll feature. Similar to Fidelity, there is no fee whatsoever from Vanguard when you buy new-issue Treasuries.
Charles SchwabYou can buy new-issue Treasuries at Charles Schwab as well. There is also no fee whatsoever from Schwab. I don’t have screenshots because I don’t have an account with Schwab.
***
Buying new-issue Treasuries in a brokerage account come down to:
Check the current rates and decide how long you will invest the money.Check the auction schedule to see when the next sale for your desired term will come up.Set a calendar reminder to place your order within the order window.Have cash ready to go in your account.Place your order. Wait for auction and settlement.You can also buy “pre-owned” Treasuries on the secondary market but you’ll have to pay a bid/ask spread there. You’re better off waiting for a new issue unless for some reason you must buy them today.
Learn the Nuts and Bolts
The post How To Buy Treasury Bills Without Fee at Fidelity or Vanguard appeared first on The Finance Buff.
March 19, 2022
Free E-File State Tax Return Directly on the State’s Website
When I was ready to e-file my tax returns through TurboTax downloaded software, it said that federal e-file was free and I could pay another $25 to e-file the state tax return at the same time. Considering that I paid only $30 for the software that includes all the complex logic to prepare both the federal and the state tax returns, $25 for simply transmitting the data and only for the state portion seems outrageous.
It isn’t just TurboTax. H&R Block does the same. Federal e-file is free but you must pay extra if you also want to e-file the state return. Only New York bans tax software vendors from charging extra for e-filing the state return.
No doubt many people relent and just pay the $25. Tax software vendors know it, and they’re counting on this for their revenue. I can afford $25. I would have no problem with it if they included it in the price up front and sold the software for $55 as opposed to $30. I just hate this sneaky tactic.
Printing and mailing the state return isn’t necessarily the only alternative though. Many states accept e-filing directly on the state revenue agency’s website. E-filing a return on the state’s website only takes a few minutes when you already have the completed forms from the tax software.
The web form on my state’s website is just an interactive representation of the same paper form. Besides personal information, I basically entered two numbers from my federal tax return – the AGI and the standard deduction. All the rest were automatically calculated.
Here I collected the available direct e-file links for all 50 states and Washington, DC. If your state offers direct e-file, at least try it once. You can always go back to paying $25 if you don’t like e-filing directly. If your state doesn’t offer direct e-file, printing and mailing isn’t that bad either. I’d done that before for many years and I never had any problems.
You save $25, and more importantly, you feel good about not falling for a big corporation’s pricing game. You get the better product when you use downloaded tax software and you pay nearly half the price than using the software online.
StateFree Direct E-FileAlabamaNo direct e-fileAlaskaNo state income taxArizonaNo direct e-fileArkansasNo direct e-fileCaliforniaCalFileColoradoRevenue OnlineConnecticutTaxpayer Service CenterDelawareDivision of RevenueDistrict Of ColumbiaMyTax DCFloridaNo state income taxGeorgiaNo direct e-fileHawaiiHawaii Tax OnlineIdahoNo direct e-fileIllinoisMyTax IllinoisIndianaNo direct e-fileIowaNo direct e-fileKansasKansas WebFileKentuckyKY FileLouisianaLouisiana File and Pay OnlineMaineMaine I-FileMarylandiFileMassachusettsMassTaxConnectMichiganNo direct e-fileMinnesotaNo direct e-fileMississippiNo direct e-fileMissouriNo direct e-fileMontanaMT QuickFileNebraskaNebFileNevadaNo state income taxNew HampshireNo direct e-fileNew JerseyNew Jersey Online Income Tax FilingNew MexicoTaxpayer Access PointNew YorkSoftware vendors can’t charge for e-fileNorth CarolinaNo direct e-fileNorth DakotaNo direct e-fileOhioI-FileOklahomaOkTAPOregonNo direct e-filePennsylvaniamyPATHRhode IslandNo direct e-fileSouth CarolinaNo direct e-fileSouth DakotaNo state income taxTennesseeNo state income taxTexasNo state income taxUtahTaxpayer Access PointVermontNo direct e-fileVirginiaNo direct e-fileWashingtonNo state income taxWest VirginiaNo direct e-fileWisconsinWI e-fileWyomingNo state income taxLearn the Nuts and Bolts
The post Free E-File State Tax Return Directly on the State’s Website appeared first on The Finance Buff.
March 14, 2022
The Best Tax Software for Foreign Tax Credit (IRS Form 1116)
After reading my previous post Too Much Hassle in Claiming Foreign Tax Credit on IRS Form 1116, several readers said they used tax software OLT this year because OLT had supported Form 1116 and its Schedule B sooner than TurboTax. My gut reaction was:
Project Management TriangleIt’s great that OLT was able to do it fast but does it produce the correct numbers?
In other words, does the project management triangle still hold?
[image error]Mapto, Public domain, via Wikimedia CommonsYou know the saying you can have any two out of the three — good, fast, and cheap — but not all three at the same time. Which two will you pick?
I posited in my previous post that the majority of Form 1116’s filed using the H&R Block software are wrong because users don’t realize that it asks them to calculate adjustments manually outside the software, and they don’t see the option to bypass manual adjustments when it’s hidden in the Forms mode. How well does OLT do?
A Four-Way TestI made up a simple test case:
John, single, earned $50,000 as an independent contractor. He received $5,000 in dividends from an international stock fund, 100% of which was foreign-source income. $4,000 out of the $5,000 was qualified dividends. The fund reported $500 in foreign taxes paid. John had no other income or deductions.
I ran this in four different software packages:
TurboTax Deluxe (download version)H&R Block Premium (download version)FreeTaxUSA (online only)OLT (online only)I took the default path in each software, i.e. how a typical user would use it. Here are the bottom-line results:
Foreign Tax CreditTurboTax$349H&R Block$435FreeTaxUSA$349OLT$381Four software packages, three different answers. Don’t you love it?
AnalysisNow, which answer is correct? Based on my limited understanding of how it should work, I say TurboTax and FreeTaxUSA did it correctly for this simple case, although I don’t see FreeTaxUSA generating the necessary Schedule B to carry the excess credit to next year. H&R Block and OLT calculated the wrong credit amount. FreeTaxUSA calculated the correct credit amount this time because the user qualifies for the adjustment exception. It will do it wrong when the user doesn’t qualify.
H&R Block and OLT won’t always give the wrong answer. You’ll get 100% credit when there’s a wide gap between the foreign taxes paid and the maximum credit allowed. Even if the software calculates the maximum credit wrong, the error may not be large enough to affect your bottom-line number. The thing is, you never know when the faulty logic in the software affects the final number and when it doesn’t. Even if the final number happens to be correct, the Form 1116 you’re filing is still wrong because other numbers on that form are wrong.
Of the four tested, only TurboTax calculates the required adjustment to your foreign-source income when you don’t qualify for the adjustment exception. The other three all ask you to read the instructions and calculate the required adjustment manually outside the software. Because most users don’t realize this, they’ll misrepresent their income when they don’t adjust. Even if they realize they must adjust, it’s quite difficult to calculate the adjustment anyway, which is why H&R Block, FreeTaxUSA, and OLT wash their hands of it in the first place. They turn lazy programming into a user error —
“I said you might need to adjust the income. It’s not my fault that you didn’t.”
When you do qualify for the adjustment exception, as in the test case used here, H&R Block doesn’t make it easy to activate the exception in the interview. You have to know to look for that option in the Forms mode. H&R Block and OLT calculate incorrectly because they omit above-the-line deductions. FreeTaxUSA calculates correctly but it doesn’t include the necessary Schedule B for you to carry the excess credit to the following year.
The WinnerWhen it comes to a complex tax form such as Form 1116, producing the correct numbers should be the top priority. Fast and cheap isn’t the right approach when it’s difficult to verify whether the results are correct. Although TurboTax was late in supporting Form 1116 and the new Schedule B, it was worth the wait.
If you’re stuck with filing Form 1116 for the foreign tax credit, use TurboTax. I’m so glad to get out of this though, for reasons I mentioned in the previous post Too Much Hassle in Claiming Foreign Tax Credit on IRS Form 1116. Even with TurboTax, I have no interest in becoming an expert in Form 1116.
Learn the Nuts and Bolts
The post The Best Tax Software for Foreign Tax Credit (IRS Form 1116) appeared first on The Finance Buff.
March 11, 2022
Too Much Hassle in Claiming Foreign Tax Credit on IRS Form 1116
When a mutual fund or ETF invests in international stocks, some foreign governments tax the fund on its income. The taxes paid to the foreign governments lower the fund’s return. If you have the fund in an IRA, there’s no way to recover those taxes. You just have to live with the lower return.
However, if you have the international stock fund in a regular taxable account, the U.S. government lets you claim a foreign tax credit on the taxes paid to foreign governments. Because this lowers your taxes, it favors keeping the international stock fund in a regular taxable account as opposed to in an IRA.
Dividend Yield and Qualified Dividend RatioThe foreign tax credit isn’t the only factor though. International stock funds tend to pay out a higher dividend. A higher percentage of their dividends also tends to be non-qualified, which are taxed at a higher rate than qualified dividends.
For example, Vanguard Total Stock Index Fund, which invests in U.S. stocks, paid out 1.3% as dividends last year and 95% of its dividends were qualified. Vanguard Total International Stock Index Fund paid out 3.2% last year and only 65% of its dividends were qualified. Both the higher dividend payout and the lower percentage of qualified dividends raise your taxes when you hold an international stock fund in a regular taxable account.
In addition, the higher dividends raise your AGI, which can have ripple effects on ACA health insurance subsidy, Net Investment Income Tax, tax on Social Security, Medicare IRMAA, and many other areas that key off the AGI.
How do you balance the two factors going in opposite directions? If you invest in both a U.S. stocks fund and an international stock fund and you have both IRAs and taxable accounts, which fund should you put in your IRA, and which fund should you put in a taxable account?
A Wash in the Grand SchemeLeif Dahleen at Physician On FIRE calculated with different funds in different tax brackets. Sometimes you’re better off holding international funds in an IRA, and sometimes you’re better off holding them in a taxable account. The absolute differences are close either way. I would call them a wash in the grand scheme.
Other practical considerations play a role when it’s more or less a wash dollar-wise.
Form 1116Claiming the foreign tax credit is as simple as putting a number on your tax return when you paid only a small amount of foreign taxes. The IRS sets that threshold at $300 for single filers and $600 for married filing jointly. When you paid more than $300/$600 in foreign taxes, the IRS doesn’t give the credit as easily. You have to file a Form 1116 with your tax return.
The whole purpose of Form 1116 is to see whether your foreign tax credit should be less than the full amount of the foreign taxes you paid. The two-page form comes with 24 pages of instructions. Receiving dividends from a mutual fund that invests in international stocks gets lumped with having wages, rental real estate, and mortgages in foreign countries.
Schedules K-2 and K-3The IRS is making it more difficult to claim the full foreign tax credit. Even though my small self-employed business has nothing to do with foreign countries, I still had to file 60 pages of nonsense schedules K-2 and K-3 on my business side only on the off chance that it might reduce the foreign tax credit on my personal return.
Adjust Foreign IncomeForm 1116 asks for your foreign-source income to see whether your foreign tax credit should be limited. H&R Block tax software has this seemingly innocent note when you enter the foreign-source income:
You might need to adjust this amount if it includes foreign capital gains or qualified dividends. To learn more, see the Form 1116 instructions, under Foreign Qualified Dividends and Capital Gains (Losses).
Because a portion of the dividend from your international stock fund is qualified dividend, they want you to learn how to adjust the income and give the already adjusted amount. If you actually attempt to read the 24-page Form 1116 instructions, you’ll see confusing adjustment procedures such as dividing your dividends into different buckets and multiplying them by 0, 0.4054, and 0.5405 respectively. Good luck with that!
Then you see in the instructions an adjustment exception that you may qualify for, but it isn’t easy to find how you can choose to use the adjustment exception. I daresay the majority of Form 1116’s filed using H&R Block software are wrong, because users don’t realize what that fine-print note means and they don’t activate the adjustment exception (available only in the Forms mode).
Some other software such as FreeTaxUSA doesn’t adjust the foreign income, period. It produces a wrong tax return when you don’t qualify for the adjustment exception.
Carryover on Schedule BThe IRS added a new Schedule B for Form 1116 to track the portion of foreign tax credit that you can’t claim in full. You carry the residual amount to the following year and try your luck again. TurboTax only started supporting Form 1116 at the beginning of March, and it only started supporting this new Schedule B today, March 11, which is more than halfway toward the tax filing deadline.
H&R Block tax software says this if you can’t claim 100% of your foreign taxes paid:

They ask you to download the form from the IRS website, complete it yourself, and attach it to your printed tax return. Oh boy. I thought the purpose of using tax software is to avoid having to fill out tax forms by hand.
Quit the GameSubjecting myself to the torture to see whether I can claim only 93% of the foreign taxes paid this year is totally not worth it to me. Even if it turns out you can claim 100%, you still have to go through the exercise.
I decided to quit this game in the spirit of making fewer things matter. I sold the international fund in my taxable account to buy a U.S. stock fund and I did the opposite in my IRA. I won’t have to worry about dealing with the foreign tax credit next year.
If you still want the foreign tax credit, try to limit your foreign taxes paid under the IRS threshold of $300 single, $600 married filing jointly. Or use TurboTax, which does a better job in handling Form 1116. See Foreign Tax Credit Form 1116 in TurboTax and H&R Block for a walkthrough.
Learn the Nuts and Bolts
The post Too Much Hassle in Claiming Foreign Tax Credit on IRS Form 1116 appeared first on The Finance Buff.
March 10, 2022
2022 2023 2024 Medicare Part B IRMAA Premium MAGI Brackets
[Updated on March 10, 2022 after the release of the inflation number for February 2022.]
Seniors age 65 or older can sign up for Medicare. The government calls people who receive Medicare beneficiaries. Medicare beneficiaries must pay a premium for Medicare Part B that covers doctors’ services and Medicare Part D that covers prescription drugs. The premiums paid by Medicare beneficiaries cover about 25% of the program costs for Part B and Part D. The government pays the other 75%.
Table of ContentsWhat Is IRMAA?2022 IRMAA Brackets2023 IRMAA Brackets0% Inflation Assumption5% Inflation Assumption2024 IRMAA Brackets0% Inflation Assumption5% Inflation AssumptionNickel and DimeIRMAA AppealNot Penalized For LifeWhat Is IRMAA?Medicare imposes surcharges on higher-income beneficiaries. The theory is that higher-income beneficiaries can afford to pay more for their healthcare. Instead of doing a 25:75 split with the government, they must pay a higher share of the program costs.
The surcharge is called IRMAA, which stands for Income-Related Monthly Adjustment Amount.
I haven’t seen any numbers that show how much collecting IRMAA really helps the government in the grand scheme. I’m guessing very little. One report said 7% of all Medicare beneficiaries pay IRMAA. Suppose the 7% pay double the standard premium, it changes the overall split between the beneficiaries and the government from 25:75 to 27:73. Big deal?
The income used to determine IRMAA is your AGI plus muni bond interest from two years ago. Your 2020 income determines your IRMAA in 2022. Your 2021 income determines your IRMAA in 2023. The untaxed Social Security benefits aren’t included in the income for determining IRMAA.
As if it’s not complicated enough for not moving the needle much, IRMAA is divided into five income brackets. Depending on the income, higher-income beneficiaries pay 35%, 50%, 65%, 80%, or 85% of the program costs instead of 25%. The lines drawn for each bracket can cause a sudden jump in the premiums you pay. If your income crosses over to the next bracket by $1, all of a sudden your Medicare premiums can jump by over $1,000/year. If you are married and both of you are on Medicare, $1 more in income can make the Medicare premiums jump by over $1,000/year for each of you.

* The last bracket on the far right isn’t displayed in the chart.
So if your income is near a bracket cutoff, see if you can manage to keep it down and make it stay in a lower bracket. Using the income from two years ago makes it a little harder.
2022 IRMAA BracketsThe IRMAA income brackets (except the very last one) are adjusted for inflation. Here are the IRMAA income brackets for 2022 coverage. Remember the income on your 2020 tax return (AGI plus muni interest) determines the IRMAA you pay in 2022. The income on your 2021 tax return (to be filed in 2022) determines the IRMAA you pay in 2023.
Part B Premium2022 Coverage (2020 Income)StandardSingle: <= $91,000Married Filing Jointly: <= $182,000
Married Filing Separately <= $91,000Standard * 1.4Single: <= $114,000
Married Filing Jointly: <= $228,000Standard * 2.0Single: <= $142,000
Married Filing Jointly: <= $284,000Standard * 2.6Single: <= $170,000
Married Filing Jointly: <= $340,000Standard * 3.2Single: < $500,000
Married Filing Jointly: < $750,000
Married Filing Separately < $409,000Standard * 3.4Single: >= $500,000
Married Filing Jointly: >= $750,000
Married Filing Separately >= $409,000IRMAA Brackets for 2022 Coverage
Source: Part B Costs, Medicare.gov
Higher-income Medicare beneficiaries also pay a surcharge for Part D. The income brackets are the same. The surcharges are relatively smaller in dollars.
2023 IRMAA BracketsIt’s too early to know for sure what the 2023 IRMAA brackets will be. Still, you can make reasonable estimates and give yourself some margin to stay clear of the cutoff points. If inflation is 0% from March 2022 through August 2022, these will be the 2023 numbers:
0% Inflation AssumptionPart B Premium2022 Coverage (2020 Income)2023 Coverage (2021 Income)StandardSingle: <= $91,000Married Filing Jointly: <= $182,000
Married Filing Separately <= $91,000Single: <= $96,000
Married Filing Jointly: <= $192,000
Married Filing Separately <= $96,000Standard * 1.4Single: <= $114,000
Married Filing Jointly: <= $228,000Single: <= $121,000
Married Filing Jointly: <= $242,000Standard * 2.0Single: <= $142,000
Married Filing Jointly: <= $284,000Single: <= $151,000
Married Filing Jointly: <= $302,000Standard * 2.6Single: <= $170,000
Married Filing Jointly: <= $340,000Single: <= $181,000
Married Filing Jointly: <= $362,000Standard * 3.2Single: < $500,000
Married Filing Jointly: < $750,000
Married Filing Separately < $409,000Single: < $500,000
Married Filing Jointly: < $750,000
Married Filing Separately < $404,000Standard * 3.4Single: >= $500,000
Married Filing Jointly: >= $750,000
Married Filing Separately >= $409,000Single: >= $500,000
Married Filing Jointly: >= $750,000
Married Filing Separately >= $404,0002023 IRMAA Brackets with 0% inflation
Because the formula compares the average of CPI numbers in a 12-month period over the average of CPI numbers in a base period, even if inflation is 0% in the following months, the average will still be higher than the average in the previous months. If inflation is positive, the IRMAA brackets for 2023 may be higher than these. If inflation is negative, which is rare but still possible, the IRMAA brackets for 2023 may be lower than the numbers above.

If inflation is 5% annualized from March 2022 through August 2022, these will be the 2023 numbers:
Part B Premium2022 Coverage (2020 Income)2023 Coverage (2021 Income)StandardSingle: <= $91,000Married Filing Jointly: <= $182,000
Married Filing Separately <= $91,000Single: <= $97,000
Married Filing Jointly: <= $194,000
Married Filing Separately <= $97,000Standard * 1.4Single: <= $114,000
Married Filing Jointly: <= $228,000Single: <= $122,000
Married Filing Jointly: <= $244,000Standard * 2.0Single: <= $142,000
Married Filing Jointly: <= $284,000Single: <= $152,000
Married Filing Jointly: <= $304,000Standard * 2.6Single: <= $170,000
Married Filing Jointly: <= $340,000Single: <= $182,000
Married Filing Jointly: <= $364,000Standard * 3.2Single: < $500,000
Married Filing Jointly: < $750,000
Married Filing Separately < $409,000Single: < $500,000
Married Filing Jointly: < $750,000
Married Filing Separately < $403,000Standard * 3.4Single: >= $500,000
Married Filing Jointly: >= $750,000
Married Filing Separately >= $409,000Single: >= $500,000
Married Filing Jointly: >= $750,000
Married Filing Separately >= $403,0002023 IRMAA bRACKETS WITH 5% inflation
As you can see from the two tables, there’s very little difference between assuming 0% inflation and 5% inflation from February 2022 through August 2022.
2024 IRMAA BracketsWe have zero data point as of right now for what the 2024 IRMAA brackets will be. If inflation is 0% from March 2022 through August 2023, these will be the 2024 numbers:
0% Inflation AssumptionPart B Premium2022 Coverage (2020 Income)2024 Coverage (2022 Income)StandardSingle: <= $91,000Married Filing Jointly: <= $182,000
Married Filing Separately <= $91,000Single: <= $97,000
Married Filing Jointly: <= $194,000
Married Filing Separately <= $97,000Standard * 1.4Single: <= $114,000
Married Filing Jointly: <= $228,000Single: <= $122,000
Married Filing Jointly: <= $244,000Standard * 2.0Single: <= $142,000
Married Filing Jointly: <= $284,000Single: <= $152,000
Married Filing Jointly: <= $304,000Standard * 2.6Single: <= $170,000
Married Filing Jointly: <= $340,000Single: <= $182,000
Married Filing Jointly: <= $364,000Standard * 3.2Single: < $500,000
Married Filing Jointly: < $750,000
Married Filing Separately < $409,000Single: < $500,000
Married Filing Jointly: < $750,000
Married Filing Separately < $403,000Standard * 3.4Single: >= $500,000
Married Filing Jointly: >= $750,000
Married Filing Separately >= $409,000Single: >= $500,000
Married Filing Jointly: >= $750,000
Married Filing Separately >= $403,0002024 IRMAA Brackets with 0% inflation5% Inflation Assumption
If inflation is 5% annualized from March 2022 through August 2023, these will be the 2024 numbers:
Part B Premium2022 Coverage (2020 Income)2024 Coverage (2022 Income)StandardSingle: <= $91,000Married Filing Jointly: <= $182,000
Married Filing Separately <= $91,000Single: <= $102,000
Married Filing Jointly: <= $204,000
Married Filing Separately <= $102,000Standard * 1.4Single: <= $114,000
Married Filing Jointly: <= $228,000Single: <= $128,000
Married Filing Jointly: <= $256,000Standard * 2.0Single: <= $142,000
Married Filing Jointly: <= $284,000Single: <= $160,000
Married Filing Jointly: <= $320,000Standard * 2.6Single: <= $170,000
Married Filing Jointly: <= $340,000Single: <= $192,000
Married Filing Jointly: <= $384,000Standard * 3.2Single: < $500,000
Married Filing Jointly: < $750,000
Married Filing Separately < $409,000Single: < $500,000
Married Filing Jointly: < $750,000
Married Filing Separately < $398,000Standard * 3.4Single: >= $500,000
Married Filing Jointly: >= $750,000
Married Filing Separately >= $409,000Single: >= $500,000
Married Filing Jointly: >= $750,000
Married Filing Separately >= $398,0002024 IRMAA bRACKETS WITH 5% inflationNickel and Dime
The standard Medicare Part B premium is $170.10/month in 2022. A 40% surcharge on the Medicare Part B premium is about $800/year per person or about $1,600/year for a married couple both on Medicare.
In the grand scheme, when a couple on Medicare has over $182,000 in income, they’re already paying a large amount in taxes. Does making them pay another $1,600 make that much difference? It’s less than 1% of their income but nickel-and-diming just makes people mad. People caught by surprise when their income crosses over to a higher bracket by just a small amount are angry at the government. Rolling it all into the income tax would be much more effective.
Oh well, if you are on Medicare, watch your income and don’t accidentally cross a line for IRMAA.
IRMAA AppealIf your income two years ago was higher because you were working at that time and now your income is significantly lower because you retired (“work reduction” or “work stoppage”), you can appeal the IRMAA assessment. The “life-changing events” that make you eligible for an appeal include:
Death of spouseMarriageDivorce or annulmentWork reductionWork stoppageLoss of income from income producing propertyLoss or reduction of certain kinds of pension incomeYou file an appeal by filling out the form SSA-44 to show that although your income was higher two years ago, you had a reduction in income now due to one of the life-changing events above. For more information on the appeal, see Medicare Part B Premium Appeals.
Not Penalized For LifeIf your income two years ago was higher and you don’t have a life-changing event that makes you qualify for an appeal, you will pay the higher Medicare premiums for one year. IRMAA is re-evaluated every year as your income changes. If your higher income two years ago was due to a one-time event, such as realizing capital gains or taking a large withdrawal from your IRA, when your income comes down in the following year, your IRMAA will also come down automatically. It’s not the end of the world to pay IRMAA for one year.
Learn the Nuts and Bolts
The post 2022 2023 2024 Medicare Part B IRMAA Premium MAGI Brackets appeared first on The Finance Buff.
February 22, 2022
When TurboTax and H&R Block Give the Wrong ACA Subsidy
[Updated on February 22, 2022 with a different example.]
When you’re self-employed, you can deduct your health insurance premium on your tax return. When you buy health insurance through the ACA healthcare marketplace, you can also get a premium subsidy when your income qualifies. The circular relationship between the self-employed health insurance deduction and the premium tax credit creates an interesting math problem.

After the IRS provided an iterative method for this math problem (see IRS Guidance On Circular Reference in ACA Premium Subsidy and Deduction), tax software vendors such as TurboTax and H&R Block implemented the calculation in their software. It solved the problem for most people. For a step-by-step walkthrough of how to make the software calculate the subsidy and the deduction, please see Self-Employed ACA Health Insurance Subsidy and Deduction In TurboTax and Self-Employed ACA Health Insurance Subsidy and Deduction In H&R Block Tax Software.
However, the calculation in the software still doesn’t work for everyone. Sometimes your specific numbers throw the software out of whack when the same software works perfectly fine with other numbers for other people. Worse yet, the software doesn’t warn you that its calculation is wrong. If you don’t know it’s wrong, you may miss out on large tax credits and deductions!
Here’s a simple example for which TurboTax and H&R Block tax software gives the wrong calculation:
Diane, single, earned $45,000 in self-employment income after all business expenses. She didn’t have any other income or deductions. After subtracting one-half of the self-employment tax, Diane’s MAGI before health insurance was $41,821. As a Texas resident, Diane paid $498/month for a health plan from the ACA healthcare marketplace ($5,976 total). The Second Lowest Cost Silver Plan in her zip code cost $600/month ($7,200 total). Diane received no advance subsidy from the ACA healthcare marketplace.
TurboTax calculated $810 in self-employed health insurance deduction (Schedule 1, Line 17) and $4,522 in premium tax credit (Form 8962, Line 24). We know this result makes no sense because Diane should be able to deduct the full amount not covered by the premium tax credit. Diane paid $5,976. If she receives $4,522 in premium tax credit, she should be able to deduct $5,976 – $4,522 = $1,454, not just $810.
In other words, this equation should hold true:
Self-Employed Health Insurance Deduction + Premium Tax Credit = Unsubsidized Health Insurance Premium (including any dental and vision premiums)
You know the tax software is giving you wrong numbers when the numbers fail the equation (except for a small difference due to rounding).
H&R Block tax software does better than TurboTax in this case. It calculates $1,378 in self-employed health insurance deduction (Schedule 1, Line 17) and $4,612 in premium tax credit (Form 8962, Line 24). This is a little too generous. Diane only paid $5,976 for her health policy but she’s getting $1,378 + $4,612 = $5,990 in tax deduction and tax credit.
A Better CalculatorMathematician Sam Ferguson first heard of this problem from a self-employed Uber driver when he was a Ph.D. student at NYU. He studied the math angles and found out why the calculation didn’t work in all cases. He wrote an alternative method in his paper Obamacare and a Fix for the IRS Iteration. When he spoke to the person in charge at the IRS, the IRS personnel acknowledged the problem but they didn’t treat it as a high priority when the existing method already worked for most people, just not for the edge cases.
Dr. Ferguson developed an online calculator with a software engineer. He authorized me to host it and keep it updated. Here’s the link:
You get these results when you run the same numbers using the better calculator:
CalculatorTurboTaxH&R BlockTax Deduction$1,375$810$1,378Subsidy$4,601$4,522$4,612
Appropriate subsidy amount: 4,601
With this subsidy, your net health insurance cost to be deducted on your tax return is: 5,976 – 4,601 = 1,375
With this net health insurance cost, your modified adjusted gross income is: 41,821 -1,375 = 40,446
If Diane simply goes with the wrong numbers from TurboTax, she will miss $79 in tax credit plus another $565 in tax deduction.
Overriding Tax SoftwareAfter getting the correct numbers from the calculator, you still need to find a way to have your tax software use those numbers. I couldn’t figure out how to override the wrong numbers in TurboTax Deluxe downloaded software. I’m not sure whether a different edition allows manual entries. I was able to figure out how to override in H&R Block software. If you use TurboTax and you run into this problem, consider switching to H&R Block software.
Although the H&R Block software is close enough for our example that it doesn’t need overriding, I’m showing you how to override H&R Block software in case its calculation is off by a larger amount for a different set of numbers. Overriding may prevent you from e-filing, but the inconvenience of having to file your return by mail sure beats missing out on a large deduction or tax credit.
In H&R Block downloaded software, click on Forms on the top, and then find “Self-Employed Health Insurance” in the forms list.

Double-click to open that form. Scroll down to Part VI. Right-click on Box a1 and click on Override. This will allow you to enter your manually calculated deduction.

Scroll further down to Part VII. Right-click on Box a and click on Override. Enter the deduction from the online calculator in the box below (in our example, $1,375).

Close this form. Find Form 8962 in the forms list.

Double-click to open Form 8962. Scroll down to Line 11. If the number in column E is different than the number from the online calculator, right-click on Line 11 column E and click on Override. Enter your manually calculated subsidy (in our example, $1,398). If you must use monthly numbers in Lines 12-23 as opposed to the annual totals in Line 11, do the override in Lines 12-23 column E.

That’ll do it. You should double-check that your Schedule 1 Line 17 shows the correct deduction and your Form 8962 Line 24 shows the correct subsidy.
Learn the Nuts and Bolts
The post When TurboTax and H&R Block Give the Wrong ACA Subsidy appeared first on The Finance Buff.
February 21, 2022
2021 Self-Employed ACA Health Insurance In H&R Block Software
Updated on February 21, 2022, with updated screenshots from H&R Block software for tax year 2021. If you use other tax software, see:
Self-Employed ACA Health Insurance Subsidy and Deduction In TurboTaxMany self-employed business owners buy health insurance from the Affordable Care Act (ACA) healthcare marketplace. Self-employed health insurance premiums are tax-deductible. When your income is low enough, you can also receive a subsidy in the form of a premium tax credit. The tax deduction and the subsidy form a circular relationship. The math is difficult to do by hand but tax software easily handles it for most people.
Use H&R Block Downloaded SoftwareThe screenshots below are taken 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.
Self-Employed Health InsuranceI’m using this scenario as an example:
You are single, self-employed, with no dependent. You had health insurance from the ACA healthcare marketplace for all 12 months in the year. 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 out of pocket. After deducting your business expenses, your income from self-employment was $45,000 for the year. You don’t have any other income or deductions.

Go to Federal -> Adjustments -> Self-Employed Health Insurance.

Enter the full unsubsidized premiums for your health insurance in the year. You find this number on the 1095-A form you receive from the ACA healthcare marketplace (line 33, column A). Include both what you paid out of pocket and the advance premium credit paid by the healthcare marketplace. You will reconcile the advance credit later.
If you also paid premiums for dental and vision insurance, add those as well. We don’t have dental and vision premiums in our example.
Right now it says 100% of your premium is deductible. It’ll change after you enter more information from your 1095-A form.
Enter 1095-A
Go to Federal -> Taxes -> Health Care Coverage.

Everyone had insurance in our example.

Check the box for a plan from the ACA healthcare marketplace.

We don’t have any of these unique situations here. Check the box for Alaska or Hawaii if you lived there.

This is a special deal in only 2020 and 2021. If you received unemployment compensation for only one week in the year, you get free (or nearly free) health insurance for the entire year. We didn’t receive unemployment.

We need to add the 1095-A from the ACA healthcare marketplace.

Enter the information as requested. Scroll down to Part III. The numbers on our 1095-A are the same for all 12 months and correct in our example. If you have different numbers for some months, choose ‘No’ and enter the month-by-month numbers from your Form 1095-A.

Enter the monthly amounts from the 1095-A. The full unsubsidized premium was $500/month. The full unsubsidized premium for the second lowest cost Silver plan was $600/month. The ACA healthcare marketplace paid $150/month in advance subsidy to the insurance company on our behalf.
We only have one 1095-A form in our example. If you have more than one, repeat and add them all.

Which months you were self-employed determines how much counts as deductible self-employed health insurance. We were self-employed in all 12 months in our example.

The software crunches the numbers. It says we are eligible for more premium tax credit than the advance subsidy the ACA healthcare marketplace already paid to the insurance company.
Self-Employed Health Insurance DeductionWe’re eligible for a tax deduction on the amount not covered by the re-calculated premium tax credit.

You can verify how much you are receiving a tax deduction. Click on Forms at the top. Double-click on Form 1040 and Schedules 1-3. Scroll down to Schedule 1 and look at line 17. That’s your self-employed health insurance deduction.
Premium Tax Credit
Close Form 1040 and Schedules 1-3 and find Form 8962 in the forms list. Double-click on it.

Scroll down to Line 24 on Form 8962. That’s our premium tax credit based on our actual income. Because we received less in advance subsidy, we’re getting the difference in our tax refund. If you received more in advance subsidy, you’ll have to pay back the difference (subject to a cap, see Cap On Paying Back ACA Health Insurance Subsidy Premium Tax Credit).
$1,388 in self-employed health insurance deduction plus $4,612 in premium tax credit equals $6,000. That’s the total unsubsidized premium for our health insurance (plus any dental and vision insurance premium, which we didn’t have in our example). The numbers add up!
The software figured out the split between the tax deduction and the tax credit. It also matched the result from TurboTax for the same example. This is where software does its best. If you take this to a tax professional, they will have to use their software to calculate the split anyway. I bet they are not able to do it by hand.
Edge CasesTax software 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 tax 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
The post 2021 Self-Employed ACA Health Insurance In H&R Block Software appeared first on The Finance Buff.
2021 Foreign Tax Credit Form 1116 in TurboTax and H&R Block
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 is over the $300/$600 threshold, you’ll need to include a Form 1116 in your tax return. I’ll show you how to do this in TurboTax and H&R Block software.
Table of ContentsTurboTaxEnter 1099-DIVForeign TaxesVerify on Schedule 3H&R Block SoftwareEnter 1099-DIVForeign Tax CreditVerify on Schedule 3SummaryI start with TurboTax. Please jump to the next section if you use H&R Block software.
TurboTaxThe 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.
I’ll use this simple scenario as an example:
Enter 1099-DIVYou 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.

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.
After you enter the 1099-DIV, TurboTax says nothing about exceeding the $300/$600 threshold or needing a Form 1116. You continue with the rest of your entries as usual.
Foreign Taxes
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.”
TurboTax isn’t ready with Foreign Tax Credit for the 2021 tax year yet as I wrote this. The following screenshots came from last year. I’ll replace them when TurboTax is ready.

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 income reported 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.

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

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

We don’t have any other foreign income or expenses. 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 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 on 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.
H&R Block SoftwareThe 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:
Enter 1099-DIVYou 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.
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.

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.

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.

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.

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.

We don’t have any carryover or carryback.

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.
SummaryBoth 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 also asks a number of questions that don’t apply to our simple scenario. It’s easy to click through those once you know they don’t apply.
Learn the Nuts and Bolts
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February 8, 2022
Backdoor Roth: Planned vs Unplanned
How to do the backdoor Roth and how to report it on the tax return are popular topics on this blog. Many people are doing the backdoor Roth pre-planned. They know their income is too high for contributing directly to their Roth IRA. So they do it indirectly through the backdoor. By following the complete how-to, they are able to make it tax-free and really easy to report on their tax return, whether they use TurboTax, H&R Block, or FreeTaxUSA.
Table of ContentsUnplanned Backdoor RothPro Rata RuleTax Return ConfusionHide Pre-Tax IRAsSplit Tax ReportingCatch UpUnplanned Backdoor RothMany others find themselves doing it unplanned. They contributed to their Roth IRA but they found out their income was too high only when they did their taxes. The tax software or their tax preparer told them they weren’t eligible to contribute to their Roth IRA for the previous year.
Then they learned that they could recharacterize their Roth IRA contribution as a Traditional IRA contribution — or if they haven’t yet contributed, just contribute to the Traditional IRA for the previous year — and then convert it to Roth. So they did. This made it an unplanned backdoor Roth.
As with many things in life, it’s much better to be proactive and do it planned as opposed to being reactive and doing it unplanned. There are some pitfalls in doing the backdoor Roth unplanned.
Pro Rata RuleFirst, there is that pro-rata rule. If you have other traditional, SEP, or SIMPLE IRAs, sometimes coming from a rollover from a previous 401k or 403b, the unplanned backdoor Roth will make you pay taxes at today’s high tax rate as if you converted some pre-tax money unless you “hide” those pre-tax IRAs.

The customer service rep at your IRA provider doesn’t know whether you have other IRAs. You could contribute or recharacterize to traditional and then convert, but it doesn’t necessarily mean you will owe zero taxes from doing so. That’s a big reason for not taking tax advice from customer service reps.
Tax Return ConfusionThen there is confusion from contributing *for* one year and converting *during* a different year.
When you are proactive, you can contribute for the current year and convert within the same year. It will make it clean and easy to report on your tax return.
When you are reactive, by the time you realize your income is too high, it’s already after December 31. You end up converting during the following year. Even when the conversion is tax-free because you don’t have other IRAs, you still have to deal with splitting the tax reporting in two different years. All the questions and confusion on how to report backdoor Roth come from this camp.
What should you do if you did an unplanned backdoor Roth?
Hide Pre-Tax IRAsIt would’ve been better to “hide” your other IRAs before you converted, but since you already converted, now it’s time to catch up on moving those pre-tax IRAs out of the way. If you leave the pre-tax IRAs alone to the end of the year in which you converted, you will trigger the pro-rata rule. So don’t wait.

Roll over your other pre-tax Traditional, SEP, and SIMPLE IRAs to a workplace retirement plan. Most employer plans accept incoming rollovers from pre-tax IRAs.
Split Tax ReportingWhen you contribute *for* one year and convert *during* a different year, you will have to split the tax reporting into two different years. You report the contribution on the tax return for the first year. You report the basis carried over from the first year and your conversion on the tax return for the second year. You will have to remember. The confusion is your penalty for doing it unplanned.

You were already caught by an unplanned backdoor Roth in one year. Don’t let it happen again. If there is any chance that your income may be too high again this year, resolve that you will be proactive and do a planned backdoor Roth from this year forward. When in doubt, do the planned backdoor. Don’t wait until next year.

After you contribute or recharacterize your contribution to the Traditional IRA for the prior year, also contribute to the Traditional IRA for the current year. Convert twice or simply convert both together. This way you break out of the cycle of doing it after the fact. It will be smooth next year.
Learn the Nuts and Bolts
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