Harry Sit's Blog, page 26

How To Enter Mega Backdoor Roth In H&R Block Tax Software

After writing a walkthrough for how to enter mega backdoor Roth in TurboTax and how to enter mega backdoor Roth in FreeTaxUSA, a reader asked me to do one for H&R Block software as well.

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.

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. Federal e-filing is included. State e-filing costs extra but you can simply print and mail or use the printed forms to file on your state government’s website.

Suppose you did a mega backdoor Roth last year. You’ll receive a 1099-R form from your 401k plan in January. You’ll need to account for it on your tax return. Here’s how to do it in H&R Block downloaded software.

In-Plan Rollover

You can do the mega backdoor Roth in two ways — rollover within the plan or withdraw to a Roth IRA. Rolling over 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 rolling over 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 the money was rolled over to the Roth account within the plan, your contributions earned $200. You rolled over $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 the entries into H&R Block software.

Go to Federal -> Income -> IRA and Pension Income (Form 1099-R).

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

The gross amount transferred 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 our 1099-R is unchecked.

We’re not a retired public safety officer.

We moved the money within the plan. The Roth 401k account is called 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.

The post How To Enter Mega Backdoor Roth In H&R Block Tax Software appeared first on The Finance Buff.

How To Enter Mega Backdoor Roth in FreeTaxUSA: A Walkthrough

I did a walkthrough of how to report backdoor Roth in FreeTaxUSA in a previous post. A reader asked me to do another walkthrough for how to report a mega backdoor Roth in FreeTaxUSA.

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 taking the money out (with earnings) to a Roth IRA or moving it to the Roth account within the 401k-type plan. 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.

FreeTaxUSA is inexpensive online tax software. It uses the freemium pricing model. Federal tax filing is free regardless of the complexity of the return. After you are done with federal, if you need to file a state return, it costs $12.95. They also offer an optional deluxe upgrade for $6.99, which includes audit assist, priority support, and amended returns. All told, with or without the deluxe upgrade, the total cost is under $20 and it includes e-filing for both federal and state.

Suppose you did a mega backdoor Roth last year. You’ll receive a 1099-R form from your 401k plan in January. You’ll need to account for it on your tax return. FreeTaxUSA makes it quite straightforward. Here’s how to do it in FreeTaxUSA.

In-Plan Rollover

You can do the mega backdoor Roth in two ways — rollover within the plan or withdraw to a Roth IRA. Rolling over 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 rolling over 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 the money was rolled over to the Roth account within the plan, your contributions earned $200. You rolled over $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 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 transferred to the Roth 401k account shows up in Box 1. The earnings are in Box 2. Box 2a is left unchecked. The amount of non-Roth after-tax contributions shows 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. 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 taxable 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. Look at Line 5 in your draft 1040 form.

The post How To Enter Mega Backdoor Roth in FreeTaxUSA: A Walkthrough appeared first on The Finance Buff.

When TurboTax and H&R Block Give Self-Employed Wrong ACA Subsidy

When you’re self-employed, you can deduct your health insurance premium on your tax return. When you buy health insurance through the ACA exchange, 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.

Tax Software

After the IRS provided an iterative method for this math problem in 2014 (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 In H&R Block Tax Software.

However, the iterative method from the IRS doesn’t work for everyone for 2020. If your income falls close to either end of the spectrum for receiving the premium subsidy, your tax software may give you wrong numbers. Worse yet, the software doesn’t warn you that the numbers are wrong. If you don’t know the numbers are wrong, you may miss out on possibly several thousand dollars worth of tax credits and deductions!

The American Rescue Plan Act of 2021, also known as President Biden’s stimulus package, is expected to become law shortly. It removes the ACA subsidy cliff in 2021 and 2022. This likely will make the IRS method in the tax software work for everyone for 2021 and 2022, but the problem remains for 2020, and it will start again in 2023 unless a new law extends the removal of the ACA subsidy cliff.

Here’s a simple example for which the IRS method as implemented by the tax software doesn’t work for 2020:

Diane, single, earned $60,000 in self-employment income after all business expenses in 2020. 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 $55,761. As a Texas resident, Diane paid $600/month for a health plan from the ACA exchange ($7,200 total). That plan was also the Second Lowest Cost Silver Plan in her zip code. Diane received no advance subsidy from the ACA exchange.

Both TurboTax and H&R Block tax software calculated $4,749 in self-employed health insurance deduction (Schedule 1, Line 16) and $0 in premium tax credit (Form 8962, Line 24). We know this result makes no sense because if Diane doesn’t get any premium tax credit she should be able to deduct 100% of her health insurance premium ($7,200). 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).

A Better Calculator

Mathematician Sam Ferguson heard 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 IRS method 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:

Self-Employed ACA Subsidy Calculator

Using this better calculator with our example shows:

Appropriate subsidy amount: 1,398

With this subsidy, your net health insurance cost to be deducted on your tax return is: 7,200 – 1,398 = 5,802

With this net health insurance cost, your modified adjusted gross income is: 55,761 – 5,802 = 49,959

This result makes sense because $5,802 in self-employed health insurance tax deduction plus $1,398 in ACA premium tax credit equals $7,200, which is her unsubsidized health insurance premium (we didn’t have any dental or vision premiums in our simple example).

Also, after deducting $5,802, Diane’s MAGI is $55,761 – $5,802 = $49,959. 400% of the Federal Poverty Line for a household of one person in the lower 48 states for 2020 coverage is $49,960. When Diane’s MAGI is just shy of the 400% FPL cut-off, she’s eligible for the premium tax credit. If Diane’s unsubsidized premium was higher she’d be eligible for more premium tax credit, but because she’s already deducting $5,802, her tax credit is capped to $7,200 – $5,802 = $1,398.

Tax SoftwareCalculatorTax Deduction$4,749$5,802Subsidy$0$1,398

If Diane simply goes with the wrong numbers from the tax software, she will miss $1,398 in tax credit plus another $1,053 in tax deduction. That’s a big difference.

Overriding Tax Software

After 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 override the wrong numbers in H&R Block software. If you use TurboTax and you run into this problem, consider switching to H&R Block software.

Overriding may prevent you from e-filing, but the inconvenience of having to file your return by mail sure beats missing out on thousands of dollars. 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, $5,802).

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 16 shows the correct deduction and your Form 8962 Line 24 shows the correct subsidy.

The post When TurboTax and H&R Block Give Self-Employed Wrong ACA Subsidy appeared first on The Finance Buff.

Make Backdoor Roth Easy On Your Tax Return

It’s tax filing time. I’ve been fielding a lot of questions on my articles about the backdoor Roth (if you are not familiar with it please read these first):

Backdoor Roth: A Complete How-ToHow To Report Backdoor Roth In TurboTaxHow To Report Backdoor Roth In H&R Block SoftwareHow to Report Backdoor Roth In FreeTaxUSA

One theme quickly emerged. All those who are confused were contributing to the traditional IRA for the previous year and then converting it to Roth. They made it too hard for themselves.

For example, they contributed to the traditional IRA for the previous year between January 1 and April 15 and then converted it to Roth. They are planning to contribute for the current year, again in the following year before April 15, before converting it to Roth. Although it’s OK to do so, it just gets very confusing at tax time when they do it this way.

The tax law requires that you report your traditional IRA contribution *for* that year and your converting to Roth *during* that year.

In the example above, the contribution made *for* year X in year X+1 goes on the tax return for year X. It has to carry over the tax basis to the return for year X+1. The conversion to Roth *during* year X+1 goes on the tax return for year X+1. The contribution *for* X+1 to be made in X+2 again goes on the tax return for year X+1 but the conversion *during* year X+2 must wait for the tax return for year X+2.

The tax return for the current year ends up having a basis carried over from the previous year, a conversion, a contribution (made in the next year), and a basis carried forward to the next year. The Form 8606 ends up looking like this:

This is very confusing.

The easy way to do it is to contribute for the current year rather than waiting until the following year. Contribute for year X in year X and convert in year X. Contribute for year X+1 in year X+1 and convert in year X+1. This way will be clean and neat. Both the contribution and the conversion go on the same tax return. You don’t carry over anything from one year to the next or wait until the following year to finish it off.

The Form 8606 when you are doing it the easy way looks like this:

That’s very clean.

If you are doing backdoor Roth, please do yourself a big favor and do it the easy way. Contribute for the current year and convert it in the same year. Contribute for year X in year X and convert during year X. Don’t wait until the following year. Otherwise you just confuse yourself at tax time.

If you must get caught up for one year, that’s fine. Contribute for the previous year before April 15, but also contribute for the current year in the current year, and convert both during the current year. You can convert more than once in any year, and there is no limit on the amount you convert. This way you will have a clean slate come next year, which lets you do it the easy way going forward.

Comments are closed because questions are becoming repetitive. Be sure to read existing comments for answers to questions similar to yours.

The post Make Backdoor Roth Easy On Your Tax Return appeared first on The Finance Buff.

Make Fewer Things Matter: My Epiphany From Cutting A Pineapple

I don’t do New Year’s Resolutions but I decided to make this my ongoing resolution for the foreseeable future: Make Fewer Things Matter. This dawned on me when I learned how to cut a pineapple.

I grew up in a northern climate. Because transportation wasn’t very good back then, pineapples were a rare treat. Whenever I saw them as a kid, they were cut by the purveyors into this delicate spiral shape. I always had two impressions of pineapples: (a) they were expensive; and (b) they were difficult to cut.

The Epiphany

I saw pineapples around last Christmas in a grocery store with a big sign: $2. I thought I’d spring for a treat for only $2. There goes my first wrong impression from childhood. Pineapples aren’t that expensive.

The next step was to learn how to cut it. Naturally, I went to YouTube and I watched the first video from the search.

To my big surprise, it was amazingly easy to cut a pineapple.

How come I got the impression they’re difficult to cut? YouTube’s autoplay feature served up the next video:

Now a light bulb went off. It’s not difficult to cut a pineapple. It’s only difficult when you want to maximize the amount of flesh. If you don’t care about maximizing the result, you can enjoy pineapples much more easily.

The lesson from cutting the pineapple connected the dots in so many issues in personal finance and investing. I came up with this motto: Make Fewer Things Matter.

The first emphasis in Make Fewer Things Matter is “make.” Things don’t stop mattering on their own. You don’t just ignore them. You do something to make them not matter. The next emphasis is “fewer.” Some things will still matter, but you reduce the number of them. Make a big list of things you think are important. Look at each item and look for ways to make it not matter. After you go through everything and you try to make them not matter, you’re left with a few things that truly matter.

Examples

Warren Buffett instructed that trustees should invest 90% in S&P 500 and 10% in short-term government bonds for his wife. Is 90% in stocks a good asset allocation for people her age? And the S&P 500 has only large cap U.S. stocks and short-term government bonds pay close to zero? Warren Buffett made it not matter how the money for his wife is invested.

While it’s hotly debated whether the 4% rule still holds in the current environment of high equity valuations and low bond yields, FIRE leaders make it not matter by keeping a positive cash flow.

Over at my post on Medicare IRMAA income brackets, people wanted to know where the income cutoff would be for next year. Because inflation used in the calculation hasn’t happened yet, it’s impossible to make an accurate projection within $2,000. But it’s dead simple to make it within $10,000. If you don’t mind leaving a larger margin of error, precisely what the number will be doesn’t matter.

I stopped updating my post on Social Security Cost of Living Adjustment (COLA) because the story is the same every year. Seniors complain COLA is too low. COLA is low because inflation is low. The most recent COLA was 1.3%. Legislators proposed making it 3% for one year. The average Social Security benefit is $1,500/month. 3% versus 1.3% would increase it by $25/month. Rather than waiting for new legislation, which didn’t pass anyway, you can make it not matter by having your retirement budget not depend on $25/month one way or the other.

A reader asked me about the HSA rollover. Because you can only do one rollover every rolling 12 months, and the rollover takes some time to complete, the question was whether the 12-month clock for the next rollover starts on the day the money comes out of the old account or on the day it goes into the new account. While there’s a technically correct answer, you can make it not matter by spacing your rollovers every 15 months. That way you’re in the clear no matter how the 12 months are counted.

Another reader asked me whether the RMD is required when the surviving spouse takes over an IRA in the year after the owner’s death. Again there’s a technically correct answer but you can make it not matter by simply taking the RMD even if it isn’t strictly necessary. At most, you take the RMD one year too soon. Delaying it by one year doesn’t matter that much anyway.

If you read personal finance and investing articles, it would seem at least half of investing is about taxes: whether you should contribute to Traditional or Roth accounts, which accounts you should put money into first after getting the employer match, which investments should be held in which accounts, which accounts you should withdraw from first after you retire, whether and how much to convert to Roth, and on and on. But if you ask me “How important is tax strategy for building wealth?” I must agree with the Bogleheads it’s not that important. While a good tax strategy is helpful, whether you become wealthy doesn’t depend on it. You can still make it work if all the tax-advantaged accounts go away and dividends and capital gains are taxed as regular income.

If you look for ways to make things not matter, you’ll see a way out in almost everything.

Ward Off FOMO and Sales Pitches

Making fewer things matter helps you zero in on things that really matter. It also helps you ward off FOMO (Fear of Missing Out) and sales pitches. FOMO and sales pitches always try to grab your attention by saying you’re making a mistake. When you don’t mind making a mistake because you made fewer things matter, the sales pitches slide right off. It’s like someone telling me I’m cutting my pineapple wrong.

“You should invest in real estate.” It’s probably a good way to make money but I’ll let others do it.

“You should buy stocks of Tesla, Nikola, NIO, and the electric vehicle industry.” Because they’re in my total stock market index fund, I’ll benefit already if they become successful.

“You should put some money in cryptocurrencies.” Maybe they’re onto something. I’ll let others have at it.

“Look at this. It’s tax-free.” I don’t mind paying more taxes.

You’ve made it when you can afford all the “mistakes.”

The post Make Fewer Things Matter: My Epiphany From Cutting A Pineapple appeared first on The Finance Buff.

Foreign Tax Credit With Form 1116 In TurboTax and H&R Block Software

When mutual funds and/or ETFs that invest in other 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 you receive from your broker. When the total foreign taxes paid from all your 1099-DIV’s is no more than a certain amount — $300 for single, $600 for married filing jointly — it’s easy to handle. You enter the 1099-DIV’s as usual 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’s 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. I start with TurboTax. Please scroll down to the next section if you use H&R Block software.

TurboTax

I’ll use this example with TurboTax Deluxe downloaded software.

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.

If you’re using TurboTax Online, consider using TurboTax downloaded software next time because it’s both less expensive and more powerful.

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.

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 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!

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 Software

I’ll use the same example in H&R Block downloaded software.

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.

If you’re entering the 1099-DIV 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.

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

Click on Add Form 1116.

H&R Block software asks upfront about the simplified election. Select Yes if you want 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 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 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?

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.

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’s 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.

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

Many self-employed business owners buy health insurance from the Affordable Care Act (ACA) exchange. 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.

Here’s how to do it in H&R Block Deluxe downloaded software. I’m using this simple example:

You are single, self-employed, with no dependent. You had health insurance from the ACA exchange for all twelve 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 -> Adjustment -> Self-Employed Health Insurance.

Enter the full unsubsidized premiums you paid in the year. You find this number on the 1095-A form you receive from the ACA exchange (line 33, column A). Include both what you paid out of pocket and the advance premium credit. You will reconcile the advance credit later. If you also paid premiums for dental and vision insurance, include those as well. We don’t have dental and vision premiums in our simple example.

Go to Federal -> Taxes -> Health Care Coverage.

Everyone had insurance in our example.

Check the box for a plan from the ACA marketplace.

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

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

Enter the information as requested. Scroll down to Part III. In our simple example, you had the same plan for all 12 months and the numbers on the 1095-A are all correct. If your plan changed mid-year, 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 exchange paid $150/month in advance subsidy to the insurance company on our behalf.

We only have one 1095-A form in our simple 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 exchange paid to the insurance company.

You can verify you are also 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 16. That’s your self-employed health insurance deduction.

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. There is 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).

$2,633 in self-employed health insurance deduction plus $3,367 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.

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Import W-2 and 1099 Forms Into TurboTax and HR Block: From Where?

After reading my previous post Fake TurboTax Discount Through Vanguard and Fidelity, reader Mike sent me an email:

I have accounts with both Vanguard and Fidelity, having several mutual funds, ETFs, and individual bonds, etc., with each company. I am able to download my tax info into TurboTax from both sites. I don’t think l can do that with HR Block.

I think this is one of the reasons Fidelity and Vanguard offer TurboTax and not H&R Block. A couple of years ago I tried using HR Block and it didn’t download my Fidelity or Vanguard info. If you know anyone who has downloaded their tax forms from HR Block, I’d like to know.

Great question. Both TurboTax and H&R Block advertise that they can import W-2 and 1099 forms. But from where?

TurboTax publishes a list of partners from which you can download W-2 and 1099 Forms. The W-2 partners include the leading payroll provider ADP, some other payroll providers, and a number of large employers. The 1099 partners include most major financial institutions.

I couldn’t find a similar list from H&R Block’s website, but since I have its software, I looked inside the software.

For importing a W-2, H&R Block asks for the employer’s federal Employer Identification Number (EIN). I entered my employer’s EIN found on my W-2. It says it’s eligible for importing because my employer uses ADP for payroll.

For importing 1099’s and 1098’s, H&R Block software lists a number of financial institutions in a scroll box. I can’t copy the complete list out of it and I don’t want to retype them. Because 1099-INT (interest earned) and 1098 (mortgage interest paid) are relatively simple, I’m not too worried about the coverage for banks and credit unions. I just looked at mutual fund companies and brokers, especially discount brokers.

H&R Block’s coverage isn’t as complete as TurboTax’s but there’s a substantial overlap. The table below compares the support for importing W-2 and 1099 forms in TurboTax and H&R Block:

TurboTaxH&R BlockADPyesyesFidelityyesyesVanguardyesyesT. Rowe PriceyesyesCharles SchwabyesyesTD AmeritradeyesyesE*TradeyesyesBettermentyesyesWells Fargo AdvisorsyesnoAmeripriseyesyesEdward JonesyesyesMerrill LynchyesyesUBSyesyes

H&R Block doesn’t yet support downloading from Wells Fargo Advisors. It says it supports importing from Vanguard, Fidelity, Charles Schwab, TD Ameritrade, and E*Trade. At a substantial saving off the comparable TurboTax version, I’m not complaining.

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TurboTax 2020 CARES Act $300 Charity Donation Deduction

From the previous posts, we know that in 2020, even if you take the standard deduction you can still deduct up to $300 in cash donations to charities (up to $150 for married filing separately). See CARES Act 2020 Charity Donation Deduction. However, finding the place to get this deduction in TurboTax requires some patience.

TurboTax

TurboTax has a place to enter charity donations as you would expect. It’s under Federal Taxes -> Deductions & Credits -> Charitable Donations. So far so good.

It’s also straightforward to enter the donations. You arrive at this summary after you enter all the details. In our example, the taxpayer donated $700 cash to a favorite charity.

However, your refund number doesn’t change after you click on “Done with Charitable Donations.” It’s as if you’re not getting the deduction for your donations. In our example, the refund was $3,836 before we started, and it was still $3,836 when we were done with charitable donations.

TurboTax continues to ask you about other deductions. After you’re done with all the deductions, TurboTax will do an analysis at that point.

TurboTax double-checks some items until it concludes that you should take the standard deduction.

Now, the next screen comes back to the cash donations to charities. It pulls up the cash donations you entered previously.

And now the refund number will change. It was $3,836. Now it’s $3,908. We’re getting $72 for the donations.

So if you don’t see your refund change after you enter your donations, be patient. Keep going, going, and going. Eventually, you will reach the place where TurboTax recognizes that you’re taking the standard deduction and you’re entitled to the $300 deduction for your donations to charity.

H&R Block Software

It’s much more straightforward to do this in the H&R Block software. The H&R Block software assumes you’ll take the standard deduction until it sees enough deductions worth itemizing. It’s a good assumption to make because close to 90% of all taxpayers take the standard deduction. As soon as you enter the charity donations in H&R Block software, the refund number will change.

TurboTax doesn’t assume. It tries to demonstrate it’s thorough and it’s doing the heavy lifting of giving you the maximum deductions. After a song and dance, you end up with the standard deduction anyway. I think the approach in the H&R Block software works better, but TurboTax’s convoluted way creates good materials for blog posts.

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2020 2021 2022 HSA Contribution Limits: Individual and Family Coverage

Even though we just got into 2021, it’s time to peek into HSA for 2022. The contribution limits for various tax advantaged accounts for the following year are usually announced in October, except for HSA, which come out in April or May.

The contribution limits are adjusted for inflation each year, subject to rounding rules. Because of the rounding rules, I’m able to calculate the limits based on the inflation numbers available so far. When a number is rounded to the nearest $50, it doesn’t matter whether it’s really $3,643 or $3,661. Since I started doing these calculations, my own calculations always matched 100% to the official numbers from the IRS.

HSA Contribution Limits202020212022Individual Coverage$3,550$3,600$3,650Family Coverage$7,100$7,200$7,250

Source: IRS Rev. Proc. 2019-25, Rev. Proc. 2020-32, my own projection.

Employer contributions are included in these limits.

The family coverage numbers happened to be twice the individual coverage numbers in recent years but it isn’t always true. Because the individual coverage limit and the family coverage limit are both rounded to the nearest $50, when one number rounds up and the other number rounds down, the family coverage limit can be slightly more or slightly less than twice the individual coverage limit.

Age 55 Catch Up Contribution

As in 401k and IRA contributions, you are allowed to contribute extra if you are above a certain age. If you are age 55 or older by the end of year (not age 50 as in 401k and IRA contributions), you can contribute additional $1,000 to your HSA. If you are married, and both of you are age 55, each of you can contribute additional $1,000.

However, because HSA is in one individual’s name, just like an IRA — there is no joint HSA even when you have family coverage — only the person age 55 or older can contribute the additional $1,000 in his or her own name. If only the husband is 55 or older and the wife contributes the full family contribution limit to the HSA in her name, the husband has to open a separate account in his name for the additional $1,000. If both husband and wife are age 55 or older, they must have two HSA accounts in separate names if they want to contribute the maximum. There’s no way to hit the combined maximum with only one account.

The $1,000 additional contribution limit is fixed by law. It’s not adjusted for inflation.

Two Plans Or Mid-Year Changes

The limits are more complicated if you are married and the two of you are on different health plans. It’s also more complicated when your health insurance changes mid-year. The insurance change could be due to a job change, marriage or divorce, enrolling in Medicare, birth of a child, and so on.

For those situations, please read HSA Contribution Limit For Two Plans Or Mid-Year Changes.

HDHP Qualification

You can only contribute to an HSA if you have a High Deductible Health Plan (HDHP). You can use the money already in the HSA for qualified medical expenses regardless what insurance you currently have.

The IRS also defines what qualifies as an HDHP. For 2021, an HDHP with individual coverage must have at least $1,400 in annual deductible and no more than $7,000 in annual out-of-pocket expenses. For family coverage, the numbers are minimum $2,800 in annual deductible and no more than $14,000 in annual out-of-pocket expenses.

For 2022, an HDHP with individual coverage must have at least $1,400 in annual deductible and no more than $7,050 in annual out-of-pocket expenses. For family coverage, the numbers are minimum $2,800 in annual deductible and no more than $14,100 in annual out-of-pocket expenses.

Please note the deductible number is a minimum while the out-of-pocket number is a maximum. If the out-of-pocket limit of your insurance policy is too high, it doesn’t qualify as an HSA-eligible policy.

In addition, just having the minimum deductible and the maximum out-of-pocket isn’t sufficient to make a plan qualify as as HSA-eligible. The plan must also meet other criteria. See Not All High Deductible Plans Are HSA Eligible.

202020212022Individual Coveragemin. deductible$1,400$1,400$1,400max. out-of-pocket$6,900$7,000$7,050Family Coveragemin. deductible$2,800$2,800$2,800max. out-of-pocket$13,800$14,000$14,100

Source: IRS Rev. Proc. 2019-25, Rev. Proc. 2020-32, my own projection.

Contribute Outside Payroll

If you have a High Deductible Health Plan (HDHP) through your employer, your employer may already set up a linked HSA for you at a selected provider. Your employer may be contributing an amount on your behalf there. Your payroll contributions also go into that account. Your employer may be paying the fees for you on that HSA. You save Social Security and Medicare taxes when you contribute to the HSA through payroll.

When you contribute to an HSA outside an employer, you get the tax deduction on your tax return, similar to when you contribute to a Traditional IRA. If you use tax software, be sure the answer the questions on HSA contributions. The tax deduction shows up on Form 8889 line 13 and Schedule 1 line 12.

If your HDHP also covers your adult children who are not claimed as a dependent on your tax return, they can also contribute to an HSA in their own name if they don’t have other non-HDHP coverage. They get a separate family coverage limit. They will have to open an HSA on their own with an HSA provider.

Best HSA Providers

If you get the HSA-eligible high deductible plan through an employer, your employer usually has a designated HSA provider for contributing via payroll deduction. It’s best to use that one because your contributions via payroll deduction are usually exempt from Social Security and Medicare taxes. If you want better investment options you can transfer or rollover the HSA money from your employer’s designated provider to a provider of your choice afterwards. See How To Rollover an HSA On Your Own and Avoid Trustee Transfer Fee.

If you are not going through an employer, or if you’d like to contribute on your own, you can also open an HSA with a provider of your choice. For the best HSA providers with low fees and good investment options, see Best HSA Provider for Investing HSA Money.

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