3 Refinancing Mistakes That Can Cost You Money

Mortgage rates are currently very low, but you can’t expect them to stay that way forever. If you bought a home within the last five to seven years and you’ve built up equity, you might be thinking about refinancing. A refinance can … Continue reading →

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1099-C: What You Need to Know about the Cancellation of Debt Tax Form

From early January to mid-February, you might receive a number of tax documents in the mail. They can range from expected W-2s from your employer to forms about mortgage interest you paid. One form that many people don’t expect is the 1099-C. Discover why you would receive such a form and what the IRS expects… Read More

The post 1099-C: What You Need to Know about the Cancellation of Debt Tax Form appeared first on Credit.com.

Guide to Managing Medical Benefits When You Leave or Start a Job

Leaving a job typically means saying goodbye to workplace benefits such as health insurance and medical spending accounts. No matter if you quit, get fired, or get furloughed, it's essential to know your options so you can make the most of those perks.

If you're starting a new job with benefits or becoming self-employed, you'll have critical decisions to make about what's best for you and your family. I recently received a couple of questions about how to handle benefits during work transitions, and I'll answer them throughout this post. We'll review the best options for managing medical benefits when you leave or start a new job.

What happens to health insurance when you leave a job?

When it's time to leave a job with benefits, it's essential to let your employer know so you can evaluate your options for managing or replacing them right away. The sooner you understand your choices, the more time you'll have to do your homework and consider what's best. 

Any insurance perks you have typically end on the last day of the month you get terminated. So, be strategic about choosing your last day, when possible.

If you leave an employer on good terms or get a severance package, ask for an extra month or two of medical coverage if you need it.

For instance, if you work through November 30, your health insurance may end on that day. But if you work through December 1, your insurance may last until December 31. Also, remember that most things in business are negotiable. If you leave an employer on good terms or get a severance package, ask for an extra month or two of medical coverage if you need it.

Here are four work transitions you may need to manage:

1. You leave a job for a new employer with benefits

Congrats! Benefits at your new job may start on your first day, or you may be subject to a waiting period, such as 30 or 90 days. Don't roll the dice with a gap in critical coverages such as health and life insurance. Something unexpected—a car accident, illness, or death—could be financially devastating for you or your surviving family.

If you have a spouse or partner who also has workplace insurance benefits, you may be wondering which plan to choose or whether you can double up on benefits. Keep reading for tips to handle this situation wisely. 

2. You leave a job for a new employer with no benefits

If your new job is with a small company, it may not offer expensive perks such as health insurance. But that doesn't mean you can't get affordable coverage on your own, which we'll cover in a moment.

3. You leave a job and become unemployed

No matter if your workplace doesn't offer benefits or you're unemployed, there are ways to get low- or no-cost health insurance.

4. You leave a job and become self-employed

When you work for yourself, you need to provide your own medical benefits package, and the same advice will apply, so keep reading.

What is COBRA continuation coverage?

A critical right you should be familiar with is COBRA continuation coverage. COBRA, which stands for the Consolidated Omnibus Budget Reconciliation Act, is a law that requires an insurer to continue your employer-sponsored medical insurance, including health, dental, and vision policies after you're no longer employed.

Anytime you leave a job with group health benefits, you can purchase COBRA coverage for a period. Your benefits administrator should give you information about your right to apply for COBRA coverage and the cost.

Anytime you leave a job with group health benefits, you can purchase COBRA coverage for a period.

You can purchase the same or fewer medical benefits than you had before you quit, got laid-off, or fired from your job. But the price won't be the same—COBRA coverage can be expensive because your previous employer does not subsidize it.

You must pay the full COBRA premiums, plus a 2% administrative charge, to the insurer. While it will cost more than you're used to, the upside is that your coverage will be seamless, and you'll be familiar with it.

COBRA protects everyone affected by the loss of group health insurance, including the former employee, his or her spouse, former spouses, and dependent children—when certain qualifying events occur, such as termination or reduction of work hours. It typically lasts for up to 18 months. However, if you're a surviving spouse or divorced from a covered employee, COBRA may continue for up to 36 months.

Don't make the mistake of thinking that you'll just wait and get health insurance when you get a new job or when you become eligible after a new employer's waiting period. If you get sick or need a trip to the emergency room, you could end up with a massive bill.

If you're not eligible for regular, federal COBRA, many states offer similar programs called Mini COBRA. To learn more, check with your state's department of insurance.

How do you get individual health insurance?

If you don't have the option to get COBRA medical benefits or can't afford it, your next best option is to shop for ACA-qualified health insurance. ACA stands for the Affordable Care Act, which set standards, known as essential health benefits, and provides subsidies that make qualified plans more affordable.

If you qualify for an ACA subsidy based on your income and family size, it can make a health plan much less expensive than COBRA continuation.

If you qualify for an ACA subsidy based on your income and family size, it can make a health plan much less expensive than COBRA continuation. But if you have high income and don't qualify for reduced premiums, COBRA may cost about the same or even give you better benefits.

So, shop and compare the cost of COBRA to a private policy when possible. Open enrollment for ACA-qualified health plans is limited to the last few weeks of the year. However, losing your group coverage at work is one of several life events that qualify you for a special enrollment period or SEP to get coverage. But you only have 60 days to sign up for an ACA plan after losing your insurance at work, so don't put it off.

If you miss the special enrollment deadline, you generally won't be able to get a marketplace plan unless you have another qualifying life event. These include getting married, having a child, or exhausting your maximum period of COBRA coverage.

You can get quotes for an ACA-qualified health plan from the following:

  • Healthcare.gov (the federal healthcare marketplace)
  • Your state's online healthcare marketplace (if you live in California, Colorado, Connecticut, District of Columbia, Idaho, Maryland, Massachusetts, Minnesota, Nevada, New York, Rhode Island, Vermont, or Washington)
  • Insurance aggregator sites, such as Bankrate.com and eHealth.com
  • Insurance brokers

Depending on your income, family size, and the state where you live, you may qualify for free or low-cost coverage from Medicaid or the Children's Health Insurance Program (CHIP). Also, note that if you're younger than 26, you can enroll in a parent's health plan even if you don't live at home or are married.

Can you have more than one health insurance plan?

Jamie left a voicemail and asks:

I'm starting a new job soon and am wondering if I should enroll in the dental and vision benefits because I already have them under my husband's insurance. How should I compare insurance policies if I need to choose between different plans?

It's not against the law to have more than one medical insurance policy, but it may be a waste of money. Having more than one medical plan doesn't mean that you get reimbursed twice for covered benefits.

Having more than one medical plan doesn't mean that you get reimbursed twice for covered benefits.

The plan you get through your employer becomes primary, and the one through a spouse or partner's employer is secondary. After the primary policy covers you, the secondary would pick up any remaining covered cost. But the combined coverage can't exceed 100% of the cost.

When you have dual health or dental plans, you must pay deductibles for both of them. In other words, you may still have out-of-pocket costs even when you have more than one plan.

Whether you could save money by enrolling in more than one medical insurance plan depends on several factors, such as the monthly premium, annual deductible, and how high your healthcare expenses could be in the future.

You'll need to make these same comparisons when you're choosing between different plans. Evaluate monthly premiums, annual deductibles, co-payments, co-insurance, and the doctor networks to estimate which one is best for your situation. 

To get some help, speak to an insurance representative from each plan you're considering. Ask them about the types of healthcare services you and your family typically need or have needed in the past. You can't predict how healthy you'll be going forward. But to evaluate different plans, or know if having more than one plan is worthwhile, you must consider your previous expenses for health, dental, and vision care. So gathering that information should be part of your research.

What happens to an HSA when you leave a job?

Adam asks, "My employer makes contributions to my HSA every payday. Do I have to repay them if I leave my job to start my own business?"

Another insurance-related benefit that you may have at work is a tax-advantaged health savings account or HSA. You're eligible for an HSA when you're enrolled in a high-deductible health plan (HDHP). Having an HDHP may be a good option when you want lower premiums, are in relatively good health, and are likely to take advantage of an HSA.

An HSA is portable, so you can take it with you if you leave an employer.

The good news is that an HSA is portable, so you can take it with you if you leave an employer. Your account balance, including amounts contributed by your old employer, are yours to spend tax-free on eligible medical expenses with no spending deadline.

You can spend an HSA on qualified expenses for you or your family members, even if you don't have a high-deductible plan or you're uninsured. However, you can't make any new HSA contributions when you're not covered by HDHP. 

If you become unemployed, you can use an HSA for COBRA premiums, or for other health insurance while you're receiving unemployment compensation. But if you spend HSA money on non-qualified medical expenses, the amounts will be taxed as income, plus you must pay an additional 20% penalty.

What happens to an FSA when you leave a job?

Another medical spending account you may need to manage when you leave a job is an FSA or flexible spending arrangement. These accounts can only be offered by employers and get funded by pre-tax payroll deductions that you can use for childcare and medical expenses.

Make sure you empty the account by spending the funds on qualified purchases before your last day of work or by the end of the month.

FSAs have a use-it-or-lose-it policy, which means the amounts you've contributed will be forfeited if you don't spend them before leaving a job. Make sure you empty the account by spending the funds on qualified purchases before your last day of work or by the end of the month.

Whether leaving a job is cause for tears or celebration, you can make smart decisions about your medical benefits and save money with some strategic planning. Be sure to ask your benefits administrator or your plan providers for help when you need it.

Understanding What to Do with Unfiled Tax Returns

The IRS has taken down Al Capone, Wesley Snipes, Martha Stewart and other big names in the past for tax fraud. The federal government takes taxes very seriously. Not filing your tax returns is a serious offense. Although there won’t be a nationwide manhunt for late returns, you may still see some hefty fines and… Read More

The post Understanding What to Do with Unfiled Tax Returns appeared first on Credit.com.

Strategies for Avoiding and Reducing Taxes

Taxes can take a big bite out of your income, especially if you’re in a higher income tax bracket. And even with careful planning, it’s possible that you could still be hit with an unexpected tax bill. The good news … Continue reading →

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5 Things to Know About the Home Office Tax Deduction and Coronavirus

Since the coronavirus quarantine began, many people have been forced to work from home. If you didn’t have a home office before the pandemic, you might have had a few expenses to set one up. I’ve received several questions about what benefits are allowed for home offices during the COVID-19 crisis.

One question came in on the QDT coronavirus question page. Money Girl reader Ian said:

"I have a question about next year's taxes and working from home. For the past 13 weeks, I have been forced to work from a home office. (I am a regular W-2 employee, not self-employed.) I have had some expenses come up that were brought about by working from home: a computer upgrade so I can better connect to Wi-Fi, a new router, and even a desk chair so I am comfortable while I work. Should I be keeping track of those expenses? Will they be deductible? My employer is not going to reimburse them. Thank you for your help!"

Another question came from Miki, who used my contact page at Lauradadams.com to reach me. She said:

"Hi, Laura, and thank you for a wonderful podcast! I've been listening for years and have always thought that you'd have a show for any question I could ever think of. But this new situation with COVID-19 has made me think of something that I'm sure many of us are dealing with right now.

"To start working from home, I had to spend quite a bit of money to get my home office on par with my actual office. I know you've done episodes on claiming home office expenses on taxes before, but could you do an episode on whether we can claim home office expenses on our taxes next year? And if we can, things we should start thinking about now (aside from saving the receipts)?"

Thanks for your kind words and thoughtful questions! I'll explain who qualifies for a home office tax deduction and serve up some tips for claiming it.

5 things to know about the home office tax deduction during coronavirus

Here's the detail on five things you should know about qualifying for the home office tax deduction in 2020.

1. COVID-19 has not changed the home office tax law

The CARES Act changed many personal finance rules—including specific tax deadlines, retirement distributions, and federal student loan payments—but the home office tax deduction is not one of them. In a previous post and podcast, Your Guide to Claiming a Legit Home Office Tax Deduction, I covered the fact that the Tax Cuts and Jobs Act (TCJA) of 2017 drastically changed who can claim this valuable deduction.

Before the TCJA, you could claim a home office deduction whether you worked for yourself or for an employer either full- or part-time. Unfortunately, W-2 employees can no longer take advantage of this tax benefit. Now, you must have self-employment income to qualify. My guess is that the IRS was concerned that it was too easy to abuse this benefit and reined it in.

Before the TCJA, you could claim a home office deduction whether you worked for yourself or for an employer either full- or part-time. Unfortunately, W-2 employees can no longer take advantage of this tax benefit.

The best option for an employee is to request expense reimbursement from your current or future employer even though they're not obligated to pay you. If you get pushback, make a list of all your home office expenses so it's clear how much you spent on their behalf. They might consider it for your next cost of living raise or bonus.

Unless Miki or Ian have a side business that they started or will start, before the end of 2020, they won't get deductions to help offset their home office setup costs.

 

2. The self-employed can claim a home office tax deduction

Let’s say you use a space in a home that you rent or own for business purposes in 2020. There are two pretty straightforward qualifications to qualify for the home office deduction:

  • Your home office space must be used regularly and exclusively for business
  • Your home office must be the principal place used for business

You could use a spare bedroom or a hallway nook to run your business. You don’t need walls to separate your office, but the space should be distinct—unless you qualify for an exemption, such as running a daycare. It’s permissible to use a separate structure, such as a garage or studio, as your home office if you use it regularly for business.

You must use your home as the primary place you conduct business—even if it’s just for administrative work, such as scheduling and bookkeeping. However, your home doesn’t have to be the only place you work in. For instance, you might work at a coffee shop or meet clients there from time to time and still be eligible for a home office tax deduction.

3. Your business can be full- or part-time to qualify for a home office tax deduction

If you work for yourself in any trade or business, either full- or part-time, and your primary office location is your home, you have a home business. No matter what you call yourself or your business, if you have self-employment income and do any portion of the work at home, you probably have an eligible home office. You might sell goods and services as a small business, freelancer, consultant, independent contractor, or gig worker.

If you work for yourself in any trade or business, either full- or part-time, and your primary office location is your home, you have a home business.

As I previously mentioned, the work you do at home could just be administrative tasks for your business, such as communication, scheduling, invoicing, and recordkeeping. Many types of solopreneurs and trades do most of their work away from home and still qualify for a legitimate home office deduction. These may include gig economy workers, sales reps, and those in the construction industry.

4. You can deduct direct home office expenses for your business

If you run a business from home, your direct home office expenses qualify for a tax deduction. These are costs to set up and maintain your office, such as furnishings, installing a phone line, or painting the walls. These costs are 100% deductible, no matter the size of the office.  

5. You can deduct indirect home office expenses for your business

Additionally, you’ll have costs that are related to your office that affect your entire home. For instance, if you’re a renter, the cost of rent, renters insurance, and utilities are examples of indirect expenses. You’d have these expenses even if you didn’t have a home office.

If you own your home, potential indirect expenses typically include mortgage interest, property taxes, home insurance, utilities, and maintenance. You can't deduct the principal portion of your mortgage payment, which is the amount borrowed for the home. Instead, you’re allowed to recover a part of the cost each year through depreciation deductions, using formulas created by the IRS.

Allowable indirect expenses actually turn some of your personal costs into home office business deductions, which is fantastic! They’re partially deductible based on the size of your office as a percentage of your home—unless you use a simplified calculation, which I’ll cover next.

How to calculate your home office tax deduction

If you qualify for the home office deduction, there are two ways you can calculate it: the standard method or the simplified method.

The standard method requires you to keep good records and calculate the percentage of your home used for business. For example, if your home office is 12 feet by 10 feet, that’s 120 square feet. If your entire home is 1,200 square feet, then diving 120 by 1,200 gives you a home office space that’s 10% of your home.

In this example, 10% of your qualifying expenses could be attributed to business use, and the remaining 90% would be for personal use. If your monthly power bill is $100 and 10% of your home qualifies for business use, you can consider $10 of the bill a business expense.

To claim the standard deduction, use Form 8829, Expenses for Business Use of Your Home, to figure out the expenses you can deduct and then file it with Schedule C, Profit or Loss From Business.

The simplified method doesn’t require you to keep any records, which makes it incredibly easy to claim. You can claim $5 per square foot of your office area, up to a maximum of 300 square feet. So, that caps your deduction at $1,500 (300 square feet x $5) per year.

The simplified method requires you to measure your office space and include it on Schedule C. It works best for small home offices, while the standard approach is better when your office is bigger than 300 square feet. You can choose the method that gives you the largest tax break for any year.

No matter which method you choose to calculate a home office tax deduction, you can't deduct more than your business's net profit. However, you can carry them forward into future tax years.

Also note that business expenses that are unrelated to your home office—such as marketing, equipment, software, office supplies, and business insurance—are fully deductible no matter where you run your business.

If you have any questions about qualifying business expenses, home office expenses, or taxes, consult with a qualified tax accountant to maximize every possible deduction and save money. The cost of working with a trusted financial advisor or tax pro is worth every penny.

The Best Pay-Per-Mile Car Insurance Companies

Wouldn’t it be nice to pay for a service only when you used it? That’s exactly what usage-based auto insurance is. Getting low mileage insurance lets you pay less by only paying for the miles you use. It’s the perfect way to cut costs without getting rid of coverage.  Choosing the right car insurance can […]

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Mortgage Escrow Account: Pros and Cons

If you own a home and are making monthly payments, you have probably read over the breakdown of your monthly mortgage charges once or twice. Your mortgage payment likely breaks out your monthly payment into three parts: principal, interest and funds that go to your escrow account. While you likely know that the principal is […]

The post Mortgage Escrow Account: Pros and Cons appeared first on The Simple Dollar.

If a Mortgage Lender Reaches Out to You, Reach Out to Other Lenders

A lot of homeowners are looking to refinance their mortgages at the moment. That’s abundantly clear based on the record volume of refis expected this year, per the MBA. And while mortgage rates are in record low territory, thus making the decision to refinance an easy one for most, it still pays to shop around. [&hellip

The post If a Mortgage Lender Reaches Out to You, Reach Out to Other Lenders first appeared on The Truth About Mortgage.

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