Ken Clark

Our college-aged daughter was out visiting us this weekend and brought her W-2 in the hopes of getting her taxes done early. Usually, I just use our TurboTax software to do her simple return. But this year, I’d heard that TurboTax is only letting you do one return per software purchase (without paying an additional fee), and I had no interest in purchasing two copies of the program.

When I went on to the TurboTax website to double-check this rumor (which was initially true, but was changed due to a customer backlash), I noticed they offer a free filing service called TurboTax Freedom. After giving it the quick once over, I decided to give it a try.

My overall impression is that this a great program for qualifying users. It only took me about 15 minutes to prepare and file her simple return (one W-2 and the standard deduction). The interface was simple and intuitive, with plenty of hyperlinks that help define confusing terms and rules.

The Federal E-file function was free and easy to use (it required me to provide either her E-file PIN or AGI from last year). Since her state of residence (California) doesn’t have a free E-file program that works with TurboTax, I paid $9.95 to be able to print her state return and file by mail.

All in all I thought it was a great program - ideal for taxpayers with just one or two W-2’s, who will either use the Standard Deduction or have very few itemized deductions.

To qualify to use the TurboTax Freedom program, a taxpayer must meet just one of the following requirements:

• Have an Adjusted Gross Income (AGI) under $30,000.
• Be active duty military with an Adjusted Gross Income (AGI) under $56,000.
• Qualify for the Earned Income Credit (EIC)

Have you used TurboTax Freedom? I’d love for you to post your experience in the comments section below.

If you’ve been reading my stuff for long, you know that I think Tax Refund Anticipation Loans (RAL’s) are a pretty bad deal for 99% of folks.

Lauren Garrison at the New Haven Register newspaper just did a great article on the perils of these short-term loans and was kind enough to include my less-than-rosy opinion in the article.

Check it out when you get a chance!

“Experts Warn of Perils From Tax Refund Loans” - The New Haven Register

Question: Can I move my fixed annuity into an IRA?

Yes and no…

You can do a “1035″ exchange between annuities, fixed to variable (although technically questionable, it has never been challenged by the IRS), variable to fixed, and fixed to fixed.

The 1035 exchange refers to the IRS code that allows an annuity holder to move the profits from one annuity to another without being subject to taxes or the 10% early withdrawal penalty at that time. The profits will generally always be taxable (at ordinary income rates, not capital gains) in the future when withdrawn and spent.

Whenever you exit (or 1035) an annuity, you have to be aware of surrender charges. Annuities can have some of the highest, and longest lasting surrender charges in the financial industry. Thus even if you avoid paying taxes in the switch from one annuity to another, you still may pay a surrender charge ranging from 1% to 10%+.

Now, to the heart of your question, can you move an annuity into an IRA?

If the annuity you own is already titled as an IRA (annuities can be owned in IRA’s or outside them), then you can exit the contract within the IRA (minus surrender charges), and buy something else under the IRA “umbrella”.

If the annuity you own is not an IRA, then the only way to get the funds into the IRA (which is probably not advisable), is to take a distribution, and use the money leftover after taxes and penalties to fund an IRA.

In that case, I generally feel like you would be better to find a low-cost annuity, with good investment options, and move on with life.

I’d also seek out professional tax help if you do anything with your IRA, a mistake could cost you a lot of money!

Hope that helps!

Ken Clark
Certified Financial Planner

Disclaimer:
Answers provided are for general educational purposes only, and may exclude other important factors relevant to your unique situation. No reader should act on the information contained in this article without consulting Ken Clark or another financial professional directly.

Question from a reader on Yahoo: How can I keep the capital gains taxes from blowing my investing profits to pieces?

There is not a lot of fancy stuff you can do outside of IRA’s.

But, here are some legal ways to lower your capital gains, each has their downfalls. Each of these has its complexities, which should be discussed at greater length with a professional.

1. Buy and hold.

2. Avoid mutual funds that have a history of large capital gains distributions.

3. Do “tax-loss” selling… sell something with an off-setting loss at the same time you sell something with a gain.

4. Donate appreciated shares instead of donating cash. You can write off th entire value, and avoid cap gains on the appreciation (there are holding period rules).

5. Gift appreciated shares to your children, and sell them in a UGMA / UTMA account. A portion of the gains will be taxed at their bracket.

6. Consider using a exchange fund (not an index fund, or exchange traded fund) for concentrated positions. These are special funds that will let you trade in a concentrated position of a stock (ie, $250,000 of Microsoft) for shares in a more diversified portfolio. These are also known as swap funds.

Hope that helps!!

Ken Clark
Certified Financial Planner

Disclaimer:
Answers provided are for general educational purposes only, and may exclude other important factors relevant to your unique situation. No reader should act on the information contained in this article without consulting Ken Clark or another financial professional directly.