Do I Have to Pay The TSA Hardship Withdrawal Penalty if My Wife Qualifies for The First-Time Homebuyer Exemption?

Question: My wife and I (both public school teachers) purchased a home in August 2018. I took a hardship withdrawal from my tax-sheltered annuity (TSA) to pay for closing and renovation costs. I know I need to pay the taxes on the amount withdrawn, but there’s also a 10 percent penalty I must pay tax on, unless we qualify for an exception. The exception I thought we might qualify for is the “first-time homebuyer” exception. Although this isn’t my first home purchase it is my wife’s and both our names are on the purchase of the home. So my question is do I have to pay the taxes on the 10 percent penalty? thanks!Luke in Virginia

Laura Adams, author, and host of Money Girl podcast responds…

If you’re thinking about raiding your retirement account early, or if you already took a TSA hardship withdrawal, it’s important to understand the rules. The regulations vary depending on the type of retirement account you have. I’ll cover the basics so you can prevent unexpected tax surprises and keep your retirement nest egg safe.

Understanding retirement accounts

First, here’s a brief explainer on retirement accounts. They were designed to encourage savings and to discourage you from dipping into them before retirement — or at least before reaching age 59½.

Retirement accounts give you terrific money-saving tax breaks, and they’re my favorite way to save for the future. However, if you break account rules, you’ll have to pay expensive taxes and penalties.

Retirement accounts aren’t piggy banks you can crack open anytime you want. Some have strict regulations that make it very difficult to get money out, even if you have a devastating financial hardship.

However, there are several qualified exceptions when you can take early distributions from retirement accounts that are penalty-free. The exceptions also depend on the type of account you have — such as an Individual Retirement Account (IRA) or a workplace retirement plan — and whether it’s a traditional or Roth account. Keep reading for more clarification.

Rules for making withdrawals from workplace retirement accounts

Many companies, nonprofits, and government agencies offer retirement accounts for workers. They’re a valuable perk to have, so be sure to participate if you’re eligible.

You’ve probably heard of a 401(k), which is a popular plan offered by many for-profit companies. It allows employees to have the employer contribute a portion of their wages to an individual account held by the plan.

[Find out how you can save more in your 401(k) this year.]

If you work for a public school, church, or charitable organization, you may have access to a 403(b) plan, also known as a tax-sheltered annuity (TSA). They’re similar to a 401(k) and also allow employees to put a portion of their wages into individual accounts.

Both a 401(k) and a 403(b) allow traditional and Roth options. With a traditional 401(k) or 403(b), you skip paying tax on contributions until you take withdrawals in the future. So tapping either type of traditional account early typically requires you to pay income tax, plus an additional 10 percent penalty, on amounts withdrawn.

With a Roth 401(k) or 403(b), you must pay income tax upfront on your contributions. That means you can make tax-free withdrawals in the future. However, distributions of any investment earnings would be subject to tax and a 10 percent penalty if you’re younger than age 59½.

Early withdrawal penalty exceptions for workplace retirement accounts

As I mentioned, there are some exceptions to the 10 percent early TSA hardship withdrawal penalty. In general, you can withdraw money from a 401(k) or 403(b) penalty-free for:

  • Medical expenses that exceed 10 percent of your adjusted gross income and are not reimbursed by health insurance.
  • Costs for military reservists called to active duty.
  • Distributions made after leaving your employer after age 55.

If you have a traditional plan, you avoid the 10 percent penalty but must still pay ordinary income tax on early withdrawals. Unfortunately, there isn’t a penalty exception for using an early withdrawal from a workplace plan to purchase a home.

However, if you have an IRA, you can avoid the early withdrawal penalty for distributions up to $10,000 during your lifetime to purchase your first primary residence (or to buy a home after not owning one for two years). Again, this exception is only allowed for an IRA and not for any type of workplace retirement plan.

How Can I Contact the IRS About My Taxes?

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Question: My fiancé has not filed federal taxes since 2008, when he was laid off after 20 years of working in customer service for a bank. He filed his state taxes and paid up to 2011 to do the best he could at the time, but then he just became overwhelmed and stopped filing. Anyway, he’s now trying to do what’s right. H&R Block suggested he call the IRS and ask what he owes. Is it better to contact the IRS first or do the taxes first? He used to get letters from the IRS, but they stopped coming in 2011. Also, he has a lien, although he didn’t own anything and actually just surrendered his car last year. He’s afraid they will go into his bank account and seize his money.Carla in California

Mandi Woodruff, Executive Editor at Magnify Money, responds…

I don’t know your fiancé’s income during the years in question. So, it’s tough to understand the full impact of not filing a tax return. Here are a few factors he should consider, though…

How much income did he have during those years?

Not every person who earns income must file a return. The minimum income amount that would require you to file a tax return depends on your filing status and age. For 2018 returns, the minimum for a single taxpayer under age 65 is $12,000. If your fiancé earned less than that in 2018, he generally wouldn’t need to file a return. The minimum threshold changes each year, so his first step should be comparing his income for each year to the minimum income threshold, which can be found in the Form 1040 Instructions for that year [1].

Was he owed a refund?

Next, even in years your fiancé was required to file a tax return, he may not have owed. If the IRS owed him a refund based on over-withholding from a job or tax deductions and credits, there’s no penalty for filing late. However, taxpayers have only three years from the original filing deadline of a tax return to claim a refund. For example, a 2009 return would have been due on April 15, 2010. If you add three years to that filing deadline, he had until April 15, 2013 to file his 2009 return and still get a tax refund. Otherwise, that refund is lost forever. If your fiancé might be due a refund for 2015, he should file that return right away to claim it.

What if he really does owe taxes?

Let’s move on to what happens if your fiancé owed tax for the years in question. While taxpayers only have three years to claim refunds, the IRS has 10 years to collect outstanding tax debts. This 10-year window starts on the day you file. Since your fiancé hasn’t filed returns, the statute of limitations for collecting his tax liability remains open.

It’s possible the IRS assessed a proposed tax liability on his behalf through the Automated Substitute for Return (ASFR) Program. The ASFR Program allows the IRS to use third-party information (such as W-2s and 1099s) to calculate a tax liability on the taxpayer’s behalf. It’s possible that some of the notices your fiancé received from the IRS in years past were assessments from the ASFR Program. However, that program was significantly scaled back in 2017 due to lack of budget.

How he can contact the IRS

Now, the question is how much he owes and what he can do about it. H&R Block’s suggestion to call the IRS and find out what he owes is one option. People who haven’t filed for several years and owe back taxes are hesitant to draw attention to themselves by calling. But IRS representatives are trained to work with taxpayers who want to get compliant.

IRS Policy Statement 5-133, Delinquent Returns – Enforcement of Filing Requirements, says taxpayers are generally considered to be in good standing with the IRS if they’ve filed six years of back tax returns, although the IRS may require tax returns from further back in some situations. He can call the IRS at 1-800-829-1040 to confirm whether they will accept six years of filed returns in order to consider his account to be current.

If your fiancé doesn’t feel comfortable doing this on his own, he can authorize a professional to contact the IRS on his behalf by filling out Form 2848, Power of Attorney and Declaration of Representative [2].

Then he needs to file his taxes

Once your fiancé knows which years need to be filed, if he has all of his documents for those years he can prepare the returns himself using online tax preparation software or work with a professional to get caught up, year by year. If he doesn’t have documentation, a good place to start is ordering a Wage and Income Transcript. This transcript shows data reported to the IRS, including W-2 income, 1099s, and other informational returns provided to the IRS. A Wage and Income Transcript is available for up to 10 years.

He can order this himself using the Get Transcript Online tool or authorize a professional to order the transcript on his behalf using the same Power of Attorney form mentioned previously [3].

Getting caught up after a decade of not filing tax returns won’t be easy, but it’s preferable to the alternative. When tax returns aren’t filed late, the IRS charges interest and penalties on top of the tax owed.

Plus, the IRS has collection powers that other creditors don’t have.

Now, about the lien on his property…

You mentioned the IRS may have already placed a lien on his property. A lien attaches to all of his assets, even those he might acquire in the future. The IRS can also levy his paycheck or bank accounts. Once you’re married, if you file returns jointly, the IRS can withhold any refunds you might be entitled to in order to pay off his back taxes.

Fortunately, the IRS has several options for paying off tax debts in installments. Once your fiancé gets approved for an installment agreement, as long as he makes payments as agreed, the IRS won’t pursue any other collection action [4]. Facing the fear of owing back taxes is often the worst part. By finding out which years need to be filed, gathering documents, and filing his returns, your fiancé can get back on track with the IRS and avoid the hefty penalties that come from being on the wrong side of the IRS.

If you need help filing this year, check out Debt.com’s extensive guide How to File Taxes.

Does the Cancellation of Debt Have an Effect on My Taxable Income?

Question: I entered into a loan modification five years ago under HARP. The modification was not honored by my lender, and I had to sue. The result of the suit was my lender reduced the principal of my loan by $115,000, and they sent me a form called 1099-C. Do I really have to pay taxes on this?William in California

Howard Dvorkin, Debt.com chairman and CPA, responds…

HARP stands for Home Affordable Refinance Program, and since it launched in 2009, it’s been the government’s most popular program for refinancing mortgages. Why? Because HARP is designed for homeowners who are “underwater” – meaning they owe more on their mortgages than their homes are worth.

There are a bunch of rules for qualifying – loan-to-value ratio must be 80 percent, etc. – but what’s important for William and other HARP participants to know is this: Yup, taxes can become an issue.

Canceled debt is considered income

Like every other government program, complications abound. So I consulted two other financial experts who have sharp insights into William’s question.

“In many cases, when a lender cancels a portion — or all — of an outstanding balance, you usually have to consider that canceled debt as income and report it on your tax return for the year in which the debt was canceled,” says Crissinda Ponder, Staff Writer at LendingTree. “However, there are instances when the canceled debt can be excluded from your taxable income. One of those possible exclusions is a loan modification on your primary home. Since the principal balance on your mortgage has been reduced, you may qualify to exclude the $115,000 from your taxable income.”

So as you can see, the answer is: Yes, you must pay taxes – except when you don’t.

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When you do, you need the tax form William mentioned. The IRS calls it a 1099-C. If the canceled debt is at least $600, you must fill one out. This form lists important information about the canceled debt, including the amount owed and the cancellation date.

More information on form 1099-C

For more on the 1099-C, I consulted Jacob Dayan. He’s the co-founder of Community Tax, one of the best tax consulting firms I’ve ever worked with.

Dayan says if the property is your principal residence, and the forgiven loan principal was part of an “arrangement entered into before January 1, 2018, or earlier,” you likely will not need to pay tax on the $115,000.  But, he says…

If the home was not your principal residence, or the arrangement to forgive part of the loan principal was entered into in 2018 or 2019, then you likely owe income tax on the full $115,000. In general, there are no tax consequences for a loan. The borrower does not report the borrowed funds as income and does not report a deduction when the borrowed funds are paid back.  However, when a loan is forgiven the tax consequences change and the amount of forgiven debt is taxable to the borrower.

Why is it so complicated?

There’s a reason for all this back-and-forth. When the home mortgage crisis gripped the country starting in 2007, Congress enacted a provision to allow homeowners to exclude canceled debt as income (meaning no tax) as long as the canceled debt was for their principal residence.

But beginning in 2018, the government scaled back that provision significantly. For the tax years 2018 and beyond, Dayan says this: “To be excludable the discharged debt must, first, cover a mortgage on your principal residence and, second, the arrangement for the forgiven loan principal must be in writing and dated before January 1, 2018.”

He continues: “if the loan covered your principal residence and the agreement to forgive the principal occurred before January 1, 2018, you will be able to exclude the $115,000 on the 1099-C and pay no tax.  But if this was a rental property or second home, and the agreement to forgive the loan principal happened on January 1, 2018, or after, you will be stuck paying tax on the full $115,000.”

Consult a tax expert

If it confuses and confounds you, then my expert advice is this: Consult a tax expert like Jacob Dayan. In almost every case, you’ll save significantly more on your taxes than you’ll pay for the expert advice. As you can see, tax questions can easily get complicated. It often requires an expert to unspool the details – and find you the savings.

What Is My Tax Credit for Buying a House if I Rented in the Same Year?

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Question: We rented our previous home for nine months out of this year. We bought our first home with cash – no loans, no mortgage, cash only in the 10th month. How would I file on my taxes that we rented but we’re now also first-time home buyers? – Kenny in Indiana

Tendayi Kapfidze, LendingTree chief economist responds…

Congratulations on becoming a first-time homebuyer, and for being able to pay cash. That’s quite an accomplishment!

Even though you don’t have a mortgage, there are still some tax deductions you may be eligible for.

The first one is for your property taxes. You only lived there a few months. So, the amount you’re able to deduct on your federal income taxes probably won’t be much. The seller will likely receive the bulk of the deduction for the property taxes.

LendingTree
If you made any energy savings improvements before the end of the year, you may be eligible for a residential renewable energy tax credit [1]. These upgrades include the following:

  • solar panels
  • solar-powered water heaters
  • wind turbines
  • geothermal heat pumps
  • fuel cells that rely on a renewable resource

Even though you can’t deduct them now, start keeping receipts for any improvements you make. If you later sell, they’ll be added to the price you paid to determine the cost for taxes.

You’ll likely need to pay taxes on the amount of money you make through appreciation when you sell your home. The higher your cost basis, the less you’ll pay in taxes on the money you make from the sale.

Unless you were writing off a portion of your previous home rental costs on your taxes — perhaps because you are self-employed or work from home — the amount of time that you were renting isn’t that important. If you’re an active duty member of the military, you will be able to write off moving expenses [2], but if not, unfortunately, the new tax law doesn’t allow you to deduct them.

Tax liability for the cash

But back to the cash you used to buy the home. You may need to discuss potential tax liability with a professional based on where the cash came from. If you cashed in an IRA or a retirement account, or if received a gift from family members, you or your relatives may need to notify the IRS that the funds were used to purchase a home…

  • IRA: You can typically withdraw up to $10,000 from an IRA to buy your first home without a tax penalty. However, you’ll need to provide a 1099-R form to the IRS, along with a copy of your closing statement to verify the funds were used for your home to avoid that penalty.
  • 401(k): You can loan yourself up to $50,000 from a 401(k) account without penalty, and there shouldn’t be anything needed in terms of tax documents. However, if you did any type of cash withdrawal and you are younger than 59½, you may be subject to early withdrawal tax penalties.
  • Gifts from relatives: Gifts of up to $15,000 from a relative are not taxable, but anything over that may create a tax consequence for the relative you received the gift from. If they did gift over $15,000, they will have to file an IRS form 79 [3].

Forms you’ll need to file taxes

Gather the following documents related to your home purchase so you don’t encounter delays when you file your taxes…

  • Address change form: Make sure to file an address change form with the IRS to let them know your new address. If you take cash out with a mortgage in the future, lenders may need to verify your income using an IRS 4506-T transcript form. This form requires they verify the information on the tax returns you filed against the IRS database. If the address doesn’t match what you filed your returns with, the IRS will reject it and create potential delays in your mortgage approval.
  • Closing statement: You’ll need to provide a copy of your closing statement to your tax preparer. This should show the sales price, how much you paid for it, any fees you might have paid related to the purchase, and any property taxes that were paid by you and the seller.
  • Property tax bill: The local tax authority can provide a copy of your property tax bill.  Very often the assessor’s office has an online tool for you to obtain the information using the legal description or something called the assessor’s parcel number.
  • Receipts for any renewable energy upgrades: If you did make any renewable energy improvements in 2018, you’ll need to provide receipts and invoices to get any type of a deduction.

[For more information on filing this year, check out How to File Taxes.]

You mentioned “we” in your question — assuming you’re married and filing jointly. It’s possible the itemized deductions may not exceed the new increased standard deduction of $24,000. A professional tax consultant can give you information about whether to itemize your expenses or take the new standard deduction.

Denny Ceizyk , staff writer for LendingTree, contributed to this report.

Can I Deduct Funeral Expenses From My Income Taxes?

Question: My husband died in September 2018. We had borrowed from his 403(b) a few years ago. I used the money we still had in our bank account to pay for the funeral costs and the cost to pay his personal debts (like a car loan). Then I received a 1099R form for the amount that was rolled over into my account. I also received a 1099R for the amount that was outstanding on the loan from the 403b. How much of the money can I claim as being used for his death? I’m assuming that the funeral costs qualify. Can I also claim the amount that was used to pay off his personal debt as being used for his death?Casey in California

Jacob Dayan, Co-Founder of Community Tax, responds…

Sorry for your loss, Casey.

Generally, beneficiary spouses can roll over the eligible distribution attributable to the employee to any eligible retirement plan. This would most likely be your existing or a new IRA rollover account. You had previously taken a loan from the 403(b) that appears to be unpaid at his death, and the unpaid balance of the loan was treated as a taxable distribution. The amount of the unpaid loan will be reported on a 1099R form, with the taxable amount shown in Box 2A.  There should also be a code “L” reported in box 7, identifying the distribution as a loan.

Any other distributions you received will also be reported on a 1099R – even the amounts that you rolled over. There are two types of rollovers that can be reported on the 1099R.

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The first type is known as a “trustee to trustee” rollover. This happens when funds are sent directly to the rollover trustee without you having received the funds. Then, the second type of rollover involves your receipt of the funds. The rolled over funds must then be deposited into the new account within 60 days of receipt.

The amount rolled over will be reported on line 16A of your 2018 income tax return. Assuming the loan was the only other taxable distribution, the loan amount will be reported on line 16B as taxable income.

Now that funds have been rolled over, you need to be aware of the “Required Minimum Distribution” rules.  Basically, you must begin to take distributions from the rollover by April 1 after you have reached age 70½.  Your investment advisor will notify you of the minimum amount you must withdraw each year.

Unfortunately, funeral costs and car loans are not deductible.

You can deduct the final medical bills that you had to pay. This deduction is limited to the amount that exceeds 7.5 percent of your income and is grouped with other allowable itemized deductions: state and local taxes, real estate tax, mortgage interest, and charitable contributions. Don’t forget to add the value of any of his personal belongings that may have been donated to charity.

Should your itemized deductions fall short of the allowable standard deduction, you’re still entitled to a $24,000 to $26,600 standard deduction depending on your ages. I know this is a lot to digest, but if you struggle with it, contact a tax pro who can break it down for you. Debt.com can help you find one.

What if I Can’t Pay My Taxes? What Happens to Me?

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Question: I run a small business by myself. I’m 24 years old, and I started this a couple years ago. In 2017, I owed $15,000. I haven’t paid any of it yet. I haven’t filed my 2018 taxes yet, but it’s expected I owe around $13,000. Then I also have to set aside taxes for 2019. I can’t possibly save up for three tax years in a single year. Not while I am making roughly $90,000 a year between those two years. Typically, I end up making around $50,000 to $60,000 after I pay for upkeep and freelance development work. My living expenses are around $3,500 a month. I just don’t know what to do. I’d have to put 100 percent of my money towards taxes this year to catch up. I heard about an “offer in compromise” or something. I have 10 Grand saved I can use to pay something. What should I do?Michael in Indiana

Jacob Dayan, Co-Founder of Community Tax, responds…

If you are unsure of your options, the best advice is to call a tax resolution expert to help determine if you qualify for any IRS resolution programs. These include…

  • offer in compromise
  • currently not collectible status
  • an installment agreement
  • one of the other IRS resolution programs

But I can give you the basics of the process…

IRS resolution basics

To begin, if you want to put yourself in the best position to qualify for an IRS resolution, the first step is to work on “compliance.”  Compliance means that you have filed the past six years of tax returns, starting with the most recent (currently the 2018 return due April 15, 2019) and paying all required Estimated Tax Payments for 2019.

The IRS wants to be confident that you will not owe in the future before they agree to a resolution program. So setting aside and paying taxes for 2019 is the most important payment to make at the beginning.

Do you have a complicated tax situation? Don’t settle for less! Resolve your tax problems and get a fresh start.

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After compliance is complete, you will be ready to negotiate a resolution with the IRS.  In general, the IRS allows you to pay off the balance in full with a 72-month payment plan. Or it allows you to submit a financial statement to determine an appropriate resolution if you are unable to pay off in 72 months.

What is the financial statement?

The financial statement is basically a list of your monthly income, monthly “allowable” expenses (like housing, vehicle, health insurance, etc.), and a list of the value of any assets (such as real estate or retirement accounts). The IRS also allows you to count any Estimate Tax Payments as an expense on the financial statement so that you are not being stretched beyond your financial capability.

The IRS will reduce the monthly payment to an amount you can afford for one instance. That’s when the financial statement shows you’re unable to pay off the balance in 72 months with a combination of the value of your assets and net income.

You may qualify for an offer in compromise if you can’t pay for 120 months.

If your financial statement shows that you cannot pay off the balance within 120 months (10 years) with a combination of the value of your assets and your net income, you may qualify for an offer in compromise and the IRS will settle for less than you owe.

To learn more, read the Debt.com report, How to Settle Tax Debt.

What Are The State Tax Garnishment Rules for Married Couples Filing Jointly?

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Question: I have a percentage withheld from my wages for my student loans. Will all our taxes be withheld for my student loans if I file with my husband, too?

Shaena in Michigan

Andrew Pentis, certified student loan counselor at Student Loan Hero, responds…

Unfortunately, filing taxes jointly with your husband means that both your tax refunds could be garnished.

As you know, defaulting on federal student loans can lead to garnishment of your wages and tax refund. If your student loans are in default, the IRS could intercept your returns to collect.

That said, the IRS should inform you of its intent to garnish your tax refunds before scooping up your money. Hopefully, you’ll at least get advanced notice if you and your spouse’s tax refunds will be redirected toward your student loans.

Some good news (sort of)

Now that we’ve gotten the bad news out of the way, here’s a piece of good news: You can save your husband’s tax refund by filing taxes separately. If you don’t file together, your husband’s refund won’t be affected by your student loans.

However, filing separately could mean you lose out on the perks of joint filing. Married couples are able to snag a number of tax deductions and credits that single filers can’t. For example, joint filers are able to claim a much larger standard deduction than single filers. If filing separately would cause you to lose out on important benefits, it might not be worth the trouble.

Compare both options to see which would make more financial sense for your situation. You might use a free tax filing service such as TurboTax, or you could consult with a tax professional for their guidance.

Once you’ve figured out the best way to file your taxes this year, you might benefit from getting your student loans back into good standing.

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Try student loan rehabilitation

As you’ve experienced, student loan default comes with a number of nasty consequences. Not only can the government garnish your wages and tax refund, but it can also dip into your Social Security benefits [1]. Defaulting drags down your credit score, and you might have had debt collectors ringing your phone off the hook.

Luckily, there are a couple of ways you can get your student loans out of default. One is through applying for student loan rehabilitation.

With rehabilitation, you agree to make nine on-time payments, which typically amount to 15 percent of your monthly discretionary income. This process can take 10 months, but it could mean your default is removed from your credit report.

Or student loan debt consolidation

The faster way to resurrect your student loan status is through consolidation. All you have to do is apply for a Direct Consolidation Loan through the government and agree to pay your loan back on an income-driven repayment plan.

An income-driven plan will adjust your monthly payments in proportion to your income, so hopefully, they won’t be too burdensome. And if you keep up with payments each month, any remaining balance could be forgiven after 20 or 25 years.

Alternatively, you could agree to make three on-time monthly payments and then apply for consolidation. In this case, you wouldn’t have to choose an income-driven plan, but you could go with whatever repayment plan best fits your budget.

The consolidation process only takes 30 to 90 days, so you could be out of default within the next few months. But unlike with loan rehabilitation, your default will remain on your credit report. Not only could you save your wages from future garnishment, but you would no longer have to worry about an offset of your and your husband’s tax returns.

The bigger challenge would likely be keeping your student loans out of default. Hopefully, your monthly payment on an income-driven plan will be reasonable, and you’ll be able to afford it.

But if you do find yourself struggling, speak with your loan servicer about your options. Your servicer might be able to adjust your monthly bills again to make them more affordable. By finding a manageable student loan payment, you can avoid default, stop wage garnishment and save your future tax returns.

I hope this information helps you and your husband, and best of luck as you overcome the challenges of paying off your student debt.

Rebecca Safier contributed to this response.

What Is a 1095-A Form and How Does It Work?

Question: Hi do I have to file a 1095-A when my exemption code is D?

Chaim in New York

Mandi Woodruff, Executive Editor of MagnifyMoney, responds…

First, let’s talk about the form you mentioned, Form 1095-A [1]. Health insurance marketplaces issue Form 1095-A. They send one copy of the form to the IRS. The agency uses it to provide information about the people who purchase qualified health coverage through the marketplace. Another copy goes to the individuals who enroll in those plans to help them prepare their tax returns.

So to answer your question, no. You don’t have to file Form 1095-A – because individuals don’t prepare that form. The marketplace will only issue it. However, if you purchased health insurance through a marketplace during any month of the year, you should receive Form 1095-A from the marketplace. And you may need to include it with your tax return.

From your question, it sounds like you might be confusing Form 1095-A with Form 8965 [2]. Form 8965 is used to report an exemption to the minimum essential coverage requirement. It’s also used to calculate a penalty if you didn’t qualify for an exemption.

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Some people may need to include both Form 1095-A and Form 8965 with their tax return. This would apply if you were covered by insurance purchased through a marketplace for part of the year and qualified for an exemption during other months of the year. If that’s the case, you still won’t need to prepare Form 1095-A. You’ll just receive it from the marketplace and attach a copy to your return. Then you’ll follow the instructions for Form 8965 to report your exemption.

An educated guess

Chaim, it sounds like you’re dealing with the Affordable Care Act’s requirement to maintain minimum essential health care coverage, and you might be confusing a few of the tax forms created to deal with the ACA’s requirements. There are a lot of them, so your confusion is understandable.

Let’s back up and explain the minimum essential health care coverage requirement.

Starting in 2014 and continuing through the 2018 tax year, the ACA penalized individuals who weren’t covered by health care coverage for every month of the year. Individuals could avoid a penalty by being covered by health insurance through work, buying a health insurance policy directly from an insurance company, applying for coverage through a Health Insurance Marketplace (either the federally-facilitated HealthCare.gov [3]or a state-based marketplace), or having coverage through a government-sponsored program such as Medicare or Medicaid.

If you didn’t have minimum essential coverage for those years, you could avoid a penalty by qualifying for an exemption. There are several possible exemptions, but it sounds like the one you’re using is Exemption D – which means you’re a member of a health care sharing ministry.

A health care sharing ministry is an alternative to health insurance. Its members typically share ethical or religious beliefs. They make monthly payments to help cover the health care expenses of other members. You could claim an exemption to the minimum essential coverage mandate for any month in which you or the other members of your household were a member of a health care sharing ministry for at least one day of that month.

To qualify, the ministry (or a predecessor) must have been in existence and sharing medical expenses continuously and without interruption since December 31, 1999. If you’re not sure whether your ministry qualifies, you can contact the ministry for more information.

The good news

A lot of the confusion over minimum essential coverage will go away when you file your tax return next year. The Tax Cuts and Jobs Act of 2017 eliminated the individual mandate starting in 2019.

Why Do I Owe Taxes This Year?

Question: Unlike most people, I ALWAYS file my taxes early as possible – and I ALWAYS get a refund of at least $2,000. This year, I actually owe money! How is that even possible? My job is the same, and while I got a raise, it wasn’t very much. My friends tell me it probably has something to do with the Trump tax cuts, but they’re all raging liberals. And how could a tax CUT raise my taxes? That makes no sense! Do you know what’s going on here? – Hope in Florida

Mandi Woodruff, Executive Editor of MagnifyMoney, responds…

It probably doesn’t help to hear that you’re not the only one facing an unpleasant surprise this year. Many are finding they owe money to the IRS when they were expecting a refund this year. But it’s true. And no one can blame you for being confused at how a tax cut turns into owing money.

In fact, a lot of people are asking the same question this year.

How Trump’s tax cuts are affecting your refund

One of the main pitches made by lawmakers in support of the Tax Cuts and Jobs Act of 2017 was that tax reform would provide tax cuts for everyone. But now that returns are being filed, many people are getting smaller refunds or having to write a check. That’s despite making zero changes to their job, income, and other factors that go into calculating their tax bill.

For some people, the problem is the loss of deductions they’ve claimed in the past. The new tax law put a $10,000 cap for state and local taxes. That eliminates the deduction for unreimbursed job expense and does away with personal exemptions. In theory, the effect of dropping these and other popular deductions would be offset by expanding other tax breaks, such as the standard deduction and the child tax credit.

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For other people, the problem stems from having less federal income tax withheld from their paychecks in 2018. Early last year, the IRS changed its withholding tables [1] in an attempt to more closely match the amount of tax people would owe under the new tax laws.

Employers and payroll companies use withholding tables to decide how much tax to withhold from employees’ paychecks. They determine that by their wages, marital status, and the number of withholding allowances they claim.

Your employer likely decreased the amount of federal income tax they withheld from your paychecks in 2018. You should have seen the withholding changes in your checks around the end of February 2018. So, instead of getting a big refund at the end of the year, you received more money in your paychecks.

So why weren’t the new withholding tables accurate? Well, here’s the problem: A tax return has a lot of moving parts, and withholding tables don’t always accurately reflect your unique tax situation. Some of the scenarios in which people might have too little tax withheld include being in a two-income family, having older dependents who don’t qualify for the child tax credit,or being accustomed to itemizing and claiming large deductions for state and local taxes.

How to avoid owing money on your tax return

So, which is it for you: loss of deductions or smaller withholding? Without looking at your tax return, we can’t tell you for sure. But you can get to the bottom of it by pulling out your 2017 and 2018 returns and doing a side-by-side comparison of the income, deductions, credits, and withholding.

To keep this from happening next year, you can complete a new Form W-4 [2] to adjust your withholding for 2019. The IRS has a Withholding Calculator [3] that can help you ensure you have the right amount withheld. Turn the updated form into your HR department as soon as possible. Withholding takes place throughout the year, so if you need to adjust it, the sooner you get it changed, the better.

However, consider whether you might actually be better off writing a small check to the IRS at tax time rather than receiving a big windfall when you file. The money that sits in the IRS coffers until you receive your refund is essentially an interest-free loan to the federal government. Your money might be put to better use when you get it in a small boost to your paycheck every two weeks instead of waiting on a fat refund every spring.

For more information on filing this year, read How to File Taxes.

Can Married Couples File Taxes Separately?

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Question: My wife left in July of last year, and we are not legally separated or divorced or anything – and she said she filed her taxes separately. I was told that since we are married and filed jointly last time and are signed up like that, we can’t do it separately. Am I right? Please let me know.

Also, is there any way she could do the taxes for both of us through Turbo Tax without me involved if she has my Social Security Number and all kinds of other personal info?

Frank in Michigan

Jacob Dayan from Community Tax responds…

If you’re legally married to someone, you generally have the option of filing as Married Filing Separate or as Married Filing Joint. Just because you filed Married Joint in prior years doesn’t mean you have to file Married Joint in the future.

Married couples can switch from Married Filing Joint to Married Filing Separate – and back again – each year if they so choose. There are only two limits on choosing Married Joint or Married Separate status:

  • Both spouses filing status must match. In other words, one spouse can’t file Married Separate, and the other Married Joint or Head of Household, in the same tax year.
  • Once a tax return is filed, you can’t always change the filing status by amending the tax return.

Both Married Filing Joint and Married Filing Separate have pros and cons.

Married Filing Joint pros and cons

Married Filing Joint is more convenient and less expensive to file. That’s because only one return needs to be filed instead of two. However, if there’s a tax balance due on a Married Filing Joint return, the IRS can come after either spouse for the entire balance due. That’s regardless of whether or not that spouse caused it.

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I have seen balances on Married Filing Joint returns cause a lot of heartaches after separating. Sometimes, the IRS decides to pursue collections or levy one spouse and not the other for the unpaid balance – particularly when that spouse is a W-2 employee and would not have owed if they filed separately. So Married Filing Joint can be cheaper and more convenient. But it can also cause problems between spouses if there’s an unpaid balance due on the return.

Married Filing Separate pros and cons

Married Filing Separate can help spouses avoid problems. What problems? Those related to combining their tax accounts by allowing spouses to keep tax refunds and tax balances separate. In general, the IRS can’t collect a balance on a Married Filing Separate return against the other spouse. However, filing Married Separate will also disqualify both spouses from certain tax deductions and credits – like the student loan interest deduction, dependent care credit, and earned income credit, among others.

Married Separate filers also need to match their selection to itemize deductions or take the standard deduction. If one spouse takes all of the largest itemized deductions – like home mortgage interest and real estate taxes – the other spouse has to itemize as well. They may be left with little or no itemized deductions to claim.

Filing taxes separately bottom line

You’re allowed to ask anyone you’d like for assistance in preparing the return, including a current spouse. If your spouse has all your information, she can certainly prepare the return with your permission. But you will need to review and sign it before it can be filed.

If choosing Married Filing Separate status, your spouse will need to be involved in some way to ensure consistency. If you’re using web-based software like Turbo tax, she may need your help in creating an online account for you. But once she has access, she should be able to complete the return without any issues.

To learn more about tax filing, check How to File Taxes.