Our last post in the Smart Money series! We’ve loved having you and hope you’ve learned as much from these posts as we learned while writing them. Lest it should come across like this is all easy to do, it’s not! Getting a handle on your finances is a lot of work, but once you develop good habits and practices it gets easier and easier. By planning, goal setting, and automating your savings and investments, pretty soon you’ll be able to focus on more important things instead of stressing about money.
To tie everything up, we’ve got to talk about two important but “boring” topics – insurance and taxes. Yes, we realize it’s nobody’s idea of an exciting Friday night, but that doesn’t mean you shouldn’t learn about them. Ideally, these two things won’t take up much of your time if you educate yourself and put systems in place so they’ll be there when you really need them.
Sometimes it feels like everything in life requires insurance – our bodies, homes, cars, even our lives! We’ll walk you through the basics of what kind of insurance you need and how to use it to work for you and your family.
TYPES OF INSURANCE
There are a lot of insurance options out there, but you don’t need them all. Most of the policies you choose will depend on your individual circumstances and where you’re at in life, though some insurance is unavoidable and necessary.
Auto and Home
It’s illegal to own a car or a home without insurance, and these policies protect against accidents and damages. Most providers will give you a bundling discount for carrying both policies with them, but it pays to shop around. Try to get rates from at least two to three providers. Rates for auto insurance are based on the age of the car, how much you drive, your driving record, your credit, and where you live. Your home insurance is based on the age and condition of the house, the location, and your credit.
Up until 2020, having health insurance was mandatory under the ACA (Affordable Care Act), and though it’s not technically mandatory now, we still think it’s best to have it. We’ll cover health insurance more below, but reliable health coverage is one of the most important things you can do to ensure you and your family steer clear of high medical bills or potential bankruptcy. There are even options known as “catastrophic” plans with very low premiums and high deductibles that won’t do much for you day-to-day, but will save you if disaster arrives.
We talked about renters insurance in our third post, and we’re big fans of it. Property owners are required to carry insurance on the home or apartment you’re renting from them, but they won’t necessarily insure your personal belongings. Renters insurance is relatively cheap (around $180/yr) and protects all your belongings from theft or damage.
There are two main types of life insurance – term and whole. Term is the more common of the two and is often the type employers offer. Term life insurance gives your family a payout at the time of your death. Whole life insurance also includes a payout upon your death, but it also acts as a kind of savings account that accrues a cash balance over time. So, in addition to the death benefit, once you have a large enough cash balance, you can borrow from it like you would a retirement fund. It is considered a loan (that you’re taking from yourself), so if you don’t repay it, the total death benefit amount will go down. Many people choose to take out a life insurance plan when they have kids or as they get older, but you’ll get the lowest rates the younger you are.
Long-term care coverage is meant to supplement and fill in the gaps that most health insurance plans leave open. It’s intended to cover things related to daily living that become harder to do as you age or become sick like eating, bathing, dressing, and using the bathroom. Though these policies typically won’t cover 100% of your needs, they can be a lifesaver. Families are often surprised to learn their current health policies don’t cover these services and too often the financial burden falls to the adult children to either pay out-of-pocket, or perform the duties themselves.
USING THE ACA
IN 2015, THE OBAMA ADMINISTRATION ALONG WITH CONGRESS PASSED THE ACA (AFFORDABLE CARE ACT), COMMONLY REFERRED TO AS “OBAMACARE.” IF YOU DON’T GET HEALTH INSURANCE THROUGH YOUR EMPLOYER OR YOUR SPOUSE’S EMPLOYER, AND IF YOU DON’T QUALIFY FOR MEDICARE OR MEDICAID, THE ACA CREATED AN ONLINE MARKETPLACE AT WWW.HEALTHCARE.GOV FOR THOSE NEEDING TO PURCHASE INSURANCE ON THE OPEN MARKET. THROUGH THIS WEBSITE AND PARTNERING STATE SITES, INDIVIDUALS CAN SHOP FOR PLANS AND DETERMINE IF THEY ARE ELIGIBLE FOR A TAX CREDIT TO HELP PAY FOR THEM. THE TYPES OF PLANS AVAILABLE TO YOU ARE REGIONALLY BASED, SO IT’S BEST TO LOG ON TO SEE YOUR SPECIFIC OPTIONS.
Types of Plans
The ACA divides their plans into three categories: platinum, gold, silver, and bronze. Platinum plans provide the most comprehensive care with the lowest deductible and out-of-pocket expenses, but you’ll pay the most in monthly premiums. Bronze plans typically have the lowest premiums, but will have higher deductibles and out-of-pocket expenses. We’ve done a more comprehensive rundown of these insurance terms in post 4.
HMOs/PPOs/EPOs and HSAs
You’ll also need to be familiar with designations within all of those plans and what they mean.
- HMO (Health Maintenance Organization): HMO plans have a limited group of doctors that you’re able to see who are “in-network.” This typically means lower costs, but it can also be limiting to those who want more options for their care.
- PPO (Preferred Provider Organization): PPO plans are open to more providers and typically will let you see a specialist without a referral. They tend to be more expensive than HMO plans.
- EPO (Exclusive Provider Organization): EPO plans are similar to HMO but often have an option for specialist visits without a referral. Like an HMO, you will have to stay within a smaller group of providers to get in-network coverage.
- HSA (Health Savings Account): An HSA is an account that you put pre-tax dollars in to pay for qualifying medical expenses. Some plans available through the ACA will have an HSA option which often makes the premiums lower.
How to Get Help
When the ACA site was first unveiled it received a lot of blowback due to its glitches, but it (and state sites) is now fixed and fairly easy to navigate and find information. Still, if you need or want help, there’s free assistance through ACA “navigators.” Navigators are local experts who can meet in person or over the phone to walk you through the process and help you choose the best plan. You can find your closest navigator here.
Insurance claims are a part of life and you’ll run across them when dealing with auto, home, and health insurance. Because health insurance claims happen the most frequently, we’ll spend most of our time talking about those.
What is a claim?
A claim is simply a formal request for coverage. For health care, claims are normally made on your behalf by the provider at the time of service. For auto of home claims, you’ll usually have to file the claim yourself if you wish to get reimbursed for damages.
How to file an initial claim
Auto claims should always be filed when an accident occurs – whether or not you were the one who caused it. If you can, take photos or video of the damage on both cars right after the accident before you leave the scene. Also ensure that you get the insurance information from the other driver, as you will both be filing claims and your insurance companies will communicate with each other to resolve it.
Home insurance claims work in a similar manner, though the damage is more likely to occur due to weather or a faulty appliance or home system. You’ll first want to consult your policy to make sure the damage is covered. When in doubt, you can call your provider or file a claim and wait for their response. Take pictures and document everything, keeping all receipts if you had to pay out-of-pocket for emergency services.
For medical claims, often your provider will submit the bill to your insurance company on your behalf. Typically within 30 to 45 days you should receive a notice letting you know how much your insurance will cover and how much you owe out of pocket.
If you receive a claim report stating you owe money on a service that you believe should have been covered by your plan, you’ll have to file your own claim contesting this one. This can be time consuming and frustrating, but sometimes it’s up to you to ensure you’re getting the most out of your coverage. Here’s what you’ll need to do.
- Preliminary research – Mistakes happen all the time and insurance providers are no different. All medical procedures have a reference number known as a CPT (Current Procedural Terminology) code. If it’s entered incorrectly, or the wrong CPT code is used (they’ll often be multiple codes used for a single visit as well as different codes for the same procedure), it could make the difference of being covered completely or not at all. If you believe an error has been made, call your provider and explain why you think you were overcharged. Sometimes, it’s a simple keying error that can be fixed on their end and you won’t have to do anything else. You may have to follow the trail to who initiated the code in the first place. Often if you were referred to a specialist, they will use the code that your primary care provider gave them. In this case, you’ll have to go back to them to see if it can be changed. If not, get ready for a little work.
2. Document – Document everything that happens and all communication you’ve had with your provider and your insurance company. Another unfortunate reality is that many claims STILL can only be made by snail mail or by fax (yes – fax!). Only a few medical insurance providers have a way to file online. This means you’ll need paper copies of everything – bills, receipts, referrals, reports.
3. Get organized – Look on your provider’s website for their claims department and follow the directions explicitly. Many times, you’ll have to send in a bunch of documentation as well as a completed form outlining why you are contesting your claim, and it can take up to six weeks to get a response. You want to make sure you have everything you need before you send it.
4. Research – Scour your insurance docs and coverage material and look for the language that pertains to your specific complaint and reference this in your claim. Also call your providers to ask questions about the procedures and codes they use to report them. Take notes.
5. Don’t give up! – If you’re lucky, your claim will be resolved with your first communication, but it may not be so easy. Stand your ground if you know you should get coverage.
Ahhh, taxes! Everybody’s favorite, right? Well, probably not but it doesn’t have to be as bad as you think. While we could never go over all you need to know when your taxes come due, we’ll cover some basics that should give you a good place to start from.
HOW TAXES CHANGE – LIFE EVENTS AND THE TAX CODE
Big life events will affect your taxes as well as changes to the tax code. The newest tax code revision happened in 2019 with the Tax Cuts and Jobs Act (TCJA), and with this came a few substantial changes. We’ll review the major things to be aware of:
Standard vs. itemized deductions
When filing your taxes you can take “deductions” so that your gross income (pretax income) is reduced, thus reducing your tax burden. There has always been a standard deduction available to both individuals and couples, or you could opt to itemize your deductions if they exceed the standard.
Pre 2019, about a third of people used itemized deductions since the standard deduction for individuals was $6,350. Now, that amount has doubled and the new standard deduction is $12,200 for individuals and $18,350 for couples.
Life events and tax deductions
Here are the most common deductions related to life events:
- Having a baby: Each dependent gives you a $2,000 tax credit if you make up to $200,000 as an individual or $400,000 as a couple. Note that if you are divorced, only one parent can claim this credit.
- Paying for a child’s education: 529 accounts (that we outlined in post 5) were once only usable for college expenses, but can now be tapped for some expenses prior to college up to $10,000.
- Home office deduction: You can claim a portion of your home and utilities that you use for business, but it has to be a dedicated work space.
- Medical expenses: You can write off any medical expenses that are over 10% of your gross income. Previously it was 7.5%.
- Mortgage interest: You’ve always been able to write off mortgage interest, but with the new code you can only do so on properties with principal loan values of less than $750,000, down from one million.
Newly eliminated deductions
The TCJA also eliminated a number of deductions that were previously available. Some of the bigger ones that you can no longer claim are:
- Employee expenses (unreimbursed expenses like uniforms and business meals)
- Tax preparation costs
- HELOC (home equity loan of credit) interest
- Moving expenses (one exception to this is if you are in the Armed Forces and have to relocate due to work)
Many people make charitable donations without thinking about their personal benefit. Whether it’s to a local shelter, disaster relief funds, or clothing to Goodwill, most charitable donations are tax deductible. However, since the TCJA, the benefit of this has largely diminished due to the higher standard deductions. This makes it more unlikely that people will be able to itemize enough deductions to go over the standard of $12,000 for individuals and $24,000 for couples. To get around this, a tax consultant can help you “bunch” your deductions. This is where you save up your charitable donations from a few years and declare them all in one year.
COMMON MISTAKES WHEN MAKING CHARITABLE DONATIONS
- You don’t watch where your money goes: If you want to reap the tax benefit, make sure you only donate to tax-exempt organizations.
- Not keeping documentation: With any donation you make, ensure you keep a record of it. You won’t necessarily have to include this with your returns, but your CPA will want to know you have them should you get audited.
- Not claiming out-of-pocket expenses while volunteering: While your time volunteering is not tax deductible, anything you spend during that time (food or gas for example) is.
WHAT IF YOU’RE UNEMPLOYED?
Even the unemployed should file a tax return, but there are some specifics you should know about ahead of time:
- You may qualify for the Earned Income Tax Credit (EITC). Find out more about it here.
- You can deduct expenses from your job hunt as long as you’re searching for one the same field as your previous job.
- Just because you’re receiving unemployment benefits doesn’t mean you don’t have to pay taxes on them. When you signed up for unemployment you should have elected that a portion of your payments be withheld. If you didn’t, you may owe something at tax time.
HOW TO GET HELP
Depending on how complicated your finances are and how much time you’re able to devote to them, you may want help organizing and filing. The good news is there are a lot of options available for any budget:
- Volunteer Income Tax Assistance (VITA) Program: VITA is a popular service funded through the IRS. It offers free tax help, but is usually only available to those who make less than $55,000. The people who assist you are not licensed CPAs, but they have received training in tax preparation and your final return will be reviewed by a professional.
- Free File: This is free filing software funded by the IRS available to those who make less than $66,000.
- Tax Counseling for the Elderly (TCE): While this program is technically available to everyone, priority is given to those 60 and over as TCE volunteers specialize in pension- and retirement-related tax issues.
- Friends and Family: It’s always an option to take advantage of friends and family who may have more experience with tax preparation. This is most common with young adults who are filing for the first time as their taxes are usually more straightforward.
Commercial Tax Software
There are a number of companies that sell tax filing software for consumers. Some are marketed and priced for individuals making less than $100,000 to help reduce costs. This is a cheaper route than paying a professional, but may not work for everyone since it’s all self-directed. Also, make sure you know all costs before you buy. Some programs will advertise a low initial cost, only to charge you more as you get deeper into filing. Look especially for additional costs added to file state taxes.
If you’d prefer to sit down with someone but still don’t want to pay a CPA, you can go to a storefront service. Keep in mind the people you are working with are trained seasonal workers and not CPAs, though they will typically have more training than VITA consultants. The nice thing about these services is they usually won’t charge you until they’ve run your numbers and shown you your return.
CPAs (Certified Public Accountants)
You can always hire a CPA to do your taxes for you, but it will cost you. Some CPAs charge hourly and some charge a flat rate for individual returns with additional charges based on complexity (like if you own a second property). In 2019 the average price was $188 for non-itemized return and $294 for itemized.
Your last option is to dig in and do your own taxes. This will take some time, organization, and research, but it can be done! This is easiest with the assistance of the IRS Free File software and the VITA program. If your taxes are pretty straightforward and you have no itemized deductions or adjustments, this could be a good option for you.
PREVENT ID THEFT
ID theft is an unfortunate part of our digital world, and it can get especially bad around tax time. While there’s no way to protect yourself completely, there are several steps you can take to ensure you don’t become an easy target.
“Phishing” emails ramp up around tax time, and they are disguised as official correspondence from the IRS. These are predatory emails that attempt to steal your money or your information. They usually do this by promising a tax refund in exchange for credit card or bank account information. The real IRS will never send you unsolicited emails asking for this.
If you are expecting a return, and aren’t sure if you’re looking at a phishy email or not, you can always check your return status here on the IRS’s official website.
Say “No” to Tax Refund Anticipation Loans (RALs)
RALs are high interest, short-term loans that some tax preparers offer so you don’t have to wait for your return. Don’t do this! These loans are typically only good for a couple weeks and the amount you pay for the service and the fees will not be worth it. If you file your taxes electronically (which most do these days), you can expect your refund to be deposited into your account within 10 to 21 days. Plan accordingly so you won’t be in desperate need of your return.
File early to catch fraud
Fraud is rampant during tax season and comes in many forms. One thing fraudsters will do is use your personal information to file a return in your name and try to take your return. If you don’t file your taxes in a timely manner, this could take weeks or months to catch. If this happens, your real returns will get flagged as a duplicate and you can start rectifying the situation then, but you won’t see it until you file.
What to do if you’re a victim
If you do find yourself a victim of tax fraud or a phishing scheme, consult the IRS’s step by step guide for help. Make sure you keep documentation of everything you do and who you speak to about the fraud to better help resolve your situation.