TurboTax Free vs. Freedom, 2010 edition

Some things age more gracefully than others. This was first posted 8 years ago, so caveat lector. Links may be broken, things may be wrong (this is the internet, after all), and you may be better off finding more recent and relevant content. Blogs are rarely graceful on a good day, let alone after a few years.

Last year, I posted “Don’t Let TurboTax Free Edition Fool You—You Probably Want FREEDOM Edition,” and it is one of the most often viewed posts on this site. Here’s the update for 2010. In short, before you try the Federal Free Edition, make sure you don’t qualify for Freedom Edition, which will allow you to file more than 1040-EZ and also allow you to file your state for free (in participating states).

Freedom Edition: Do you qualify?

  • Your AGI is under $31,000 (same as last year)
  • You are/were active duty military in 2010 with an AGI under $58,000 (up from last year)
  • You qualify for the Earned Income Credit (EIC) Find out if you qualify at IRS.gov

If any of these are true for you, try the TurboTax Freedom edition.

If you do qualify, you can also file for free in these states: AL, AR, AZ, GA, IA, ID, KY, MI, MN, MO, MS, NY, NC, ND, OK, OR, RI, SC, VA, VT, WV.

What are you waiting for? Head over to the IRS Free File portal today!

The IRS Free File program

TurboTax Federal Free is not associated with the IRS’ Free File program, which allows anyone with an Adjusted Gross Income (AGI) of $58,000 or less e-file for free, including some state returns. TurboTax Freedom is.

TurboTax Freedom has stricter limits than the Free File program, so you may want to explore your options and choose another online preparer if your AGI is over $31,000.

The Free File page can help you choose the preparer that is right for you. Make sure to check if your chosen preparer will allow you to file your state income taxes as well.

More good news: because the normal deadline falls on Emancipation Day, meaning gov’t offices are closed to receiving mail and processing returns, you have until April 18 this year to file your taxes.

What’s the real difference?

For the most part, both programs step you through the process of filing, helping you make sure that you claim all the credits and deductions that you qualify for. Freedom Edition, since it isn’t restricted to Form 1040-EZ, has many more options and will allow you to itemize deductions, claim small business income, and capital gains or losses. Federal Free edition is very limited in what it will allow you to claim beyond the standard exemptions. You can’t itemize deductions at all.

What made me notice the difference is the cost of filing for state income taxes: Freedom Edition allows you to file states for free, so long as they also participate in the Free File program. Federal Free edition charges you $27.95 for each state.

Freedom edition does not have as nice of an interface, though, so if you want to be wowed by pretty graphics (at the expense of not filing for free), it’s not the program for you.

I am not a licensed tax preparer or financial professional of any kind. If you have questions about your taxes, you should consult a qualified tax professional. This is simply my observation based on my own research for filing my own taxes. This is also in no way sponsored by the IRS or Free File program. I just want everyone to be as educated as possible.

You just got a 2% pay increase! Use it wisely.

Some things age more gracefully than others. This was first posted 8 years ago, so caveat lector. Links may be broken, things may be wrong (this is the internet, after all), and you may be better off finding more recent and relevant content. Blogs are rarely graceful on a good day, let alone after a few years.

…well, kind of, sort of. On Dec. 17, Congress agreed to extend many of the Bush-era tax cuts, which is generally pretty awesome in the more-money-in-my-pocket way but not so much in the holy-staggering-national-debt-increase-Batman! way. In addition to the extensions is what I’ll call Making Work Pay 2.0 (officially the Tax Relief Act)—a employee payroll tax decrease.

The payroll tax, more commonly known as the Social Security tax, is normally 6.2% of your gross income. Everyone who earns money by legal, non-tax-avoiding ways pays this, no ifs-ands-or-buts, although if you make more than $106,800, your maximum tax is $6,621. For 2011, the tax for employees is reduced to 4.2% (a max savings of $2,136). If you’re self-employed, you’ll still have to pay the full employer-side 6.2% for a total of 10.4% instead of 12.4%. And if you’re an employer, you still have to pay 6.2% for each of your employees.

So, that begs the question: what are you going to do with it?

I’ve already made my decision—it’s going straight into my retirement account. I figure I might as well save for my own retirement while I’m getting a reprieve from paying for someone else’s. The proper paperwork has been signed, sealed and delivered. I waffled about this or paying off debt faster, but I’ll have my over-5%-interest consumer debt all taken care of by the end of January, and I expect that my retirement returns will be higher than that in the long run. It just makes financial sense. After all, thanks to compounding interest, your early 20s is a great time to start saving for retirement.

What’s your plan, Stan?

One note of import: since it’s all very last minute, your employer has until Jan. 31 to fix their payroll system so that the money goes in your check instead of to the government. This means you may not see an increase until February. Then, your employer has until Mar. 31 to give you whatever they owe you from not having the system set up correctly in January.

How Bad Does it Hurt? Closing Your Oldest Credit Card

I came home a few weeks ago to an ominously large envelope from 1st Financial Bank, USA, the guarantor of my oldest credit card—too large to be the statement or those deplorable fee-heavy cash advance checks they send me. You may remember from my grousing a while back that 1FB was guilty of pretty much every shady tactic outlawed by the CARD Act that recently went into effect, and how happy I was to finally pay the card off. Well, know that they’ve been forced to stop double-cycle billing, roving due dates, and other money-making tactics, they have a new way of making money: annual fees.

The new annual fees? $25, $45 for limits over $1000. Although based on their wording, there’s no guarentee that they’ll charge you. In fact, when I called up to cancel, I was told You know, your annual fee can be waived on a yearly basis, upon request. So, it sounds like they’re planning on making most of their money on the inattentive that never bother to call in.

I have no intentions of potentially paying $45 annually for a card to sit in my wallet virtually unused, nor bother with calling in yearly. The only reason I still have the card is that it is my oldest (by a year), and has the highest credit limit. Those two factors supposedly help my credit score out quite a bit. Especially the high limit, which accounts for over half of my available credit. I’ve seen first hand how a high debt-credit ratio can bring down your score, so I don’t relish the thought of halving my available credit (and doubling my current debt-credit ratio). But does the fact that it is my oldest card count? After all, even closed, it will remain on my record as a closed account for the next few years. And should I even be worrying about my credit score? After all, I’m working on getting out of debt, not taking more on. I have a newish car (2007), and with a paltry 20k miles on it to date, I’m sure I won’t be needing another one for quite a while. We decided that a mortgage isn’t in the cards any time soon—it’s cheaper to rent here in Utica, and we’re not sure we want to stay long-term anyhow. So, why do I even need an excellent score? The answer? I probably don’t.

So, I “rejected the change to my account,” which is their euphemism for “you won’t play our profit game, so we force you to tell us to close the account.” And then I waited anxiously for them to report to the credit bureaus to see how much my score was affected.

The Score Hit

I started out with a 769 TransUnion score, which is considered an excellent score by Credit Karma. That’s actually quite a change since this time last year, mostly due to paying off the 1FB account and bringing down my debt-credit ratio quite a bit. Since that ratio is what is going to take the biggest hit with this cancellation, it did have me a bit worried.

The resulting score: 761.

So, not much of a hit at all. But, despite my worry before closing, I’m now at peace: I have one fewer card to worry about losing/having stolen, and will have to spend that much less time reviewing and filing statements (1FB jumped on the paperless bandwagon a mere month before I closed the account). And, by the time I’m ready to apply for a mortgage, my debt-credit ratio will be ~0, so the score will be back up.

The moral of the story? In my situation, at least, the myth that closing your oldest credit card will severely effect your credit rating doesn’t seem to hold true. What does cause issues is the drop in debt-credit ratio from losing the available credit on the card. If you’re young, and have a pretty good history, there’s no good reason to not consider dropping your oldest card if the bank gives you reason. A slightly lower score is still better than paying a high annual fee for no rewards and no features.

I know 1FB USA isn’t the only bank out there that has started charging annual fees. Have you had any surprise changes to your accounts since the CARD Act went into effect?

Great Time to Start an IRA

“You’re in your early 20s. That’s too early to start thinking about retirement.” Wrong. So completely wrong. Now is the best time to think about retirement. Sure, it’s a long way off, but even a small percent of your salary can mean a nice bit of savings in the long run thanks to the power of compounding interest.

Start an IRA

I was inspired to write this post because ING/Sharebuilder is offering FREE automatic investments for the year when you start a new IRA with them before 15 Apr 2010. I already have a Roth IRA with them, but I decided to start another one. Those normal $4 commissions really add up and put a dent in returns, especially when saving as little as I am, and if I can get all of those transfers for free for a year, well, I’m gosh darn gonna try! The promotion applies to both Roth and Traditional IRAs as well as Rollover Roths.

If you’re not interested but are considering opening up a non-IRA account with them, leave a comment to that affect and I’ll pass along a referral that nets me five free investment trades and you $25 to invest.

Why?

As I said, compounding interest is amazing for growing money. I started my Roth IRA just a few months before my 23rd birthday. There’s not a lot of money in there, because I only put in $50/month right now while I pay off debt. At $4/trade, that’s a lot of fees in relation to the investment, so I started doing the investment every other month at $100 for now, until I can bump up my monthly contribution. But let’s run some numbers about what I’m gaining by even my paltry investment.

In my calculations I’m considering a really low return: 5%. Historically, smartly invested funds will net about 10% in the market over the time we’re talking about before retirement. At 5%, we should barely beat inflation. But, this requires investing in the market or things like bonds, not letting it sit in your local bank savings account or CD.

Effect of Compound Interest
Starting age Monthly investment Money invested Interest earned Total value at age 65 Monthly to match age 23 Increased investment Interest earned
I’m rounding. Numbers aren’t precise, but close.
23 $50.00 $25,200 $60,724 $85,500
33 $50.00 $19,200 $28,236 $47,436 $ 90.00 $34,560 $50,940
43 $50.00 $13,200 $10,867 $24,067 $178.00 $46,992 $38,508
53 $50.00 $ 7,200 $ 2,679 $ 9,879 $433.00 $62,352 $23,148

I’m using simple math here. Compounding annually, ignoring inflation, conservative return, ignoring commissions.

What does this show us? By saving $50 a month in an investment vehicle that is only returning 5%, starting at age 23, you get over $60,000 interest on top of your principal. If you wait 10 years, starting at age 33, that free money shrinks to only a little over $28k. Meanwhile, if you plan to have $85,500 in the bank at 65 like you would had you started at 23, you’ll have to bump up your monthly contribution to $90, and you’re still losing out on $10k in interest. And that return shrinks exponentially the longer you wait.

If you don’t believe me, play around with this calculator. It’s simple, but simplicity at it’s best: it’s very clear about the differences between starting now and starting later, with nothing fancy to confuse the fact.

N.B. The savings I’m talking about here is on top of any employer-based retirement plan if one with matching is available. If you’re not already contributing enough to get the employer match if you have one, you’re doing things wrong. Obviously, saving $50/month for retirement isn’t going to secure you a nest egg. Even my full retirement savings, currently around 7.6% of my income including a 3% employer match won’t set me up for retirement. I know I have to step it up once I pay down debt. But based on these numbers, the money I’m saving now is miles beyond better than saving nothing, don’t you think? So, why not start now?

But, I’m in debt!

I argue that even being in debt is no excuse not to start saving. With a caveat: If you’re so in debt that you’re paying minimum balances, pause retirement savings. You need to set up a budget, forgo some luxuries and pay off debt so that you can start saving. But I’m not a financial adviser. If you really are struggling that much, you need to go see one.

Don’t Let TurboTax Free Edition Fool You—You Probably Want FREEDOM Edition

TurboTax touts their Free Edition’s free-ness. Free to use, free to file. Free for Federal, that is (1040EZ only). Then, they try to up-sell you on filing State for $27.95. What they probably don’t want you to notice is that the Free Edition has nothing to do with the Free File program offered by the IRS, which TurboTax does participate in. But I noticed. Especially one year in while in college when I had to file in three different states, all of which allowed Free E-Filing.

Some of the numbers have changed. View the 2010 update.

Do You Meet One These Criteria?

  • AGI of 31k or less, or
  • Active Military with AGI of 57k or less, or
  • you qualify for the Earned Income Credit

Congratulations, you should probably use Freedom edition if you are planning on using TurboTax.

The IRS Free File program has its limits, as does TurboTax Freedom edition. For the former, you’re only eligible if you had an AGI of $57k or less in 2009. For TurboTax, it’s even more stringent: $31k AGI (for single filers). Additionally, if you own a house, own a business, have a lot of investments/capital gains/losses or donate a lot to charity and you don’t pay attn. to tax laws on your own or don’t care to, neither of TurboTax’s free editions are right for you. There are other companies that offer robust solutions through the Free File program that don’t have the same income limits (Freedom) or restrictions to 1040EZ (Free).

Why should I care?

I don’t know about you, but I don’t want to pay $30 to file my state taxes. Freedom edition allows you to do it for free in states that allow for free e-filing.

Additionally, while 1040EZ will suffice for some people, many others have more difficult tax needs and thus need access to the 1040, which is provided by the Freedom edition, but not Free edition.

But, I don’t see that option on TurboTax’s Web Site!

Yes, they’re rather sneaky like that. In order to access the Freedom edition, you have to go through the IRS Free File Portal. The IRS provides a nice tool to help you choose a preparer, but you can also choose to go to TurboTax directly. The link to TurboTax will allow you to use the Freedom Edition, where things really are free.

I can’t speak with any amount of authority, but I believe the same process is true for some of the other tax companies as well. So, if you do have an AGI under $57k, it’d be smart to head over to the IRS Free-File page and access the online tax applications from there. They provide a list of participating companies, the limitations of each, and a link to the correct free edition.

My Opinion of 1st Financial Bank, USA: Steer Clear

In honor of paying off my oldest/highest-interest credit card balance (woohoo, halfway through my CC debt!), I thought I’d share some thoughts on the card issuer—1st Financial Bank, USA. Particularly, why I think it is an exceptionally shady lender that preys on financially-uneducated students. Sure, most credit card lenders are shady, but few target students to the extent of 1FB.

Is there any good?

Before I bash them, I will admit to a couple of good things: they allowed me to found a credit history at age 18 and raised my limit like clockwork every 6 months, allowing me to maintain a decent debt/credit ratio. Except, maybe that latter bit wasn’t that “good.” I mean, do they really expect a college student to have the means to pay back ~12k? No, definitely not, but 1FB can make a decent chunk of fees if one were to charge up that amount. For the record, I never hit anywhere near that limit.

The Bad

They make it hard to pay and hard to know when to pay by providing jumping due dates, outdated Web access, no option for e-statements, no financial education tools, and limited telephone customer service hours. Maybe some research firm told them that it was good business sense for Generation Y to have access to account information via text message, but to lack a robust online portal, who knows, but if they did, they were told wrong. Regardless of my critique of their technological presence, the real issue is that they exhibited about every bad practice outlawed by the recently-passed CARD act, and are retaliating with painful rate increases and feature removal.

Preemptive CARD Act Changes

Two words: 24.99% APR. Yes, in anticipation of the CARD act coming into effect, they raised my interest rate by 10%! in October. 14.99% wasn’t great to begin with, but 25% is usury in most states (but not SD, where 1FB is based). Also, in addition to the general overdraft/late fee raising that most banks are doing, they also removed the one “reward” type feature of the card: 0% on balances below $250 (or $500 for other cards of theirs).

A good thing? They did remove double-cycle billing. Of course, it wasn’t out of the kindness of their blackened hearts; ceasing double-cycle billing is one of the major dictates of the CARD act.

When Is My Bill Due?

On the nth of the month, give or take a week. My due date constantly bounces around. It is generally somewhere early in the month, but has ranged from the 5th to the 16th. It’s a great way to trap the inattentive (or busy!) student into a late fee.

And a newer development: The online FAQ provides the following about information available online:

1FBUSA Online Services provides easy access to the following information about your credit card account: your credit limit, current account balance, amount of your last payment, date last payment received, your available credit, last statement balance and date, minimum payment due, payment due date, next billing statement date, and next billing statement payment due date. Transactions posted since the date of your last statement are also available, …

[Emphasis Mine]

However, after recent site updates, they no longer provide either a next billing statement date or the next due date. It may seem like unimportant information, but I would like to know the exact date I can see the final finance charges due on my account. Not to mention I prefer to pay the account as close as possible to the statement date, rather than the due date.

How do I pay my bill?

Oh, sorry, we’re still in the 20th century. Mail us a check with your statement stub, please. Your bank does online payments? Well, that’s some newfangled thing they’ve never heard of (ok, a little exagerated, they do provide an ACH program you can enroll in), but the bank can send them a paper check instead of an electronic payment. That’s what ING Direct does for me. The downside there is that despite it being free for me (one of the great ING features), it takes about a week to post, depending on the date 1FB receives it, since it doesn’t have the remittance stub with it, just the acct # on the check..

What about paying online or by phone, like most any decent credit card? Sure, for a $9 charge. I guess it’s the lesser of two evils: forget to send your payment and tomorrow is the due date? No problem, just pay $9 to make a payment on their Web site. Think that’s ridiculous? NP, you can just pay the higher late fee.

Want some human compassion/courtesy? Fuggetaboutit.

Don’t get me wrong, I don’t think it’s the bank’s responsibility to forgive fees right and left or for every sob story, but pretty much anywhere will give you one late payment fee pass, especially if you pay on time consistently. Does that include 1FB? Not in my experience, and I didn’t even hit the dreaded 30-day past, report to the Credit Bureaus point, just 15 days or so.

A few years ago, my grandmother passed away during December finals, right before the payment due date. The following two weeks were a mess—flying home for the funeral, flying back to school to finish my finals, driving home for the month break between semesters (and you had to be out, out, out! of the dorms within 24 hrs. of your last final). True, it’s my responsibility to pay my bill, but obviously, I was a little distracted. I forgot to send in payments for both of my cards. Two weeks go by and I realize my mistake, and send in the payments, then make the dreaded call to request forgiveness of the late fee with my story. Chase: “Sorry for your loss, miss. I see you’ve paid on time in the past. We’ll remove that fee right away as a one-time courtesy. Thank you for calling.” 1FB: “Errr, you paid late. That means a fee. You need to pay it. Yeah, you’ve always paid on time before, but it doesn’t matter. Have a nice day.”

Maybe they decided to take the tough-love approach to creating dependable borrowers. Sure.

What Can You Do About It?

If you have a 1FB card, get it paid off (consider transferring the balance to a new company’s card), find a different card to use every day, and consider closing your account. But don’t close it if it is your oldest account—that will likely hurt your credit score. If you don’t already have a 1FB card, don’t get one!

Update: closing the account might not hurt your score as much as they try to make you think it will. Read about how (not) bad it hurt my credit score to close this account in June 2010.

If you’re a just-entering-college student, verse yourself in financial literacy. Don’t use the card except for small things that you pay off monthly. And that advice applies to any card, not just 1FB-issued ones.

If you’re a parent of a young-adult, please educate them on how to handle their finances, and if possible find a way to get them a card with a company that has some sort of conscience, no matter how small it is. Any other bank seems a little better than 1FB USA.

Of course, in a dream world, we wouldn’t need to worry about getting a credit card at 18, but unfortunately, credit history is important once you graduate and enter the real world, and that’s about the only place to start.

My Craziest Investment: Lending Club

I finished my BA a couple of years ago better off than some, in terms of student loan debt, but worse off than those lucky people whose parents paid their way. Between those loans and dumb credit card debt I accrued while in school, I pay a fair amount toward debt every month, but I also make sure to save and invest. I take advantage of my company’s matching in a SIMPLE IRA, have my own ROTH IRA, and occasionally throw some spare money at a non-retirement investment account or two. The most interesting? My Lending Club Account.

The referral promo has ended. As of 12 Aug 2010, friends get $25 dollars to invest. That’s the cost of a single loan note.

What is Lending Club?

Jumping on the social trend, Lending Club is a Web-based (but completely legit) social lending/borrowing platform. On the investment side (the lenders), it offers pretty nice returns, and on the borrowing side, it offers relatively low-interest personal loans. They tout their stringent loan approval processes to protect the lenders, but do offer loans to a variety of risk-level borrowers. Their spiel:

Why should banks make all the money? We started by asking this one simple question. Now Lending Club offers investors higher returns and borrowers lower-cost loans through an online financial community that eliminates the high cost and complexity of traditional banks.

How does the investing work?

Investors/Lenders buy notes, $25 chunks of loans being requested by the approved borrowers. From what I understand, all of the notes in a loan must be purchased by investors for it to be considered “fully funded”, otherwise the loan is rejected. The lenders have a few tools to help make intelligent choices about which notes to purchase. To start with, each loan is ranked by a very convoluted point structure that ultimately results in a letter grade and numerical secondary-grade. The higher the grade (A1 at the top, G5 at the bottom), the lower-risk the loan is. Lower-risk loans have lower interest rates for the borrowers, and lower returns for investors, but are, of course, the safest.

Investors can browse through the notes, and view quite a bit of information about the purpose of the loan, amount, monthly payments, etc. They also have the option of asking the borrowers questions to clarify any confusion, or gather more information that might help them make their decision to help fund a specific loan. There’s also the option to set up automatic investments based on certain criteria (such as risk, purpose), if you aren’t willing to micromanage to the point of choosing specific notes.

Like with many other types of investments, there’s a risk of loss, especially if you suck at choosing notes to invest in, but one important thing to note is that uninvested money in your account is FDIC insured (up to the current limit). For investors who are constantly reinvesting their returns, that’s probably not a good deal, but the payments I’ve received from borrowers are currently sitting uninvested until I have enough to buy another note, so it is a good thing for me.

What made me start investing?

To put it bluntly: a $50 sign-up bonus that was being offered a while ago. $50 is enough to purchase two notes, and get a feel for how it works. So far (after 4 months), my two notes are both current, although both are pretty low-risk; I have A- and B-grade notes. My low-funded investments won’t return much, although it is a 9.72% return at the moment. The real goal is to have enough invested so that you are constantly purchasing new notes after receiving monthly payments on the current notes you hold. I’m planning on investing enough of my own money in the future to do just that.

Right or wrong, I love the ability to pick and choose the notes you buy, because it gives me the feeling of helping someone be responsible with debt repayment (I stick mostly to debt consolidation loans). For instance, a recent one I saw was a guy trying to consolidate credit card debt and help pay for his daughter’s wedding. I can quickly see that I have no desire to fund that loan. Why on earth would you go into more debt when you’re already needing to consolidate? I’m sorry, but you definitely shouldn’t go into debt to fund a wedding! But, that’s just my opinion.

Are you intrigued?

Lending Club is offering another sign-up bonus right now to the tune of $64.62. Like I mentioned earlier, that will get you 2 notes without any investment of your own money. And, you’ll be in a better position to reinvest sooner with that extra $14 and change.

Learn more about Lending Club, and get $64.62 for signing up to invest.

The $64.62 deal is a limited time thing, but even if it has passed, they seem to offer $25-$50 on a fairly regular basis. It’s great seed money if you’re a little hesitant to jump right in. As with any investment avenue, make sure to read all the fine print, including the state and net worth limitations. Sadly, they don’t have approval to lend/allow investments from all states right now. It’s also US-only, FYI.

Want to hear what others think? Plenty of Personal Finance bloggers have blogged about their experiences. Head over to a search engine and see what you can find. I know Five Cent Nickel has an ongoing series of posts detailing their experience.

Or, if you’re already using Lending Club, please comment and let us know what you think!