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On money

The end of the line for free filing

By HELEN HUNTLEY
Published November 20, 2005

The free ride is over for some taxpayers who have been taking advantage of the IRS Free File program.

Next year, only those reporting adjusted gross incomes of $50,000 or less will be eligible to file for free online. That's still a lot of people - in fact, it covers 70 percent of all filers. However, millions of others will be left out.

Apparently the program was too successful with those who make more than that, taking potential paying customers away from electronic filing companies such as TurboTax. More than 5-million taxpayers used Free File this year, the third tax season it was available.

The policy change is the result of a new agreement between the IRS and a group of those companies, who banded together as the Free File Alliance. The companies originally agreed to offer free filing to prevent the IRS from setting up its own electronic filing service. The IRS benefitted too, since it got more people to file electronically - a major agency goal - and it didn't have to put up the money to start its own filing service.

However, the companies ended up competing with each other to give away their services, which must not have been great for profits. No one forced them to open their filing to taxpayers with higher incomes, but apparently they couldn't stop themselves. Instead, they got the IRS to put a lid on the competition.

It's now up to participating companies to decide whether they will offer free filing next tax season to everyone below the $50,000 threshold or whether they will be more restrictive. In the past, some have limited free filing to taxpayers who were 55 or older or who lived in certain states or who were eligible for the Earned Income Credit.

As in the past, taxpayers who file state income tax returns or who want to use more elaborate versions of tax preparation software will have to pay a fee.

IRS officials hope electronic filings will grow to be 56 percent of all returns next year and 65 percent in 2010. It will be interesting to see if limits on free filing slow progress toward those goals. No doubt some people would rather file a paper return than pay to file electronically, especially if they are not getting a refund.

I receive $50,000 a year from two pensions, neither of which I contributed to. If I had to provide this amount myself, I would need $1-million. If I die first, my wife receives half my pension plus Social Security. How much, if any, of this is used by the government in calculating my net worth or eligibility for Medicaid benefits?

A pension is not an asset unless it is payable to you as a lump sum. Rather, it is an income stream, like a paycheck. It is not counted in your net worth. In determining Medicaid eligibility, it counts as income, not as an asset.

Since the Florida intangibles tax is based on holdings as of Jan. 1, is it possible to move funds to a Florida bond fund exempt from intangibles tax in December and then move it back to a tax-free fund the following year to avoid the tax?

Yes. Just keep in mind that you may incur a capital gain or loss when you sell fund shares.

The tax applies if your investments on Jan. 1 are worth at least $310,000 (single) or $560,000 (married), not including bank accounts, retirement accounts, insurance products or Florida municipal bonds. Next year the tax will be 50 cents per $1,000 of nonexempt assets. Check with the Florida Department of Revenue (call toll-free 1-800-352-3671) if you need more information.

NOTE TO READERS: Here's good news for generous grandparents. The gift tax exclusion increases from $11,000 to $12,000 next year. That's how much you can give to one person in a year without having to concern yourself with gift tax rules.

Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to hhuntley@sptimes.com or Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.

[Last modified November 22, 2005, 15:18:59]