Yes, you can teach a finance class in a bowling alley

Yes, you can teach a finance class in a bowling alley
Eileen St. Pierre, The Everyday Financial Planner

I have been teaching finance since 1992, starting off in the typical college classroom but soon yearning for something more. The more off the wall and unpredictable the location, the better. Yeah, sometimes you wonder if you’re getting through – like the time I taught in the basement of military barracks with intermittent electricity and no air conditioning on a 100 degree day. But most of the time it does work, making for a truly memorable experience for both the students and the teacher.

I was recently asked by an Army Captain to teach a financial class to his soldiers at the bowling alley on a Friday afternoon. He wanted the full spread – PowerPoint presentation and everything. We were expecting 80 + soldiers and some family members. Oh boy, this definitely called for a scouting trip down to the bowling alley to figure out where the heck I was going to hold this.

Our only doable option was to take over the pool room:

Bowling Alley Class

As you can see, there were not a lot of chairs. We placed our financial resources on one of the pool tables. The room was packed full. There was no room for a PowerPoint presentation – just me using my teacher voice. The Captain gave a short speech about how important this subject was, and his own experience managing money.

Then an amazing thing happened. For about 90 minutes we covered budgeting, managing credit, deployment financial issues, and saving for retirement (including the military’s new Blended Retirement System ). No one left the room. Almost all the financial resources were taken. There were lots of questions afterwards.

Wow, I felt like I bowled a perfect 300 game.

Holding too many investment funds can hurt you

Holding too many investment funds can hurt you
Eileen St. Pierre, The Everyday Financial Planner

I’ve seen a lot of investors who own way too many mutual funds. Financial advisors never seem to recommend selling funds. That’s because most get paid when you buy in, not when you sell. If they really had your best interests in mind, they would determine if the fund met your investment objectives. If it didn’t, they need to explain to you why it doesn’t and recommend you sell it. There is no shame in selling. Holding too many investment funds can hurt you.

Some funds may not be suitable.

You may not have understood the investment objectives of some of your funds. Perhaps they were not explained properly to you. While I can tell a lot by looking at the fund’s name, at a minimum I always look at the fund’s summary prospectus to determine if it meets my client’s needs.

It is important to update your financial plan. Your investing goals and risk preferences may have changed and a fund may no longer be suitable.

Some funds may not be necessary.

Do you know what securities your funds hold? I like to go to www.morningstar.com, look up the fund’s ticker symbol and get Morningstar’s free reports. If I see a client who has three funds that basically invest in the same securities, I pick one for them and encourage them to sell the others. Here are some factors I consider to help me make my decision:

excessive fees

  • What is the fund’s annual expense ratio? Do you just have to pay a management fee or is there also a 12b-1 fee? A 12b-1 fee is a fancy word for a marketing fee – part of which goes to the advisor who recommended the fund.
  • What is the turnover ratio? If the portfolio manager is constantly buying and selling securities in the fund, this will increase the annual expense ratio. Is there a reason the turnover has to be so high?
  • Is there a redemption fee? In other words, do you have to pay a fee to sell the fund?
  • Even though past performance is not a guarantee of future performance, how well have the funds performed over the past five years?

Diversification can now be achieved with one fund.

Instead of trying to select funds to meet your investment objective, you may be able to find one fund that holds the right mix of individual funds already. The best example here are Target Date and Lifecycle retirement funds. These funds hold a mix of stock and bond funds and gradually re-balance your portfolio towards a safer basket of securities as you approach your retirement date. 

Fees can really add up over time.

If you have to pay sales charges or front-end loads to buy into a fund, that’s less money for you to invest upfront. Let’s say you invest $10,000 in a mutual fund that charges a 5% front-end load. You will only invest $9,500 of that money; your advisor will keep $500. If that money is invested at 8% for 10 years, you will earn $1,080 less than if you had invested the full $10,000.

For more information on investing, visit my Basic Financial Management page.

Five Back-to-School Budgeting Tips

Five Back-to-School Budgeting Tips
Eileen St. Pierre, The Everyday Financial Planner

A new school year is fast approaching. Is it time again for back-to-school shopping? Here are five tips to help you keep a handle on your budget.

  1. Know how much you can afford to spend.

First determine what you need to buy and what you can use from last year. Then determine how much you can afford to spend. Also consider how much autonomy you will give each child to pick out his/her own things. By giving them each a set amount of money to spend, you may be amazed at how well they budget their money if it means getting a few more outfits!

Set the money you budgeted aside in a separate savings account. Set up automatic transfers when you get paid. Having a dedicated account for back-to-school shopping creates a “mental accounting” for this money.  After school starts, you can use this account to start saving for Christmas presents.

  1. Take advantage of sales tax holidays.

back to school shoppingnIn my home state of Oklahoma, our tax-free shopping weekend is August 4-6 but only clothing and shoes up to $100 are exempt from sales tax. We can also drive to Texas the next weekend (August 11-13) and take advantage of their tax-free shopping. More is covered – clothing, backpacks, and school supplies up to $100. To get the complete list for all the states, go to www.taxadmin.org/sales-tax-holidays.

  1. Can you wait until after school starts?

There are many reasons to try to hold off buying until after school starts:

  • Your kids can see what the other kids are wearing.
  • You can take advantage of discounts after school starts.
  • There are always Labor Day sales.
  • You can see if you really do need the items on the school’s supplies list.
  • For children starting college, you may want to wait until you see where they will be living. Your daughter may really hit it off with her roommate and they may want to decorate their dorm room together.
  1. Use online shopping to your advantage.

It is quite possible that you can get many items cheaper online. For clothes, have your kids try them on in-store first to make sure of size. Look and see if there are any online coupon codes – many do not work but you never know.

  • Don’t forget about shipping costs.
  • Make sure you know the online vendor’s return policies.
  • Allow yourself enough time to comparison shop.

But be wary. Take steps to avoid identity theft.

  • Make sure the website is a legitimate vendor.
  • Be careful when inputting your credit card information. To avoid giving the vendor your information directly, use PayPal whenever possible.
  • While the new credit cards with embedded chips (i.e., the new “dip” cards) make it difficult for thieves to steal your credit card numbers from physical stores, you do not get those protections online. [Read more HERE.]
  • If you think you are a victim of identity theft, go to identitytheft.gov to report it.
  1. Be prepared to pay your bills.

Pay off your credit cards right away – use them like a debit card. Take cash if you don’t think you have the discipline to stick to your budget. If your child really wants something, set up a payment plan for him/her to pay you back.

I’ll end this post the same way I started it. Remember that savings account you set up earlier? You set the money aside for this, so use it.

Visit my Basic Financial Management page for more information.

Starting July 1, credit reports just got a lot more accurate

Starting July 1, credit reports just got a lot more accurate
Eileen St. Pierre, The Everyday Financial Planner

On July 1, the three credit reporting agencies (Experian, Equifax, and Transunion) started to tighten data reporting requirements for those consumers with civil judgments and tax liens against them. Now these agencies are requiring debt-eraserthe following for these records to be placed on your credit report:

  • A Social Security number or date of birth to go with your address.
  • Records need to be updated every 90 days.

Records that do not meet these new standards will be removed from your credit report.

Why is this happening?

These agencies haven’t been required to do this. They are doing it voluntarily. They just got sick of so many people complaining about these incomplete records hurting their credit scores. These types of records hurt your credit score a whole lot more than carrying a balance on your Visa card.

Who is affected?

Only about 6 or 7% of people with FICO scores will probably be affected – and only by a little bit. It is predicted these people should see their FICO scores rise only by about 10 points. The reason – people who have these types of records on their credit reports typically have other negative information such as collections and past due payments.

What can you do?

If you haven’t done so in a while, check your credit report. You can get a free copy from each of the three credit reporting agencies at www.annualcreditreport.com every 12 months. Check it for any reporting errors. Follow the instructions on the report on how to get them removed, or check out my blog post. Don’t count on errors to be removed for you. You are responsible for your own credit history.

For more help on managing your credit, visit my Debt Management page.

The Snowball Effect on Debt

The Snowball Effect on Debt
Eileen St. Pierre, The Everyday Financial Planner

In last week’s post Which Bill Should I Pay First?, we discussed debt reduction strategies. A very effective strategy is called the Snowball Effect that starts with paying off the lowest balances first.

Here’s an example:

Debt

Balance Interest

Rate

 Monthly

Payment

Credit Card 1 $200 18% $50
Credit Card 2 $500 19% $25
Car Loan $20,000 10% $370.52

You decide to focus on paying off credit card 1 first, then move to credit card 2, and finally knock off your car loan.

  • You have a 6-year car loan so you have 72 monthly payments.
  • Your total monthly debt payments are $445.52 – this is how much you are budgeting towards debt repayment.

Here’s the payoff:

Using an accelerated debt payoff calculator like those at Calculators.org or PowerPay.org, we get the following payoff schedule after selecting to pay off the lowest balance first:  

Payment Credit Card 1 Credit Card 2 Car Loan
1 $50 $25 $370.52
2 $50 $25 $370.52
3 $50 $25 $370.52
4 $50 $25 $370.52
5 $7.84 $67.16 $370.52
6   $75 $370.52
7   $75 $370.52
11   $13.03 $432.44
12     $445.52
60     $50.75

During the 5th month, the first credit card bill is paid off. You then can devote the freed up $42.16 to credit card 2. In month 6, you now have $75 to put towards credit card 2. Just make sure you don’t start using credit card 1 again! Keep making your car loan payment.

During month 11, you will have credit card 2 paid off. You now have extra money to put towards your car loan. From month 12 on, you can now put your entire $445.52 budget towards your car loan. Doing this, you will have your car loan paid off during month 60.

Giant_snowball_OxfordHere are the results of this strategy:

  • You will save $1,154 in interest.
  • You will pay off your car one year early.

Visit my Debt Management page for more information.

Which Bill Should I Pay First?

Which Bill Should I Pay First?
Eileen St. Pierre, The Everyday Financial Planner

It’s easy to become overwhelmed when you are in debt. The first step is to realize that getting out of debt is not going to happen overnight. You need to develop a plan. Here are three simple steps:

Step 1 – Look at the timing of your bills.

How often do you get paid – weekly, bi-weekly, or monthly? List all your bills and your due dates. Is it possible to change any of the due dates?

  • If you get paid twice a month, you want to pay roughly half your bills at the beginning of the month and half at the end.
  • This way you smooth your cash outflow.
  • I’ve never heard of a creditor being unwilling to change the due date – you just have to ask.

Take another look at your W-4 at work. Do you have the proper number of withholding allowances (claimed exemptions)? The higher that number, the less money is deducted for taxes. Many people list 0 so they get the maximum tax refund.

Step 2 – Determine your payment priorities.

Help and support signpostWhat do you really need?

  • A roof over your head
  • A way to get to work
  • Food
  • Clothing
  • Utilities turned on

You have to be able to pay for your needs.

Where can you cut your expenses?

  • Cell phone/cable plans
  • Eating out/entertainment expenses
  • Car insurance coverage/deductibles
  • Travel
  • Personal expenses

Ask yourself – Do I really need this or do I just want it?

  • For example, you need to have car insurance coverage, but do you really need to have a $250 deductible?
  • If you increase your deductible to $1000, your insurance premiums will go down and you can use the freed up money to pay down other debts. Or better yet, you can put the money you saved into an emergency fund to avoid taking on more debt in the future.

 Step 3 – Determine how much money you have to put towards your bills.

Let say after paying your rent, your car loan, and your other essential needs, you only have $200 a month to put towards paying down your credit cards. Focus on paying down the debt with the lowest balance. Just make the minimum payments on the other credit cards.

  • By reducing the total number of debts you have, you’ll get an emotional boost.
  • Some financial advisors recommend you pay down the highest interest rate debt first, but if it takes you 5 years to do it, you may lose hope and give up.
  • Once you pay off the first card, take the money you had been paying on that card and put it towards the next credit card balance. Remember, you have already budgeted this money to pay bills. So you should be used to not having this money to spend on other things.
  • Keep repeating this cycle until you have paid off all of your credit cards.

We call this accelerated debt payoff scheme “The Snowball Effect.” I’ll provide a more detailed example of it in next week’s blog post.

Visit my Debt Management page for more information.

 

What is Your Debt-to-Income Ratio?

What is Your Debt-to-Income Ratio?
Eileen St. Pierre, The Everyday Financial Planner

family vacationAh, those lazy summer days. There are vacations to plan, theme parks to visit, summer sales to check out at the mall. All these activities cost money. It’s real easy to get in over your head. This spending can have a snowball effect, leading to a debt spiral that is hard to stop. The first step is to recognize if you have a debt problem.

Here are some warning signs:

  • You are stressing over money.
  • You have depleted or neglected your savings.
  • You are thinking about tapping accounts like your 401(k) that you have always considered off-limits.
  • You are starting to pay bills late each month.
  • You are making debt payments with your rent money.
  • Creditors are starting to call and send you threatening notices.
  • You are transferring balances from one credit card to another.
  • Every year you have to use your tax refund to pay your bills.

Calculate your debt-to-income (DTI) ratio:

  • Calculate the amount of debt you owe each month, including your mortgage or rent, car payment, and minimum credit card payments.
  • Divide this amount by your monthly income.

Here are some calculators that do the math for you:

If your DTI is 20% or less, you are doing an excellent job managing your debt! According to Gerri Detweiler, Director of Consumer Education at Credit.com, a DTI ≤ 36% is a healthy debt load to carry for most people. If your DTI is

  • 37% – 42%, that’s not bad but you should start focusing on reducing debt now before you get in real trouble.
  • 43%-49%, you need to take immediate action to avoid serious financial difficulties.
  • 50% or more, you have a debt problem. You need to seek professional help to aggressively reduce debt.

If you need professional help, check out these organizations:

Please read my column Choosing a Credit Counselor to make sure you do not choose an organization that will take advantage of you in your moment of need.

Visit my Debt Management page for more information.

The Pros and Cons of Using SoFi to Refinance Your Student Loans

The Pros and Cons of Using SoFi to Refinance Your Student Loans

Eileen St. Pierre, The Everyday Financial Planner

A friend of mine recently asked my thoughts about using SoFi to refinance student loans. SoFi was started in 2011 by four Stanford graduates to provide more affordable options to repaying student loans. Everything is pretty much done online. They have since expanded to mortgages and financial advisory services to keep their customers as clients as they move through life.

Here are my pros and cons of using SoFi to refinance your student loans.

money-case-163495_1280Pros

Like all things digital, it’s quick and you can submit an application anytime and in your pajamas. They do offer lower interest rates than their competitors and a 0.25% discount if you set up automatic payments. Humans are available if you need them.

Bottom Line: If you have very good credit (credit score above 700) and a high income (over $100,000), and your case is straightforward, you may have a good experience.

Cons

One of the advantages of having federal student loans (versus private loans) is that you get many protections with them. If you refinance at SoFi, you will lose these protections. SoFi is a private company. To keep your federal protections, you need to follow the federal student loan consolidation process.

If you lose your job or have a hard time paying your loan, SoFi only offers up to 12 months of forbearance. Their competitors offer longer periods.

Your credit score matters!

They perform a soft inquiry first based on the information you submit to them (which does not hurt your credit score) and give you an estimate.

  • After you fill out the application and formally apply, they perform a hard credit inquiry (which does affect your credit score) and verify all your information.
  • What they actually give can be much different from what they originally quoted.
  • This has led to a lot of negative reviews. Of course, these people may not have been upfront about their information.

Bottom Line: Like all lenders, they will verify your information. If you are considered a risk, you will pay more. Many applicants have complained about their documents getting lost, not handled properly, or not interpreted properly. This is what can happen when you do things digitally.

Remember, SoFi was created by Stanford graduates. It’s not for those borrowers who need the help most – those who never finished their college degrees, are saddled with high levels of private loans, have screwed up paperwork, and are un- or underemployed. If we can find a way to help these student loan borrowers, then our society will really be better off.

 Get more info!

Student loans will cost more next school year

Student loans will cost more next school year
Eileen St. Pierre, The Everyday Financial Planner

The Federal Reserve has started raising interest rates again. What does that mean for student loans? In August 2013, Congress passed legislation pegging the interest rate on Direct loans to the 10-year Treasury note. Every July 1, student loan rates are updated.

student loan pictureIf you take out a student loan for the 2017-2018 school year,

  • The interest rate on a Direct (Stafford) undergraduate loan will be 4.45%, up from 3.76%.
  • The interest rate on Direct (Stafford) loans for graduate students will be 6%, up from 5.31%.
  • The interest rate on Direct PLUS loans for parents and graduate students will be 7%, up from 6.31%.

These are fixed rates, so once you accept the loan, the rate is set.

  • This means that rates on your existing student loans will not change.
  • If you take out a loan for the 2017-2018 school year, these rates only apply to those loans.
  • However, if you need to take out another loan in future years, you may have to pay even more. The Federal Reserve is expected to keep raising interest rates.

For one $10,000 loan repaid in 10 years, this increased cost will probably be less than $500 over the life of the loan. That’s not too bad. What makes it a bad deal is if you keep taking out loans and/or take too long to pay the loan back.

That’s when you need some strong financial guidance to understand what you are getting yourself into before signing the loan papers. Visit my post K is for Knocking Out Student Loans for information on different repayment plans, how to pay off your loans faster, and the consequences of defaulting on your loans.

More information can be found at my College Planning page.

Free Webinar: Negotiating Webinar Bills

Free Webinar: Negotiating Medical Bills
Eileen St. Pierre, The Everyday Financial Planner

After a five month hiatus, I am once again giving my free monthly webinar for the Choctaw Nation’s Asset Building Program. Join me on Thursday, May 18 from 3:30 to 4:00 (Central Time).

Summary

It happens to all of us. At some point in our lives we will incur high medical bills. It’s important to understand how much your insurance will cover, what you are expected to pay, and what happens when you don’t pay your bills. Join us for this free webinar to learn about negotiating medical bills. Topics covered include:

  • Determining the impact on your budget.
  • Setting up payment plans.
  • Asking for a settlement or discount.
  • Applying for financial assistance.
  • Avoiding negative impacts on your credit score

Click HERE to register. Upcoming webinars include “Which Bill Should I Pay First?” in June and “Back-to-School Budgeting” in July.

Choctaw CAB

Top Ten Reasons to Save for a Rainy Day

Top Ten Reasons to Save for a Rainy Day
Eileen St. Pierre, The Everyday Financial Planner

I am sitting in my office on a stormy Friday in Oklahoma (no tornadoes as of yet) trying to get inspired to write. It’s a good time for another top ten list. Here are my top ten reasons to save for a rainy day. Enjoy!

  1. Need the money to do something fun while it’s pouring buckets outside.
  1. Roof is leaking again…guess it’s time to finally fix it.
  1. Stupid rain fade – can’t watch satellite TV – have to get cable.
  1. Feeling frisky??
  1. My old car won’t start.
  1. Rain is as good of a reason as any to buy new shoes!
  1. Just two words – Amazon Prime.
  1. Our landscaping just washed down the street.
  1. Your kid was playing in a puddle, slipped, and broke his ankle.
  1. Have you seen how terrible people drive in the rain?

Remember,

april-showers-bring-may-flowers-clip-art-eiMKMxB6T

 

 

 

 

 

 

 

Happy Spring from The Everyday Financial Planner!

Three Tips for Handling Medical Bills

Three Tips for Handling Medical Bills
Eileen St. Pierre, The Everyday Financial Planner

One hospital visit or procedure can turn your budget upside down. If you have an emergency fund, it will drain it quickly. Financial experts will tell you to read your health insurance policy and make sure you know what it will and will not cover. But life has a way of disrupting the best laid financial plans. You may not have time to research which hospital or clinic is most affordable or right for your situation. An emergency is just that.

medical billsOnce the bills start coming in, it is important to get a handle on them. Here are three tips:

  1. Know how many bills you can expect to get.

I needed to get a CT scan and a MRI last year. I got three bills for this one trip to the hospital:

  • A fee for using the equipment from the hospital.
  • A bill from the technician (an independent contractor) for performing the procedure.
  • A bill from the physician (also an independent contractor) for creating the report sent to my doctor who never looked at it.

If I had also needed lab work done, there would have been a few more bills.

Can you imagine all the bills that would arrive if you need an operation? This MRI/CT scan led to two surgeries for me. I had to create a special folder to keep all the bills organized. There were bills from providers who I never knew were involved in my surgery. How can I dispute these bills? I was unconscious!

  1. Call your medical provider to make financial arrangements.

I had the money saved to cover the medical bills from my surgeries. But I knew from counseling others that I could set up a 0% payment plan with the hospital. All I had to do was call them. After making just one payment, they offered me a discount on the remaining balance if I would pay it in full. I jumped at this offer and ended up saving almost $1,400.

Be honest if you are having trouble paying. Many hospitals offer charity care. You will need to apply for it. The amount of charity care you are offered depends on where your income falls as a % of the federal poverty level.

  • The hospital knows if you have a large out-of-pocket expense left to cover.
  • Be prepared for someone to visit you in the hospital to discuss any programs you may be eligible for to help you pay.
  • If you don’t feel comfortable discussing the subject at the time, ask for a contact number to call after you are released. Don’t sign anything if you aren’t well enough to understand what you are signing.
  1. Don’t let medical bills hurt your credit score.

Medical debt only hurts your credit score when it becomes 90 days past due. That’s when it goes to collections. If you still don’t pay, the holder of the debt may take you to court and get a judgment against you. Then your wages may be garnished or your bank account frozen. This negative information will stay on your credit report at least seven years.

The FICO 9 credit score gives less weight to medical debt in collections. However, many lenders do not use this credit score, particularly mortgage providers. The bottom line is to contact your medical providers before you are 90 days past due on your debts. They will work with you if you make the effort.

Visit my Debt Management page for more information.

Everyone is worthy of financial redemption

Everyone is worthy of financial redemption
Eileen St. Pierre, The Everyday Financial Planner

This Easter Sunday is the perfect time to deliver a very simple message. Everyone is worthy of financial redemption. You may have made some bad financial decisions in the past. Perhaps your financial problems were caused by a series of events that were not your fault. Regardless of the cause, it is not too late to fix things.

All you have to do is ask for help. Yes, it is hard admitting you need help. Financial counselors are not here to judge you. They want to help. If you are not willing to take responsibility for your financial problems, then financial counseling will not work. You have to be open to changing your financial behavior.

Improving your financial life will not take place overnight. It is a process. But there is light at the end of the tunnel if you are willing to look for it.

Faith

The St. Pierre Auto Insurance Checkup

The St. Pierre Auto Insurance Checkup
Eileen St. Pierre, The Everyday Financial Planner

Health-Insurance-2It’s like clockwork. Every six months the auto insurance comes due. This time around, my husband Jeff wanted to practice what he preached and trim our auto insurance coverage on his 1991 Chevy truck. One of his pet peeves is being over-insured. I concurred.

It’s ok to drop some coverages on older vehicles.

We dropped collision coverage on Jeff’s truck years ago. His view was “If I cause an accident, then I deserve to pay for it.” Jeff is the world’s best driver. He doesn’t cause accidents. I am perfectly happy being a passenger and letting him do all the driving.

  • If you are financing a vehicle, your lender will require you to have collision coverage with a maximum deductible amount. They do this to protect their collateral.
  • Once you pay off the loan, you can increase your deductible and lower your auto insurance payments.
  • Once the blue book value drops below a certain level, you are better off dropping collision coverage because the insurance company isn’t going to give you much for the vehicle. Take the money you save on insurance payments and put it in a savings account for a new vehicle.

How much will the insurance company really pay on an old vehicle?

This year, we decided to drop comprehensive coverage. This part of your policy covers damage caused by acts of nature and theft. Because the truck is now 26 years old, the insurance company would not give him much if it got caught in an Oklahoma hail storm. Jeff could get more money for it selling it damaged – he still gets complements on it. Even an old truck has value to someone.

Insurance companies never tell you to drop coverage.

Just for the heck of it, Jeff inquired about the medical payments coverage (MPC) on the truck. This coverage would pay the medical expenses of any passengers in the truck, in our case up to $10,000. While it’s not required under Oklahoma law, it can be useful to have.

In a prior post, I talked about how important it was for us to have MPC in Oklahoma. But it turned out that we never really needed it on the truck, just our every day vehicle. The truck is not driven that often and when it is, I am the only passenger. Apparently we’re both covered already since we have MPC on our other car. The insurance company never told us this.

This year’s auto insurance checkup will end up saving us about $100 a year.

The moral of this story is to ask questions about what you really need.

Many people still pay way too much for insurance. Remember, insurance is needed for high severity events. You need to weigh the cost of the loss with the probability of the loss. The best way to handle low severity losses is not by purchasing more insurance – it’s by building an emergency savings fund.

Visit my Basic Financial Management page for more information.

Do I still owe a penalty if I choose to go without health insurance?

Do I still owe a penalty if I choose to go without health insurance?
Eileen St. Pierre, The Everyday Financial Planner

Thinking man picThe failure of the House of Representatives to pass the initial Affordable Care Act (ACA) or Obamacare “repeal and replace” bill has left more questions than answers. As it stands now, the ACA is still in force. This means the individual mandate that requires all Americans to have health insurance still stands, unless you qualify for an exemption. However, an executive order signed on January 20 to reduce the burden of the ACA has made things a lot murkier.

You are now allowed to file a “silent” 2016 federal income tax return.

Before this executive order, the IRS was automatically rejecting 2016 returns where the taxpayer failed to indicate health insurance coverage. After the order, the IRS starting accepting “silent” returns where the box essentially goes unchecked. By not indicating whether or not you had mandated health insurance, taxpayers can avoid paying the penalty, also referred to as the shared responsibility payment. If you still plan on using a paid tax preparer to file your 2016 taxes (the deadline is April 18), keep in mind that not all preparers will file a silent return for you.

You are still required to pay the penalty.

Be prepared for the IRS to send you a notice, asking for more information regarding your health insurance coverage. You could also face an increased risk of audit. Depending on how the politics work out later this year, you may still have to pay the penalty. The IRS is not allowed to garnish your wages if you do not pay it, but they can deduct it from future tax refunds.

The penalty for not having coverage in 2016 can be steep.

The penalty is calculated two different ways – per person or as a % of income. You pay the higher amount:

  • $695 per adult + $347.50 per child under age 18, up to a maximum of $2085
  • 2.5% of household income, up to a maximum of the yearly premium for the national average price of a Bronze plan sold through the Marketplace

Expect things to get even more confusing as the open enrollment period for 2017 approaches this fall. I will do my best to keep you up to date.

Visit my Taxes and Health Care Reform pages for more information.