Does the IRS Accept Scanned Documents?

I’ve spent a good bit of time digitizing paperwork over the past couple of years. My primary weapon in this battle has been a sheet-fed scanner, though I sometimes snap pics with my iPhone and turn them into “scanned” pdfs using JotNot.

While it feels to good to be working toward a paperless financial world, however, the issue of whether or not these scanned documents would be acceptable has always bothered me. Having a store refuse a return because I didn’t have the original receipt would be annoying; having the IRS reject my documents could be a disaster.

So… Does the IRS actually accept scanned documents?

As it turns out, yes… They’ve actually accepted electronic documentation since at least 1997, when they issued IRS Revenue Procedure 97-22, which states:

This revenue procedure provides guidance to taxpayers that maintain books and records by using an electronic storage system that either images their hardcopy (paper) books and records, or transfers their computerized books and records, to an electronic storage media, such as an optical disk. Records maintained in an electronic storage system that complies with the requirements of this revenue procedure will constitute records within the meaning of § 6001 of the Internal Revenue Code.

Section 6001 of the IRC essentially requires you to keep and make available sufficient records to show whether or not you’re liable for taxes. It further states that such records must be retained “so long as the contents thereof may become material in the administration of any internal revenue law.”

The general requirements of the “electronic storage system” referenced in the quote above are that it:

…must ensure an accurate and complete transfer of the hardcopy or computerized books and records to an electronic storage media. The electronic storage system must also index, store, preserve, retrieve, and reproduce the electronically stored books and records.

There are some additional requirements, but the essence is that you can digitize your documents as long as they’re clearly legible (both on-screen and in hard copy) and easily retrievable. Just be sure to keep your data safe. In our case, we maintain both local and online backups of our data, so our digital documents are probably safer than hard copies.

And don’t forget to secure your files to protect them from prying eyes. The last thing you need is for your cache of sensitive data to fall into the wrong hands.

Of course, I’m not a tax pro, so I suggest that you check out the details and decide for yourself. The relevant guidelines can be found in this document from the IRS. The pertinent section (Rev. Proc. 97-22) starts on page nine.

E-Filing Saves the IRS $3.10/Return

As January winds down, you should have received most of the paperwork that you’ll need to file your taxes. If you’re like most FCN readers — and most Americans in general — you’ll be e-filing this year.

Sure, e-filing is convenient. But guess what? It’s also much cheaper for the IRS to process your return if you file electronically. As it turns out, it costs the IRS $3.29 to process a paper return vs. $0.19 for an electronic return — a savings of $3.10 (or nearly 95%!) per e-filer.

Looking back at last tax season, more than 100M individual federal tax returns were e-filed. Thus, the e-filing program saved well over $300M last year alone — not to mention an awful lot of paper waste.

Source: GAO via Don’t Mess With Taxes

Home Economics

I have long contended that, at its most fundamental level, keeping a household’s finances in the black has much in common with operating a profitable business. In both cases, you have to try to generate the greatest revenues, while at the same time keeping expenses in check. It’s not rocket science or brain surgery. In both worlds, success boils down to making – and keeping – more money than you spend.

These thoughts were percolating in my mind last fall, when I covered one of the printing industry’s largest conventions, the Graph Expo Show at Chicago’s McCormick Place. The show is both a showcase for printer manufacturers and suppliers, and an opportunity for printing companies large and small to learn about the latest technology.

On day one, I sat down to take notes at a presentation billed as “Heidelberg Presents the State of the Industry with Andy Paparozzi.” As vice-president and chief economist for the National Association for Printing Leadership, Paparozzi had been called on by printer maker Heidelberg to offer attendees an hour of well-chosen economic illumination.

If you ever get a chance to witness a talk by Andy, don’t miss it. Knute Rockne could have taken lessons from Paparozzi in exhorting listeners to greater glory. As impressed as I was by Andy’s gifts at a microphone, however, I was even more taken by the universal nature of his insights.

While Andy’s talk was geared to an audience of printing company honchos, it could just as well have fit virtually any other industry. Beyond that, almost every lesson he imparted to business held some parallel for those trying to hold household budgets together.

Let’s take a look at a few of Andy’s key points, and see how effectively they translate to the American household of Joe and Jane Sixpack and their 2-1/2 precocious youngsters.

Managing uncertainty

Paparozzi started by noting that as he talked to printing industry professionals, he sensed an aura of uncertainty from each. They didn’t know what to expect next.

“I’ve never seen that in my 28 years in this great industry,” he said. “Recovery has been maddeningly slow, irritatingly sporadic and uneven. But recovery is nonetheless occurring. This recovery is not what we want it to be, but what we make it. That requires making smart investments, managing uncertainty, and learning from the last recession.”

Translation: We’re not happy with the bounce-back from the economic abyss of 2008, but why waste time and effort complaining about it? We can still exert some control over how we recover, and that in itself is energizing. We’re not helpless pawns in the recovery, but masters of our own ship. We can put extra time and consideration into what we spend, and manage uncertainty by husbanding our household savings and avoiding risky purchases. We can also avoid mistakes made last time, which for many centered on assuming good times would last.

“Nothing is more important to the future than getting capital investments correct,” Andy went on. “We can’t pass inefficiencies on to our clients. The industry’s too competitive.”

Translation: One of the “capital investments” any family can make is in education and training. Being good is no longer good enough in the workforce of 2011. A struggling economy may be the best time to invest in training, because as the economy improves, it stands to make us more marketable in an ever more competitive employment landscape.

“We must stay lean,” was Andy’s next message. “Recovery no longer provides a margin for error. And you can’t let being busy be an opportunity for not getting better. We’re getting better or falling behind. Retain multi-taskers and release those who can’t or won’t multi-task. And set up a cost-watch task force on the production floor.”

Translation: Let’s excise the fat from our household budgets, while also seeking an opportunity in our spare time to improve our financial circumstances. Let’s look at landing a second, part-time job, selling some unneeded camping equipment, clipping coupons or taking in a boarder. Let’s find a way to convert some of our relaxation time into productive use, and while we’re at it, set up a reward program for the kids when they identify places to cut costs.

“If we learn, we win,” Andy next exhorted his listeners. “If we don’t, the Recession wins. If you aren’t doing things differently, you’re not in business. You can lose it all quite easily if you aren’t prepared to change your business model. We can do more with less. We have to keep our costs light, even in the good times.”

Translation: There’s nothing like tough times to force agonizing appraisals on any household. This is probably one of those times for re-examining. Can we find a lower-cost place to buy groceries? A more cost-effective phone plan? Can we trade in our car on a more fuel-efficient model? Can we scan the Internet for Deal-of-the-Day offers? We can do more with less. We have to keep our costs light, even in the good times.

“Create a ‘Recovery Manifesto,’” Andy urged in conclusion. “Improve continuously. Challenge your own success. Never use being busy as an excuse for not improving. Be adaptable and flexible, because those who are get stronger.”

Translation: You may be tired of the slow recovery, but that’s no reason not to embrace principles that make businesses successful, in printing or any industry.

High Deductible Health Plans and Major Medical Bills

I spent yesterday at the hospital. Don’t worry, it sounds a lot worse than it was… Our oldest son had to have his tonsils and adenoids removed, so my wife and I were camped out in the outpatient surgical center for the better part of the day.

In the end, everything went smoothly, and he’s on the road to recovery. But this isn’t a parenting or medical website. This is a financial website. Thus, I thought I’d talk a bit about the financial side of such things.

As you know, we’ve been participating in my employer’s high deductible health plan for the past couple of years. In other words, we’ll be facing a whopping bill once the dust settles. Actually, it will be multiple whopping bills… The hospital, the doctor, and the anesthesiologist all bill separately. And then there will likely be some lab tests, etc.

The good news is that we’re protected on the upside by our $3,000 deductible. The bad news is that, since it’s January, we’ve paid almost nothing toward it thus far, so we’ll be paying that out-of-pocket. In our case, that really just accelerates the inevitable. With four kids in the house, we usually hit our deductible bill mid-year whether or not we have a major medical procedure.

But still, a $3k medical bill to start the year is something that could really set a lot of people back. Fortunately, we have short term cash in the bank, and we also having a well-funded health savings account (HSA) in case we need it.

Truth be told, we’re planning on continuing to use our HSA as a tax-advantaged investment account, so we’ll be paying for this from other sources. But if we weren’t, we could always fall back on that HSA.

As I’ve noted in the past, the lower premiums of our particular health plan more than make up for the higher deductible. But if we hadn’t been planning ahead, a relatively major medical procedure could’ve created a short-term cash crunch. If you’re considering a high deductible health plan, just be sure that you’re aware of, and prepared for the worst case scenario.

Should You Buy Travel Insurance?

If you’ve booked a vacation for your family lately, or sent your kid off on a school-sponsored field trip, you’ve probably considered trip-cancellation insurance. These offers generally promise to reimburse you for the vacation or field trip if you need to cancel. Are these plans worth the cost? It depends on your own personal risk calculation.

What does it cover?

Trip cancellation insurance comes in several flavors. Basic coverage reimburses you if you can’t make your trip because of certain reasons, such as if you get sick, a hurricane rakes the island you were going to visit, or terrorists attack your hotel. The insurance covers non-refundable expenses, so if the tour operator cancels your tour and they refund your fee, for example, the insurance does not pay.

The basic coverage also generally provides benefits if your trip is delayed or interrupted. It also pays for lost or delayed baggage, some medical benefits if you’re injured during your vacation, and emergency evacuation if something horrible happens during your vacay.

You can add to the basics. For example, for an extra fee you can add “cancel-for-any-reason” coverage, which reimburses you for at least part of the non-refundable portion of your trip if you cancel for any reason not covered by the usual terms. Other common upgrades are rental car insurance and accidental death insurance at higher amounts than the basic package offers.

Needless to say, read the terms carefully before you buy so you fully understand what is covered.

What does it cost?

How much does all of this cost? Prices vary, of course. In a comparison of four leading providers, basic coverage for a family of four on a $4,000, week-long, domestic vacation ranged from $82 for a policy from Travel Insured to $275 for a policy form HTH Worldwide.

Those two plans differed mostly in the amount of coverage. For example, the HTH plan included $500,000 in health coverage, while the Travel Insured plan offered $10,000; and the HTH plan offered $1 million emergency medical evacuation coverage, while the Travel Insured plan provided $100,000 coverage for that service.

In addition to the two firms mentioned above, popular trip cancellation insurance firms include American Express, Travelguard, and Access America. Insuremytrip.com is a site that allows users to compare rates from about 20 providers.

Furthermore, many trip providers, such as school field trip organizers, offer their own policies. As do some credit cards — be sure to see if your card provides this coverage before spending money on a separate policy.

But do you need it?

This all sounds good, but you should evaluate this kind of insurance the same way you would evaluate any kind of insurance. Rather than thinking, “Wow, I’d love to get reimbursed for our vacation if my kid gets the flu the night before,” think, “Hmmm, what are the odds my kid is going to get the flu the night before our vacation?”

Use the $4,000 family vacation above as an example. Let’s say you’re considering a plan that costs $200 and will reimburse you for the full $4,000 if someone in the family gets sick and you have to cancel. Forget about the rest of the coverage — emergency medical evacuation, health insurance, death benefits, etc. — for the moment and focus on the real reason you might get this insurance: to refund your purchase price.

If you buy this policy, you are essentially gambling $200 against a potential pay-out of $4,000. What are the odds that you will “win” this gamble? You’ll win if one of you gets sick or a big storm hits the vacation site or whatever. So what are the odds of that? One way to calculate those odds for your family is to look at history: How many vacations have you had to cancel in the past few years? If you have taken ten vacations over the past five years, and cancelled one of them because of a covered reason, you could assume that the odds of you having to cancel your current, $4,000 vacation are one in ten.

So think about it: If your neighborhood bookie put $4,000 on your kitchen table and said you could have it if you drew the right card out of a stack of ten, would you pay him $200 for that one draw? Probably not, unless you’re really into taking risks.

But here’s another way to think about it: If you bought the insurance every time, you would come out even if you were able to collect on the insurance once for every 20 trips. Now it doesn’t sound that risky, especially if you travel a lot.

Obviously, many factors play into your personal risk calculation — maybe you are not traveling with any accident-prone children or maybe you know the tourist destination you are headed to frequently has hurricanes (hmm, maybe you want to rethink this vacation!). The point is, whatever the circumstances, make a rough guess of your odds of using the insurance before you plunk down the money.

Insurance companies do this with highly trained actuaries using sophisticated algorithms and databases full of historical information, but you can make an educated guess without any of that.

That way, whether you get the insurance or not, you will rest easy knowing that you made an informed decision.

Thoughts on Kids and Gift Cards

Ahhh, gift cards. The gift we all love to hate. Sure, they’re convenient (for the giver) and they seem (again, to the giver) like they’re more thoughtful than cash, but they’re not all they’re cracked up to be.

Don’t get me wrong, I’m always thankful when I receive a gift, and I do recognize the ease of grabbing a gift card when I need to buy a gift on short order, but I still have mixed feelings when it comes to gift cards.

Over the weekend, our (now) ten year old son had a birthday party, and he made out like a bandit. He got a number of great gifts, as well as some cash and several gift cards. He was thrilled, but those gift cards often cause headaches.

They frequently require an extra trip to a store we rarely visit, and they often require a bit of extra spending to spend them out in a single visit. And don’t forget about the risk of losing them while hauling them around waiting for a chance to spend them.

To combat these problems, we’ve developed a system for helping our kids make the most of any gift cards they receive. For cards from mainstream retailers like Wal-Mart, Target, or Amazon, we usually make them a deal… They give us the card, which we’ll use while going about our daily business, and we give them cash.

In this way, the cards get used in a timely fashion, the risk of loss is reduced, and our kids get flexibility to make use of the gift however they want. Sure, one could argue that we’re subverting the giver’s wishes, but I’m more interested in making sure that the gift gets used.

Of course, this doesn’t really apply to cards from places like GameStop, where we rarely shop on our own. But when it comes to places we shop on a regular basis, this works out quite well.

Oh, and for the record, if we don’t have time to shop for a proper gift when our kids are invited to a birthday party, we’ll often secure a bunch of dollar coins inside the birthday card rather than giving a gift card. This is a much more flexible gift, and it’s unique enough that it makes an impression on the recipient.

Thoughts on Kodak, Bankruptcy, and Investing

Over the past couple of weeks, there have been rumors swirling about Eastman Kodak’s financial (in)solvency. And then it happened. They filed for Chapter 11 bankruptcy protection yesterday. Not surprisingly, their stock dropped 35%. But really, that’s just the tip of the iceberg.

Kodak actually traded at an all-time high of just under $93/share in February 1997. And now? It closed last night at $0.36/share. That’s a stunning decline of 99.99% over the past 14 years. Yikes!

As of right now, they owe a total of $6.75B (yes, billion) to more than 100k creditors. At the same time, they have around $5.1B in assets. Thus, even if they liquidated everything, they’d still be in a $1.75B hole. Not good. Not good at all.

And guess what? Back when we first started getting interested in our finances, we almost invested in Kodak. This was back in the mid-90s, and their stock (like many others) had been on a tear. They were also seemingly well-positioned to take advantage of the transition to digital photography. What could go wrong?

Well… They wound up struggling to make the digital transition and their business suffered.

This was before we had discovered the wonders of broad-based index funds — and before we had enough money for the then-steep investment minimums in most mutual funds. Thus, we were busy filtering through blue chip companies in search of dividend reinvestment plans (DRIPs) that would allow us to directly invest our hard-earned dollars.

We were enamored with such household names as 3M (MMM), Campbell’s Soup (CPB), Coca-Cola (K), Intel (INTC), Merck (MRK), Procter and Gamble (PG), and yes, Eastman Kodak (EK). Over the years, some of these have performed reasonably well and others haven’t. But none have imploded like Kodak.

Truth be told, our DRIP investing phase didn’t last very long. We soon discovered the wonders of indexing, and built up enough cash to get over the minimum investment barrier. We ultimately liquidated our individual stock positions and haven’t looked back since.

If nothing else, our near miss with Kodak should be taken as a cautionary tale about diversification. At the time, we were only holding five or six companies — in part due to a lack of capital — so taking a major hit on any one company would have really hurt.

Of course, it’s not like they lost that 99.99% overnight, but still… I certainly sleep better at night knowing that we own literally thousands of companies. Yes, we still have market risk, but there’s little in the way of company-specific risk.

Make the Most of Your Pay Raise

Despite high unemployment and lingering financial turmoil from the recent recession, American workers continue to earn pay raises each year. According to the Bureau of Labor Statistics, the typical worker earned an average pay raise of 1.9% last year, and they are on tap to earn a similar raise in 2012.

These annual pay raises will help wages keep up with inflation. While a 2% to 3% raise may not seem like a lot of money at first glance, it can equal $1,000 or more per year for a family earning $50,000. But the real question remains, what should you do with your new pay raise after you earn it?

If you do not take an active role in putting the money to good use, then you are more inclined to simply find it disappearing into your monthly budget before you can even realize the money is gone. Below are five ways to help you put your new pay raise to good use.

Pay off high interest debt

Using a new pay praise to pay off high interest debt is typically a wise move. Having credit cards that charge you 18% or more in annual interest can quickly start to add up. Paying off credit cards with a high interest rate with a pay raise is like earning the same amount from an investment.

If you were paying 18% each year in interest on a credit card and paid off that card with your new pay raise, it is just like having earned 18% annual rate of return on your money. While the stock market zigzags like a roller coaster, paying off your high interest debt can be as sure a return as possible.

Build up your emergency fund

One thing that I personally struggle with is having a fully funded emergency fund in place. Most financial experts recommend that you have three to six months of living expenses set aside in an emergency fund. What many people do not often realize is that six months of expenses is actually quite a large amount of money in many cases. It can quickly equal $10k-$20k for some families. Living on your previous income and saving your new pay raise is a great way to help boost your emergency fund if have not quite reached your goal of six months of living expenses.

Boost your retirement savings

Using your pay raise to build up your retirement savings can be a great plan. You have until April 15^th of each year to finish contributing to an IRA. If you receive a year-end bonus or a pay raise at the beginning of the year, you can put that money to good use by finishing up maximizing your retirement account contributions.

A pay raise is also a great way to build up to maximizing your 401(k) retirement plan contributions. In 2012, you can contribute up to $17,000 to your 401(k). That is a lot of money, especially if you are just starting out in your career. But, you can incrementally increase your 401(k) contributions each year until you reach your maximum contribution level. If your small increase is timed with your new pay raise you won’t even notice the difference.

Double check your insurance coverages

Do you have enough insurance coverage? Far too many people find themselves underinsured in many aspects of their lives. Do you have umbrella insurance to protect yourself from being sued? Do you have flood insurance on your house? According to FEMA, over 30% of all home damage from flooding occurred on homes that are not in a federally designated flood zone. Purchasing flood insurance if you live outside of a flood plain is very inexpensive. Spending money now on the proper insurance coverages can help you save on insurance in the long run.

Splurge on yourself a little

I am not talking about spending your entire pay raise by purchasing things for yourself. But, you did earn the money, and you should enjoy it. Many financial experts recommend taking a small portion, such as 10%, of your raise or any year-end bonus you earn and spending it on something for yourself. Doing so will help you stick to your other plans for the rest of the money. This is similar to having a cheat day on a diet. If you are too strict with yourself and how you spend your money, you will be more inclined to fall off the wagon and be resentful to your new financial goals.

Are you one of the lucky ones that will receive a pay raise this year? What will you do with your new pay raise? Will you just absorb it into your monthly budget, or will you use it to increase your financial wellbeing? Living on your previous year’s income and using your new pay raise to accomplish your financial goals is a great use of the new money. What do you like to do with a pay raise?

401(k), 403(b), and 457(b) Contribution Limits for 2012

Do you have a workplace retirement plan such as a 401(k), 403(b), or 457(b)? If so, then you might be interested in knowing that the contribution limits for these account types has increased for 2012.

This means that individuals under age 50 can contribute up to $17,000 to their 401(k) account this year, up from last year’s limit of $16,500. And if you’re over age 50, you can contribute an extra $5,500 toward your retirement this year.

Beyond the above, the aggregate limit (employer + employee contributions), which is specified by Section 415(c)(1)(a) of the Internal Revenue Code, has increased to $50k/year. This is the so-called 415(c) limit and, while it doesn’t affect many of you, it does have an impact on some people (especially if you’re self-employed and have a high incomes).

Note that 403(b) and 457(b) plans, as well as the Thrift Savings plan, are subject to the same contribution limits, so those of you in the non-profit, educational, and public sectors will likewise be able to save a bit more this year.

Contribute to Your Roth IRA, Even if it Stretches Your Budget

Your 2011 taxes are due in just under three months. That also means that you have just under three months left to make any 2011 IRA contributions that you might have been putting off.

But what if you’re neglected to contribute to an IRA because you’re not sure you can afford it? Maybe the only cash you have on hand is earmarked for emergencies, and you’re not willing to risk the 10% early withdrawal penalty that comes with a traditional IRA.

Well, I’d like to encourage you to think twice about that stance and consider making a Roth IRA contribution. As I noted the other day, Roth IRA contributions can be withdrawn at any time and for any reason without penalty. And if you don’t believe little old me about this, you can check it out for yourself in IRS Publication 590.

While I’m not crazy about this flexibility to the extent that it encourages (or at least allows) people to raid their retirement to buy shiny things, one huge benefit is that it gives you the flexibility to make a contribution even if you’re not sure you can afford it.

This flexibility is very valuable because you’re only allowed to contribute a limited amount to IRAs each year. In other words, if you fall behind on contributions now, you won’t be able to make up for it later when you can (hopefully) better afford it.

If you make the contribution now and fate smiles upon you, you’ll be able to re-build your emergency savings “on the outside” while having more money stashed away inside your Roth IRA. And if things go awry, you’re free to yank that money out (up to the amount that you’ve contributed) and use it to take care of whatever emergency you’re dealing with.

Some issues to be aware of:

1. This rule applies to Roth IRAs only, so don’t try this trick with a traditional IRA.
2. The usual contribution limits still apply, so don’t try to sock more money away than is allowed.
3. Roth IRA conversions are subject to a five year waiting period before they can be withdrawn without facing a penalty.
4. Make sure a Roth is right for you. If you expect to pay the same or higher taxes in the future, then a Roth might make sense for your situation. But if you expect your tax burden to fall in the future, a traditional IRA might be better — but remember, only Roth IRAs qualify for the penalty-free withdrawal of contributions.
5. Given that this is money that you may need to withdraw at any time, be sure not to put it at risk once inside the Roth. Instead, plug it into a money market fund or something similar until you’ve re-built your emergency savings.