Credit Karma is trying to Make Tax Prep Free
According to Kenneth Lin, tax preparation is not rocket science. That is his pitch to get you to use Credit Karma, his popular credit-monitoring site, to do your taxes online for free. He is taking on TurboTax and H&R Block, which are now charging the typical homeowner or investor more than $90. Their prices have jumped more than $20 over the past month, the tax preparer’s version of surge pricing, as the April 18 filing deadline approaches.
Preparers oversell how difficult their job is, said Lin, Credit Karma’s chief executive officer, who co-founded the San Francisco company in 2007. For most taxpayers, getting the maximum refund should be a simple process, he said, and gratis—not just for the simplest filers but for everyone. “We think we can be transformative in this space,” Lin said.
The U.S. tax prep industry—with $8.9 billion in annual revenue online and off-line, according to IbisWorld—is not panicking yet. Credit Karma is hardly the first company to try this tactic. Even with the low, low price of zero, new players can face insurmountable barriers. Americans will not trust just anyone with their taxes, and the incumbent players can afford to spend huge sums on marketing and technology to stay on top. TurboTax, owned by Intuit Inc., dominates U.S. online tax prep with a market share of 65%. In the most recent fiscal year, Intuit’s consumer tax division reported revenue of $2 billion and operating profit of $1.3 billion, a profit margin of 65%.
Lin acknowledges the difficulty but says Credit Karma has advantages that previous upstarts lacked. Almost half of Americans 18 to 34 years old are Credit Karma members, the company says. More than 60 million people are signed up for the platform, already sharing their financial details with Credit Karma in the process. “We have built-in brand loyalty and trust,” Lin said. “We have a resonance with a younger generation of consumers.” Credit Karma can offer free tax preparation because it makes money in other ways. The company, with 600 employees, gets paid to recommend financial products, such as credit cards and auto loans, to customers. It says it had revenue of $350 million in 2015 and has been profitable for a couple of years. By breaking into tax prep, Credit Karma hopes to get better data on its members and improve its recommendations. The idea is to create a “trusted digital assistant” for its customers’ financial lives, Lin said.
Delivering credit scores and loan products is one thing, navigating the maddeningly complicated U.S. tax code another. Credit Karma acknowledges the problems, and spent the first several weeks of the tax season rewriting questions on its forms to improve their clarity. “There was a lot to learn there,” he said. Credit Karma launched a live chat feature so users can ask for help from tax professionals. Lin said he is already planning many more improvements for next year’s tax season.
According to Gil Luria, Director of Research at D.A. Davison & Co., as of the early weeks of the tax season, TurboTax and H&R Block seemed to be holding on to market share, based on the results for both companies as of late February and on filing data from the Internal Revenue Service. Intuit Chief Executive Officer Brad Smith said Credit Karma could actually help TurboTax by expanding the number of Americans who think about doing taxes online rather than paying hundreds of dollars to hire a professional. “After that, we’ve got to have the easiest product, and it’s got to deliver the best value for the price,” Smith said. Intuit’s investments in new technology help make it worth the money, he said. “We have to make sure we’re the last man or woman standing. That puts our energy into the innovation that’s not easily matched.” For example, TurboTax has expanded its SmartLook feature, which lets users chat with tax professionals by video. The pros can see the customer’s screen and help navigate tricky issues in real time. Smith said Intuit is investing heavily in artificial intelligence, machine learning, and big data to make filing taxes quicker and easier. H&R Block is also emphasizing technology this year, teaming up with IBM’s Watson supercomputer to redesign tax prep in the company’s storefront offices.
Lin is skeptical of the tax industry’s tech ambitions. “A lot of that is just sort of a marketing gimmick,” he said, calling artificial intelligence a “new catchphrase” for the sort of data analysis that tech companies, from Amazon.com Inc. to Netflix Inc., have been doing for a decade or more. “You’re not a rocket scientist trying to hit an orbit on Mars,” he said. Lin hopes that someday, by extracting data from a variety of sources, Credit Karma’s platform will be able to pull together user 1040 forms automatically. If your credit report shows that you have a mortgage, for example, the software should make sure you are claiming a mortgage interest deduction. “This is year one,” Lin said. “This is just the beginning of a big investment we’re going to make in the space.” For now, Credit Karma’s product is simple. Certainly the price is right, and with millions of Americans waiting until the last minute to file this year, Lin is hoping Credit Karma will attract procrastinators desperate for help but wary of a big fee.
Citations
- https://bloom.bg/2p8tr3K Bloomberg
- http://bit.ly/2nMHqLA – Forbes
23andMe Reboots Personal Genetic Testing for Consumers
The Food and Drug Administration (FDA) approved the first-ever direct-to-consumer genetic testing for people’s personal risk of contracting 10 potentially serious conditions including late-onset Alzheimer’s, Parkinson’s disease, celiac disease, and a hereditary blood-clot condition called thrombophilia. The product is offered by the closely held Silicon Valley genetics-testing company 23andMe, Inc., which was initially stymied by the FDA in 2013 when it sought to offer such saliva-analysis tests to the general public. But the company began making more headway by 2015, when it offered consumers a test to tell them if they carried a genetic variant for one of 36 diseases that could be inherited by their children. Those hereditary tests evaluated people for their likelihood of passing on conditions like cystic fibrosis, sickle cell anemia and a disease known as Bloom syndrome.
To date, about two million people have purchased a test from 23andMe, which currently sells an ancestry test for $99 and a combined heredity and ancestry test for $199. With the FDA approval, customers of 23andMe will soon be able to get information about their own risk of 10 diseases, included in that $199 package. The company’s executives, in a phone interview, said that information about four of those diseases—also including a gene variant known as AAT deficiency that can lead to lung or liver disease—will be available by the end of this month, and others will be rolled out later. The Mountain View, California company stressed that, in all cases, the test “does not describe a person’s overall risk” of developing the disease in question, which can be affected by environmental factors and a person’s lifestyle.
“This is a very significant development,” said Jeffrey N. Gibbs, a medical-device attorney with the Washington, D.C., firm of Hyman, Phelps & McNamara who specializes in FDA matters. Now that this first approval for personal genetic tests has occurred, subsequent products can go through a simplified, and quicker, FDA process that simply requires a company to demonstrate it is substantially equivalent to the test already on the market.
Mr. Gibbs estimates that there are probably dozens of such businesses lining up to offer genetic testing. He noted that the FDA will set controls on the sale of the kits that guide customers as to how serious or how minor a person’s risk is of developing a certain disease. The decision for an individual to gain such genetic-disease risk information is especially thorny in cases like Alzheimer’s and Parkinson’s, where there is little current knowledge about how to prevent the illness.
“Some people really want that information,” said Anne Wojcicki, 23andMe’s Chief Executive in a phone interview. “They find it empowering. They may want to make diet and exercise changes, or retire earlier, or they may be able to detect symptoms earlier. And then the question is whether we can potentially intervene more effectively by learning the risk sooner.” She called the issue “really a question of personal choice.”
Apart from offering the genetic data to customers, the company also mines the data from many of them for information that could potentially lead to new pharmaceuticals. Kathy Hibbs, the company’s chief legal and regulatory officer, said 23andMe has provided the FDA with information demonstrating a high level of precision of the genetic tests. It has conducted “studies to demonstrate that consumers can understand and use this information,” she said. Such context will be provided before purchase and accompanying the test kit, company officials said. Customers will be told that, in some cases, there is limited or no treatment and that the disease-risk information may be upsetting to them, said Ms. Hibbs.
The company, named for the 23 pairs of chromosomes in a human cell, hasn’t always had such a happy relationship with the FDA. In November 2013, the FDA ordered it to stop marketing its mail-order kit, referring to a risk that false results could result in unnecessary medical procedures including breast-cancer surgery. It wrote that false results on people’s response to the blood-thinner drug warfarin could lead to clotting or bleeding and a risk of injury or death. In a letter to the company Thursday, the FDA said product labeling should show that the test “is not intended to diagnose a disease, determine medical treatment, or tell the user anything about their current state of health.”
Citations
- http://on.wsj.com/2oeU7mm – Wall Street Journal
- http://bit.ly/2o7iEry – Fierce Biotech
The Good News Is . . .
- Orders for durable goods, items such as autos and airplanes designed to last at least three years, rose 1.8% in February after a 2.4% gain in January. The strength in durable goods was led by a 47.5% increase in orders for commercial aircraft, a gain that followed an even bigger 83.2% rise in January in this volatile sector. Demand was also up for primary metals such as steel, computers, construction machinery and oilfield drilling equipment.
- Monsanto Company, a leading seed producer and provider of crop protection solutions, reported earnings of $3.19 per share, an increase of 48.1% over year-earlier earnings of $2.41 per share. The firm’s earnings topped the consensus estimate of analysts by $0.40. The company reported revenues of $5.1 billion, an increase of 12.0%. Management attributed the results to strong growth in its corn and soybean businesses, favorable currency exchange rates and the sale of its Latitude wheat fungicide business.
- JAB, which is privately held, said it would acquire the Panera restaurant chain for $7.5 billion, and add it to its growing empire of American coffee and food favorites. In 2014, JAB bought the bagel chain Einstein Brothers, which it has been combining with Caribou is some markets. And last year, it paid $1.35 billion for Krispy Kreme, the struggling doughnut chain. In Panera, JAB will acquire a popular fast casual chain that serves soups, salads, sandwiches and baked goods at about 2,000 locations. Panera has set itself apart by offering relatively healthy options and being one of the first national restaurant chains to distance itself from high fructose corn syrup. Under the terms of the transaction, JAB would pay $315 a share.
Citations
- http://apne.ws/2obqBxt – Associated Press
- http://cnb.cx/2lwnm3s – CNBC
- http://monsanto.info/2p0NQbe – Monsanto Co.
- http://nyti.ms/2oRUYaz – NY Times Deal
Planning Tips
Guide to Minimizing the Tax Impact on Your Taxable Portfolio
Once you have established and adequately funded your retirement accounts, you can consider starting a taxable portfolio. Investing in a taxable portfolio can be much more nuanced than investing in an IRA or an employer retirement plan. Every investment must be reviewed not only for its potential investment return, but also for its potential tax impact. After all, an investment return is only meaningful if you get to keep it. Below are some ways you can work to minimize the tax impact of investing outside of retirement accounts. Be sure to consult with your financial advisor to determine if these types of investments are appropriate for your situation and goals.
Utilize Municipal Bonds Instead of Corporate or Federal Government Bonds – The interest paid by municipalities such as cities and school districts is usually free from federal income tax. While the stated yields on municipal bonds will be lower than taxable bonds of comparable credit and duration, the amount you keep after taxes is more important, and for investors in a higher tax bracket, municipal bonds are usually a smart choice outside of retirement accounts.
Focus on Qualified Dividends Instead of Ordinary Dividends – When stocks and stock funds produce dividends, they can be treated as either qualified dividends taxed at 15%, or ordinary dividends taxed as ordinary income, depending on when the stock is purchased and how long it is held before and after the dividend is paid. When managing a portfolio for after-tax return, it is important to try and have as much of the portfolio’s dividend income treated as qualified dividends as possible.
Manage Capital Gains and Losses – When a stock is sold at a profit, any gain is taxed as a capital gain. Short-term capital gains from investments held less than a year are taxed as ordinary income, while long-term capital gains on investments held longer than a year are taxed at an advantageous rate. When managing a taxable portfolio, it is important to defer gains so that they receive long-term capital gains tax treatment, and thus control how much net gain you have at the end of any year. In certain instances, you may sell part of an investment this year and wait and sell part of an investment the next year to spread the tax impact. Selling investments that have lost money can offset the gains taken on other investments. It often makes sense to sell losing investments and reinvest elsewhere to offset gains taken on winners. Losses not used to offset gains can be carried over to future years when you do have gains, and up to $3,000 per year can be deducted from income. Also, if you sell an investment to harvest a loss, you need to avoid repurchasing that investment for 30 days or the loss is disallowed for tax purposes. This applies across accounts, so you cannot harvest a loss in your taxable account and buy the same stock in your IRA.
Avoid Asset Classes That Create Unpredictable Tax Consequences – In taxable portfolios, avoid allocations to asset classes that either produce a lot of ordinary income or that can have tax impacts beyond your control, such as funds that employ option strategies. If these asset classes make sense for your investment goals, place them in your retirement accounts whenever possible.
Utilize Tax-Managed Mutual Funds – When building portfolios using mutual funds, you need to be aware of not only the tax impact of buying and selling on the fund level, but also what is going on inside the mutual fund. Mutual funds pass the tax liability of their buying, selling, dividends and interest to the investors. When a fund has tax-advantaged or tax-managed in its name, the portfolio managers have a goal of maximizing after-tax returns for investors, and will usually employ all of the above strategies within their funds. The managers try to minimize the capital gains created when they buy and sell investments and try to keep dividends passed to investors classified as qualified dividends. If the fund includes bond allocations, they are most likely municipal bonds producing tax-free interest. Index funds and similar low-turnover strategies can also be good choices as there is not much buying and selling within the funds to create capital gains.
Citations
- http://bit.ly/2ohxJsE – The Motley Fool
- http://bit.ly/1imtPED – US News & World Report
- http://bit.ly/2ob9NGV – Investopedia
- http://bit.ly/2nTYY9B – TheBalance.com
- http://bit.ly/2nU4fha – Russell Investments
