What you need to know to combat tax identity theft

 
Earlier this year, the U.S. Federal Trade Commission (FTC) reported there was an almost 50% jump in identity theft complaints in 2015. The primary driver of that spike, by far, was tax identity theft. The FTC received 490,220 complaints about identity theft last year, with tax identity theft accounting for 221,854 of the complaints. 
 
It’s obvious that individuals can’t afford to ignore the threat of tax identity theft, but the IRS has taken some measures to combat the epidemic that has implications for employers, too. Businesses also need to be aware of the risk of tax identity theft they face. Criminals aren’t just pursuing Social Security numbers (SSNs) — they’re also going after employer ID numbers (EINs) assigned by the IRS.  

Individual tax identity theft

To date, most of the attention has been paid to individual victims of tax identity theft. According to the IRS, it occurs when someone uses a stolen SSN to file a tax return claiming a fraudulent refund. The victim may be unaware of this until he or she attempts to file a return and learns that one has already been filed. Alternatively, the IRS might send a taxpayer a letter saying it has identified a suspicious return with the taxpayer’s SSN. The U.S. Government Accountability Office found that the IRS paid out $5.8 billion dollars in fraudulent refunds for the 2013 tax year.
 
In addition, a fraudster might use another’s SSN to obtain a job. The employer then reports that person’s income to the IRS under the stolen SSN. The victim, obviously, won’t include those earnings when filing his or her tax return, so IRS records will indicate that the victim underreported income.
 
How does a fraudster obtain an SSN? These thefts can often be traced back to the victim’s place of employment. Insiders at a company may steal the numbers and other employee or customer information. Perpetrators also might wait until staff members let their guards down and leave SSNs readily accessible on computers or in waste receptacles. And, of course, individuals may simply be careless with their SSNs and other sensitive information.
While large companies like banks and hospitals are favorite targets, the improper lifting of just a single SSN can wreak havoc for one of your employees or customers. That means smaller companies are at risk, too.

IRS actions 

Tax identity theft is a top concern for the IRS, which has again placed it on its annual “Dirty Dozen Tax Scams” list. The agency will be implementing new provisions and is working with states and the payroll industry to put new safeguards in practice.
 
Most notably for employers, the Protecting Americans from Tax Hikes (PATH) Act signed in late 2015 now requires employers to file W-2, W-3 and 1099 forms by January 31 of the year following the tax year. The idea is that it will be easier for the IRS to catch discrepancies between legitimate forms filed by employers and those filed by fraudsters seeking refunds based on false forms — before the agency sends out refund checks.
 
The earlier deadline takes effect for statements filed in 2017 for the 2016 tax year. (W-2s and 1099s still must be furnished to employees and payees by January 31.) With these forms now due to be filed with the IRS a month earlier than in the past (or, for electronic filers, two months earlier), employers will need to pull together the necessary information more promptly. 
 
The IRS is also expected to expand a pilot program it launched this year to verify the authenticity of W-2 data submitted by taxpayers on electronically filed tax returns. For the pilot program, the IRS partnered with several major payroll service providers to provide a 16-digit code and a new Verification Code field on a limited number of W-2 copies provided to employees. Each unique number is derived from data on the form itself and therefore is known only to the IRS, the payroll service provider and the employee. The IRS plans to broaden the scope of the program for the 2017 filing season by increasing the number and types of W-2 issuers involved.

Risks for businesses

Thieves are going after EINs, which is a startling proposition for the many businesses that put far more effort into protecting SSNs than their EINs. A fraudster could use a stolen EIN to report false income and withholding and file for a refund. The Treasury Inspector General for Tax Administration has estimated that the IRS could issue almost $2.3 billion in potentially fraudulent tax refunds based on EINs annually. Moreover, the legitimate business could find the IRS coming after it for payroll taxes that were reported as withheld but not remitted.
 
As with SSN theft, EIN theft victims may not discover something’s amiss until they file their tax returns and receive IRS notification that they had already filed for that tax year. They also might be tipped off by receipt of an IRS notice regarding nonexistent employees.

Tips for preventing tax identity theft

You can take several steps to help reduce the risk of theft of SSNs and EINs, including:
Businesses should bear in mind — and remind their employees and customers — that the IRS doesn’t initiate contact with taxpayers by email, text messages or social media to request personal or financial information.

Don’t put your head in the sand

The risk of tax identity theft, whether of SSNs or EINs, is real. We can help you take the necessary steps to avoid the morass of negative consequences that can result for a business and its employees and customers.
 
Side Note:
 
Some tax refunds delayed next year to help combat tax identity theft
In efforts to combat target areas of identity theft, no credit or refund will be issued before February 15 on returns processed in early 2017 with the Earned Income Credit and/or the Additional Child Tax Credit, due to a mandate enacted December 18, 2015 by the PATH Act. Since many of the fraudulent returns contain refundable credits, the delay in processing refunds will allow the IRS more time to analyze returns for validity.

 

It’s common for parents, grandparents and others to make gifts to minors and college students. Perhaps you want to help fund education expenses or simply remove assets from your taxable estate. Or maybe you’re hoping to shift income into a lower tax bracket. Whatever the reason, beware of the “kiddie tax.”

What is the kiddie tax?

For children subject to the kiddie tax, any unearned income beyond $2,100 (for 2016) is taxed at their parents’ marginal rate (assuming it’s higher), rather than their own likely low rate. For example, let’s say you transferred to your 16-year-old some stock you’d held for several years that had appreciated $10,000. You were thinking she’d be eligible for the 0% long-term gains rate so could sell the stock with no tax liability for your family. But you’d be in for an unhappy surprise: Assuming your daughter had no other unearned income, $7,900 of the gain would be taxed at your rate (15% or 20%, depending on your bracket).
 
Or let’s say you transferred the appreciated stock to your 18-year-old grandson with the plan that he could sell the stock tax-free to pay for his college tuition. If his parents are in a higher tax bracket, he won’t end up with the entire $10,000 gain available for tuition because of the kiddie tax liability.

Who’s a “kiddie”?

Years ago, the kiddie tax applied only to those under age 14 — providing families with the opportunity to enjoy significant tax savings from income shifting. Today, the kiddie tax applies to children under age 19 and to full-time students under age 24 (unless the students provide more than half of their own support from earned income).

Alternative strategies

Fortunately, there may be ways to achieve your goals without triggering the kiddie tax. For example, if you’d like to shift income and you have adult children who’re no longer subject to the kiddie tax but in a lower tax bracket, consider transferring income-producing or highly appreciated assets to them. Or, if you want to help your grandchild fund college, consider paying tuition directly to his or her school. An added bonus: a direct tuition payment isn’t subject to gift tax.
 
For more on the kiddie tax and ways to achieve your goals without triggering it, contact us.

You might be able to claim a deduction for the business use of a home office. If you qualify, you can deduct a portion of expenses, including rent or mortgage interest, depreciation, utilities, insurance, and repairs. The exact amount that can be deducted depends on how much of your home is used for business.

Basic rules for claiming deductions

The part of your home claimed for business use must be used:

A strict interpretation

The words “exclusively” and “regularly” are strictly interpreted by the IRS. Regularly means on a consistent basis. You can’t qualify a room in your home as an office if you use it only a couple of times a year to meet with customers. Exclusively means the specific area is used solely for business. The area can be a room or other separately identifiable space. A room that’s used for both business and personal purposes doesn’t meet the test. The exclusive use rule doesn’t apply to a daycare facility in your home.

What if you’re audited?

Home office deductions can be an audit target. If you’re audited by the IRS, it shouldn't result in additional taxes if you follow the rules, keep records of expenses and file an accurate, complete tax return. If you do have a home office, take pictures of the setup in case you sell the house or discontinue the use of the office while the tax return is still open to audit.

There are more rules than can be covered here. Contact us about how your business use of a home affects your tax situation now and in the future. Also be aware that deductions for a home office may affect the tax results when you eventually sell your home.

If you’re getting married this year, we know you’re probably focused on things like the dress, the venue, the food, etc. As your accounting firm, we want to remind you of some things you should know considering your finances. Here are 7 important things newlyweds should know.

  1. If you change your name, be sure to report the name change to the Social Security Administration (SSA) using Form SS-5, Application for a Social Security Card. You can obtain the form on-line at SSA.gov, by calling 800-772-1213 or directly from a local SSA office. Updating your name with the SSA is important because names and Social Security numbers on your tax return must match SSA records.
  2. Be aware that if you get married during 2016 you will be considered to be married for the entire year for tax purposes. You and your spouse may choose to file as married, filing a joint return, or married, filing a separate return, each year.  Please contact us to determine what would be the most advantageous filing status for you and your spouse for 2016.
  3. A change in marital status may, of course, result in a change in your tax bracket. So, if you work, be sure to complete a new Form W-4, Employee’s Withholding Allowance Certificate, so that your federal and state tax withholdings are adjusted as soon as possible. We can help determine correct 2016 tax withholdings that will allow you to avoid surprises at the tax filing deadline.
  4. In some instances, there may be a "marriage penalty" where two higher-income people who get married wind up owing more in taxes on a combined basis than if each had remained single. The only way to avoid this would be by postponing the wedding until the next year, and paying the penalty then. On the other hand, couples with very dissimilar incomes generally end up owing less by getting married, in essence getting a “marriage bonus.” See more on this topic in our article, "Getting married? Learn the tax implications" here.
  5. If you purchased health insurance from the Health Insurance Marketplace and are receiving 2016 advance payments of the health insurance premium tax credit, it is important to report changes in address, financial status, and family size to the Health Insurance Marketplace. This will assure that you will receive the proper amount and type of premium credit for 2016. These changes may also open the Marketplace special enrollment period that permits health care plan changes. In most cases, this period is open for 60 days from the date of the life event.
  6. You should also inform the IRS if your address changes. You can do that by filing Form 8822, Change of Address, with the IRS. (Form 8822 and mailing instructions may be downloaded at IRS.gov.) You should, of course, also inform the U.S. Postal Service and arrange for mail forwarding either by visiting your local post-office or on-line at USPS.com.
  7. Be aware that changes to retirement plan and life insurance beneficiaries may be needed as well when you marry. Generally, retirement plans and life insurance companies can only pay benefits to a participant’s/owner's named beneficiaries upon his or her death. To change beneficiaries, you should contact your employer or plan administrator and your life insurance company to request change of beneficiary forms and complete them as indicated.

These are just a few things to think about when you come back from your honeymoon. If you have questions about how your new marriage will affect other financial matters, please contact us at (719) 630-1186 or through our Secure Email here. We're glad to help!

The wedding bells are ringing, waves are crashing onshore at your honeymoon in Hawaii, and then it hits you!  How is getting married going to affect my taxes? Okay, so maybe no one is thinking about taxes on their honeymoon, but it is something that every couple should understand. The tax system of the United States is setup so that combined tax liability of a married couple may be higher or lower than their combined tax bill if the couple had remained single.

This is where the idea of marriage penalty and marriage bonus comes from. The marriage penalty often affects taxpayers that have very high and very low incomes, and the marriage bonus affects several middle-income couples who have disparate incomes. The extent to which the marriage penalty or bonus affects a given couple depends on factors such as the level of their combined income, the proportion of their individual incomes being similar, and how many children they have.

A marriage bonus typically occurs when one individual with a higher income marries and files a joint return with an individual who has a much smaller income, and the additional income is not usually enough to push the combined income into a higher tax bracket. Married couples fall into the married filing joint tax brackets, which are wider in terms of income limits and result in a lower tax bill.

A marriage penalty occurs when two individuals with equal incomes marry and relates to individuals who have very low and high incomes. A high-income couple falls into this trap because income tax brackets for married couples at the top of the income tax schedule are not twice as wide as the equivalent brackets for single filers.  

An example is the 33% tax bracket, which for 2016 single filers starts out at $190,151, but for married filing joint filers it starts out at $230,451. Two high incomes when combined could easily put a couple’s income into a higher bracket than filing as single, thus resulting in a penalty.

Another item to consider for the marriage penalty with high-income earners is the new 3.8% investment income tax. This tax is imposed on single filers who have adjusted gross income of $200,000 or more and for married filers with gross income of $250,000.

Two individuals who both made $150,000 would not be subject to the net investment income tax if filing as single. But if these two filed as married they would be subject to the additional tax, which is the lesser of their net investment income or the amount of their adjusted gross income over the threshold, times 3.8%.

When else can a penalty occur?

A marriage penalty can also occur when two low-income individuals file as married. Two individuals who file single can be eligible for a large earned income credit depending on how many children they have to claim. The other advantage of claiming a dependent is the opportunity to file as head of household instead of just single. Head of household tax brackets are wider and there is also a larger standard deduction. Filing married eliminates the benefits of head of household and could potentially lower the amount of earned income credit available due to the combined incomes.

So what options do we have?

The idea of a marriage penalty or bonus causing a couple to tie the knot or to wait it out seems extraordinary, but it could affect one’s decision to work, work less, or not work at all. A married couple could have one individual who makes $40,000 and falls into the 25% tax bracket filing single, but who would fall into the 15% tax bracket filing married. The reverse could be true for the other spouse who didn’t work as single and would have been in the 0% bracket, but then married if they decided to work could possibly be in the 15% to 25% bracket.

Will the US ever change this policy?

There are ways to eliminate the marriage penalty and bonus, but it would require large changes to the US tax code. The US tax code is designed to be progressive in nature, but to also be equal in treatment among married and unmarried couples. If the United States adopted a flat tax and removed all provisions, then the marriage penalties and bonuses could be elmiminated. The United States could also eliminate the marriage penalty and bonus by keeping  the progressive tax structure, but requiring everyone to file single. Without a major overhaul of the United States tax code, solutions such as widening the tax brackets for high-income earners filing joint and a permanent extension of the marriage penalty relief of the Earned Income Tax Credit will have to suffice as potential short term solutions.

If you’ve been bitten by the net investment income tax (NIIT) in the past three years, you may be ready now to get more serious about exploring strategies to avoid or reduce your exposure to this complicated 3.8% Medicare surtax on investment income. Below are ten strategies to minimize the bite of this surtax in 2016 and succeeding years.

  1. Sell securities with losses before year-end to offset gains during the year from the sale of securities.
  2. Donate appreciated securities instead of cash to IRS-approved charities so that gains won’t be included on your return even though you will receive a tax deduction for the donation.
  3. Use installment sales or Section 1031 like-kind exchanges to either spread the gain recognition over several years or defer the gain on the sale of property. These two strategies work best for investment real estate.
  4. Invest more taxable investment funds in municipal bonds. Interest income from municipal bonds is federally tax exempt and also state exempt as well, if bonds are issued by your resident state. If you are subject to the NIIT, be sure to include the 3.8% in your municipal bond interest conversion calculation.
  5.  Invest taxable investment funds in growth stocks. Gains won’t be taxed until the stocks are sold, and growth stocks generally do not distribute dividends.
  6. Consider conversion of traditional IRA accounts to ROTH accounts. This idea is part of a long-term strategy and requires careful coordination with your tax and investment advisors, because the taxable income from the conversion does increase your taxable income and may result in more of your investment income being subject to the NIIT in the year of the ROTH conversion. In the future, though, this strategy could result in tax savings since the earnings and gains inside the ROTH will be exempt from both income tax and the NIIT when distributed.
  7. Invest in life insurance and tax-deferred annuity products. Earnings from life-insurance contracts and annuity contracts generally aren’t taxed until they are withdrawn. Life-insurance death benefits are generally exempt from federal income tax.
  8. Invest in rental real estate. Rental income is offset by depreciation deductions, reducing the amount of net investment income.
  9. Maximize deductible contributions to tax-favored retirement accounts such as 401(k) and self-employed SEP accounts
  10. If you are a cash basis self-employed individual or sole shareholder of an S-Corporation, consider accelerating business deductions into 2016 and deferral of business income into 2017.

Bottom-line, the NIIT is complex, and all strategies should be discussed with your tax and investment advisors before implementation to avoid other unintended tax consequences. Many of these strategies take time to implement as well, so start planning now. We can help you evaluate which strategies would be best for your particular situation, so give us a call soon to get started on your 2016 planning process.

Individuals

Charitable Deductions

Summertime means cleaning out those often neglected spaces such as the garage, basement, and attic for many of us. Whether clothing, furniture, bikes, or gardening tools, you can write off the cost of items in good condition donated to a qualified charity. The deduction is based on the property's fair market value. Guides to help you determine this amount are available from many nonprofit charitable organizations.

Charitable Travel

Do you plan to travel while doing charity work this summer? Some travel expenses may help lower your taxes if you itemize deductions when you file next year:
  1. You must volunteer to work for a qualified organization. Ask the charity about its tax-exempt status. 
  2. You may be able to deduct unreimbursed travel expenses you pay while serving as a volunteer. You can’t deduct the value of your time or services.
  3. The deduction qualifies only if there is no significant element of personal pleasure, recreation or vacation in the travel. However, the deduction will qualify even if you enjoy the trip.
  4. You can deduct your travel expenses if your work is real and substantial throughout the trip. You can’t deduct expenses if you only have nominal duties or do not have any duties for significant parts of the trip.
  5. Deductible travel expenses may include:

    • Air, rail and bus transportation
    • Car expenses
    • Lodging costs
    • The cost of meals
    • Taxi fares or other transportation costs between the airport or station and your hotel

Renting Your Vacation Home

A vacation home can be a house, apartment, condominium, mobile home or boat. If you rent out a vacation home, you can generally use expenses to offset taxable income from the rental. However, you can't claim a loss from the activity if your personal use of the home exceeds the greater of fourteen days or 10% of the time the home is rented out. Watch out for this limit if taking an end-of summer vacation at your vacation home. 
 

Businesses

Traveling for Business

When you travel away from home, you may deduct your travel expenses – including airfare, train, bus, taxi, meals (generally limited to 50%), lodging – as long as the primary purpose of the trip is business-related. You might have some downtime relaxing, but spending more time on business activities is critical. Note that the cost of personal pursuits is not deductible.

Entertaining Clients

If you treat a client to a round of golf at the local club or course, you may deduct qualified expenses – such as green fees, club rentals, and 50% of your meals and drinks at the nineteenth hole – as long as you hold a "substantial business meeting" with the client before or after the golf outing. The discussion could take place a day before or after the entertainment if the client is from out of state. For information on what does and does not qualify, please contact us.

Using Your Home Office  

Home office expenses are generally deductible if part of a business owner's personal residence is used regularly and exclusively as either the principal place of business or as a place to meet with patients, customers or clients. The IRS provides an optional safe-harbor method that makes it easier to determine the amount of deductible home office expenses. These rules allow you to deduct $5 per square foot of home office space (up to 300 square feet). In addition, deductions such as interest and property taxes allocable to the home office are still permitted as an itemized deduction for taxpayers using the safe harbor.
It’s summertime! And although that means vacations and tans for many of us, it may also mean for students that it’s time to get a summer job. Whether your student finds work mowing lawns, babysitting or working in a restaurant, there are some things they should be aware of. If it’s their first job, it gives them a chance to learn about the working world – and that includes taxes!

Below is a list of eight things that students who take a summer job should know about taxes:

1. Don’t be surprised when your employer withholds taxes from your paychecks. That’s how you pay your taxes when you’re an employee. If you’re self-employed, you may have to pay estimated taxes directly to the IRS on certain dates during the year. This is how our pay-as-you-go tax system works.

2. As a new employee, you’ll need to fill out a Form W-4, Employee’s Withholding Allowance Certificate. Your employer will use it to determine how much federal income tax to withhold from your pay.

3. Keep in mind that all tip income is taxable. If you get tips, you must keep a daily log so you can report them. You must report $20 or more in cash tips in any one month to your employer. And you must report all of your yearly tips on your tax return.

4. Money you earn doing work for others is taxable. Some work you do may count as self-employment. This can include jobs like baby-sitting and lawn mowing. Keep good records of expenses related to your work. You may be able to deduct (subtract) those costs from your income on your tax return. A deduction may help lower your taxes.

5. If you’re in ROTC, your active duty pay, such as pay you get for summer camp, is taxable. A subsistence allowance you get while in advanced training isn’t taxable.

6. You may not earn enough from your summer job to owe income tax. But your employer usually must withhold Social Security and Medicare taxes from your pay. If you’re self-employed, you may have to pay them yourself. They count toward your coverage under the Social Security system.

7. If you’re a newspaper carrier or distributor, special rules apply. If you meet certain conditions, you’re considered self-employed. If you don’t meet those conditions and are under age 18, you are usually exempt from Social Security and Medicare taxes.

8. You may not earn enough money from your summer job to be required to file a tax return. Even if that’s true, you may still want to file. For example, if your employer withheld income tax from your pay, you’ll have to file a return to get your taxes refunded.

 

Contact your CPA or visit IRS.gov for more about the tax rules for students.

 

See if you qualify for the Child and Dependent Care Credit

If you haven't already, you may be planning to enroll your kids in daycare or a camp this summer to keep them well cared for while having fun and staving off boredom. While many parents use child care year-round, summertime can offer unique opportunities and challenges.

The costs can certainly add up, but you may qualify for a federal tax credit that can lower your taxes. The IRS has put together some facts you should know about the Child and Dependent Care Credit.

10 Facts you should know about the Child and Dependent Care Credit:

1. Your expenses must be for the care of one or more qualifying persons. Your dependent child or children under age 13 usually qualify. For more about this rule see Publication 503, Child and Dependent Care Expenses.

2. Your expenses for care must be work-related. This means that you must pay for the care so you can work or look for work. This rule also applies to your spouse if you file a joint return. Your spouse meets this rule during any month they are a full-time student. They also meet it if they’re physically or mentally incapable of self-care.

3. You must have earned income, such as from wages, salaries and tips. It also includes net earnings from self-employment. Your spouse must also have earned income if you file jointly. Your spouse is treated as having earned income for any month that they are a full-time student or incapable of self-care. This rule also applies to you if you file a joint return.

4. As a rule, if you’re married you must file a joint return to take the credit. You can still take the credit, however, if you’re legally separated or if you and your spouse live apart.

5. You may qualify for the credit whether you pay for care at home, at a daycare facility or at a day camp.

6. The credit is a percentage of the qualified expenses you pay. It can be as much as 35 percent of your allowable expenses, depending on your income.

7. The total expense that you can use for the credit in a year is limited. The limit is $3,000 for one qualifying person or $6,000 for two or more.

8. Some exclusions to note: Overnight camp or summer school tutoring costs do not qualify. You can’t include the cost of care provided by your spouse or your child who is under age 19 at the end of the year. You also cannot count the cost of care given by a person you can claim as your dependent. Special rules apply if you get dependent care benefits from your employer.

9. Keep all your receipts and records. Make sure to note the name, address and Social Security number or employer identification number of the care provider. You must report this information when you claim the credit on your tax return.

10. Remember that this credit is not just a summer tax benefit. You may be able to claim it for care you pay for throughout the year.

 

These tips are taken from IRS Special Edition Tax Tip 2016-10, June 21, 2016

 

 

 

 

 

 

 

 

 

If you have a financial interest or signature authority over a foreign financial account, you may be required to file FinCEN Form 114a, otherwise known as the Report of Foreign Bank and Financial Accounts (FBAR). A US citizen must file if the aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year. The deadline of June 30th may not be extended.