How to Prevent Tax Identity Theft

The start of a new year is a time for fresh starts and new goals, but it’s also the beginning of the oft-dreaded tax season, which means Tax identity thieves are on the lookout for information they can use in order to create fraudulent tax returns. Here are some tips to help protect yourself from tax identity theft during tax season.

File Early to Prevent Tax Identity Theft

Tax-related identity theft most commonly occurs from February to early March because thieves want to beat real taxpayers to the punch by filing fraudulent returns before legitimate ones. Because the IRS allows only one tax return per Social Security number per year, your best defense against identity theft is to file your taxes as early as possible.

Use E-File Instead of Postal Mail

An e-filed tax return arrives instantly at the IRS, which then sends back an acknowledgement receipt. At this point you’ll be notified if there’s any suspicious activity, such as possible identity theft. The quicker you know, the quicker you can deal with it. Before you e-file, however, be sure that your firewall, antivirus, and anti-spyware software are all up to date. If you do send your tax return in by post, think about taking it directly to the post office rather than letting it sit in your mailbox.

Don’t Fall for Scams

The IRS will not contact you by phone, email, or text to ask for personal or financial information. Never give out your Social Security number, passwords, PINs, and credit card or bank information to someone who reaches out via these channels. Official correspondence from the IRS is issued in the form of a letter and sent through the mail. However, scammers are getting increasingly clever, and sometimes phony links can look just like the real IRS website. If you ever have questions about the legitimacy of an IRS related query, your best bet is to call the IRS at 800-829-1040.

Protect Your Financial Accounts

Start by using a different password for each of your financial accounts, preferably one that combines letters, numbers, and special characters. It’s also wise to use a two-factor authentication when available, which requires you to verify your login—typically a code sent via call or text.

How to Report Tax Identity Theft

If you’re a victim of tax-related identity theft, you’ll find out when you try to file your return and learn that a return has already been filed with your Social Security number, or you’ll receive a letter from the IRS stating that a suspicious return using your Social Security number has been identified. If either of these happen, you should do the following:

  • Complete a paper return. As shocking as it is to learn that you’ve been the target of identity theft, you still need to file your tax return. In order to avoid tax penalties or late fees, submit a paper return by the filing deadline.
  • Go to IdentityTheft.gov to file a report with the FTC and IRS.
  • File an Identity Theft Affidavit (Form 14039). Fill out and attach this form to your paper return. It will make its way to the Identity Theft Victim Assistance Organization, which will work on your case. Be prepared to submit various forms of documentation proving your identity.
  • Contact the three major credit bureaus—Equifax, Experian, and TransUnion—and ask them to place a fraud alert on your credit records. You should also consider asking them to freeze your credit in case the thief should try to open new credit accounts in your name.
  • Request a copy of the fraudulent return via Form 4506-F. Seeing the fraudulent return will help you determine the specifics of the theft, such as what family information has been compromised.
  • As a precaution, delete any stored credit card numbers from shopping sites and change saved passwords to online accounts.

 

If you have questions on tax identity theft or would like to discuss your 2019 tax return, please feel free to email me at dkittell@mkrcpas.com or call 317.549.3091.

How the Tax Cuts and Jobs Act Affects Year-End Business Tax Planning

With the learning curve of the first tax filing season in the TCJA era behind us, year-end tax planning is a perfect time to incorporate those lessons learned. Here is a general overview of some steps business owners can take in their year-end tax planning.

Depreciation-related Deductions

If your business has acquired a fixed asset or property (one that you don’t intend to sell for at least one year and will be used to earn long-term income), and it’s placed in service before the end of the year, you can typically write off the cost in 2019. Thanks to changes made by the TCJA, this now applies to both new and used assets. The TCJA boosted the deduction limit to $1.02 million with a phase-out threshold of $2.55 million for 2019. It also increased bonus depreciation to 100% for property placed in service after September 27, 2017 and before January 1, 2023.

Travel Expenses

The IRS recently clarified that food and beverage costs are deductible by 50% in certain circumstances and when those costs are stated separately from entertainment on invoices or receipts.

QBI Deductions

One of the most significant changes made by the TCJA affects owners of pass-through entities (partnerships, S corporations, and LLCs) as it authorized a deduction of up to 20% of the owner’s qualified business income (QBI) for the tax years 2018 through 2025. The QBI deduction is reduced for some taxpayers based on the amount of their income, so some individuals may need to consider reducing their taxable income so it falls under the $157,500 threshold ($315,000 for married filing jointly), whether by making contributions to retirement plans or health savings accounts, or even through charitable contributions. Something to keep in mind is that specified service business owners, which includes most personal-service providers, are not eligible for the deduction if their taxable income is above a certain threshold.

Business Repairs

It isn’t a bad idea to complete minor repairs by the end of the year because the deductions can offset taxable business income. However, costs of improvements to business property must be written off over time. If you’re unsure whether a specific renovation or upgrade falls under a repair or an improvement, the IRS recently issued regulations that clarify the distinctions.

Estimated Tax Payments

If your corporation is anticipating a small net operating loss for 2019 but a substantial net income in 2020, you might think about accelerating just enough of the corporation’s 2020 income to create a small amount of net income for 2019. You could also choose to defer some 2019 deductions. This way, rather than having to pay estimated taxes based on 100% of your 2020 taxable income, you will be able to base your estimated tax installments on the comparatively small amount of income shown on your 2019 return.

Tips for Year-End Business Tax Planning

With additional guidance and regulations released consistently since President Trump signed the Tax Cuts and Jobs Act of 2017 into law, one thing remains clear: strategic tax planning is key to lowering a business’s total tax liability. Read on for some moves on lowering your 2019 business tax bill.

Establish Tax-Favored Retirement Plan

Current tax rules allow for significant deductible contributions, so if your business doesn’t already have a retirement plan in place, it’s worth considering. Small business retirement plan options include 401(k), SEP-IRA, SIMPLE-IRA, and the defined benefit pension plan. Some of these plans can be established up until December 31 and allow for a deductible contribution for the 2019 tax year, except for the SEP-IRA and SIMPLE-IRA, which mandate a set-up deadline of October in order to make a contribution for the same year.

Review Your Reports

The end of the year is typically a time for businesses to begin goal setting for the next year, so it’s crucial to have a firm grasp on how your business performed financially this year. Make sure your books are up to date and accurate so you have a clear picture before diving into next year’s plan.

Defer Income If It Makes Sense

Depending on where your income level is, you can potentially cut your tax bill by postponing any end-of-the-year income until January 1 or later. Ask your accountant if shifting receivable income to the new year makes sense for your business.

Purchase Business Essentials to Take Advantage of Deductions

Upgrade equipment and furniture, stock up on office supplies, take care of repairs, and make vendor payments in advance in order to maximize deductions. And thanks to the TCJA, you can claim 100% bonus depreciation for qualified asset additions that were acquired and put in place in 2019.

Make Charitable Contributions

Tis the season for giving…and claiming a deduction for the fair market value of your donations. In addition to money, think outside the box and contact a program that sponsors families for the holidays. They often need food, bedding, toys, cookware, and clothing. It’s a great way for employees to feel like they’re making a difference too. Just don’t forget to get the necessary documentation and receipts to keep with your records.

Start Preparing for Next Year

If you put these tips into action, you’ll be better prepared at this time next year. For instance, you’ll already have a retirement plan in place. By going through the process of tax preparation this year, you have the opportunity to create systems for organization that will expedite the process next year.

The Difference Between Tax Credits and Tax Deductions

When doing your taxes, the goal is to maximize the tax credits and deductions for which you’re eligible. But tax credits are worth more than deductions with the same value, so knowing the differences between the two will help you save money on taxes.

Key Difference

Both credits and deductions lower your tax bill but in different ways and with different outcomes. Tax credits lower your tax liability while tax deductions reduce your taxable income. For instance, someone who’s in the 25% tax bracket with a $100 tax credit will save $100 dollars in taxes, but if that same person has a $100 deduction, they will only save $25 in taxes (25% of $100).

Tax Credits

Tax credits are a dollar-for-dollar reduction on your tax bill, regardless of tax rate, which explains the $100 savings with a $100 tax credit in the previous example. Taking advantage of eligible tax credits after applying all deductions will help to slash your taxes due. Some of the more popular tax credits include:

  • Earned Income Tax Credit (EIC or EITC)
  • Child Tax Credit
  • Child and Dependent Care Credit
  • American Opportunity Tax Credit
  • Lifetime Learning Credit
  • Adoption Credit
  • Saver’s Credit
  • Residential Energy Tax Credit

Refundable Tax Credits vs. Non-Refundable Tax Credits

Some tax credits are refundable while others are not. When you claim a refundable tax credit that exceeds your total tax liability, the IRS will send you the difference. For example, if your tax liability is $1,000 and then you apply your EITC, which is $2,500, you would use that $2,500 to pay your liability and the remaining $1,500 would be refunded to you. By contrast, a non-refundable tax credit can reduce your federal income tax liability to zero, but any leftover balance from the credit will not be refunded.

Tax Deductions

There are two types of tax income deductions, which reduce the amount of income you’re taxed on: itemized deductions and above-the-line deductions.

Itemized Deductions

Itemized deductions are certain tax-deductible expenses that you incur throughout the year. For some taxpayers, those expenses add up to be greater than the standard deduction amount, in which case, they should itemize their tax returns rather than take the flat-dollar standard deduction. Keep in mind that if you plan to itemize, you should accurately track your spending throughout the year, and keep supporting documentation (receipts, bank statements, check stubs, insurance bills, etc.) in the instance that IRS would ask for proof.

Common itemized deductions include:

  • Medical expenses
  • State and local income taxes
  • Property taxes
  • Mortgage interest
  • Charitable contributions

The standard deduction is a fixed amount that varies in consistency to your filing status. For 2019 returns, the standard deduction is:

  • $12,200 for single filers and married filers filing separately
  • $24,400 for married filers filing jointly
  • $18,350 for heads of household

Above-the-Line Deductions

If you claim the standard deduction, you can use “above-the-line” deductions, which reduce your adjusted gross income (AGI), to lower your tax bill. Some of these deductions are:

  • Health savings account (HSA) contributions
  • Deductible contributions to IRAs
  • The deductible portion of self-employment taxes
  • Contributions to self-employed SEP-IRA, SIMPLE IRA, and other qualified plans
  • Self-employment health insurance premiums
  • Penalties on early savings withdrawals

Above-the-line deductions typically aren’t as valuable as tax credits, but they help to lower your AGI, which can slash your tax liability and qualify you for other tax breaks based on income limits.

How to Claim Social Security Survivor Benefits

The Social Security Administration sends survivor benefits to about 6 million Americans every month, directed to widows, widowers, and children who have experienced the loss of someone who has paid into the social security program. Read on to find out who is eligible to receive survivor benefits and how to collect them.

Who is Eligible to Receive Survivor Benefits?

If you were married to your spouse for at least nine months before their death, you are eligible for social security survivor benefits. (The one exception to this length-of-marriage stipulation is if you are caring for a child of the deceased who is under 16 years old). Children of the deceased who are under 18 years old may also receive survivor benefits, as can disabled children under the age of 22. Finally, parents, stepparents, or adoptive parents who are at least age 62 and were dependent upon the deceased could potentially qualify for survivor benefits.

When Can You Begin Social Security Survivor Benefits?

Surviving spouses can begin collecting survivor benefits as early as age 60, but this will result in only about 70% of the amount the survivor could get if they wait until their survivor full retirement age, which is 66 for people born between 1945-1956 and gradually increases to age 67 for those born in 1962 or later. There are some exceptions to this as well: if you are disabled, you may begin collecting survivor benefits at age 50; any surviving spouse can collect a one-time death benefit payment of $255 at any age; and as noted above, survivors who are caring for a child of the deceased who is under age 16 can collect at any age.

How to Claim Social Security Widow and Widower Benefits

First, the death needs to be reported, which is a task that most funeral homes include as part of their service as long as the social security number of the deceased is provided. Documents needed to apply for Social Security survivor benefits include:

  • Proof of death for the deceased in the form of a death certificate
  • Social Security number of the deceased
  • Social Security numbers of the survivor and any dependent children
  • Your birth certificate
  • Your marriage certificate
  • Most current W-2 forms of the deceased
  • Bank information for direct deposit

Once everything is submitted, you’ll be notified of your eligibility to receive survivor benefits.

How Much Will You Receive?

The amount you receive is determined by the deceased’s earnings and whether or not the deceased was collecting benefits (either full or reduced) at the time of death. The basic breakdown looks like this:

  • For couples who hadn’t started receiving benefits: it’s recommended for the highest earner of the two to wait until age 70 to begin Social Security benefits. This generates a larger monthly benefit amount that becomes the survivor benefit if and when the first spouse passes away.
  • If both spouses had already started claiming: the higher benefit amount becomes the survivor benefit while the lesser of the two benefit amounts will stop.
  • If the deceased spouse had already begun benefits, but the survivor had not:

The surviving spouse will need to decide when they will claim survivor benefits in a way that is likely to give them more lifetime income.

In addition to whether or not either spouse was already receiving Social Security benefits at the time of death, the actual dollar amount a survivor receives will depend on how much money the deceased spouse paid into Social Security over their lifetime.

How to Estimate Retirement Income Needs

Depending on where you are in life, trying to anticipate your financial needs in retirement and determining how exactly to get to that point could feel like a daunting task, or even a task that doesn’t need tackling yet. In fact, according to a study completed by The Alliance for Lifetime Income, only 28% of non-retired Americans have attempted to estimate their retirement income. Not as intimidating as it sounds, read on to learn how to estimate those needs.

Start with Your Current Income

If you’re living within your means and not depending on credit cards to maintain your lifestyle, using your paycheck as a benchmark is a sufficient starting point. This, of course, excludes contributions to a traditional 401(k) account as well as health insurance premiums that are deducted from your gross pay. A common and simple approach, then, is to set your desired annual retirement income at 60% to 90% of your current income. However, it doesn’t take a financial expert to note potential flaws with this approach. What if, for example, you plan to travel extensively during retirement? Planning for 60% to 90% of your current income might not be enough to fulfill your jet setting goals.

Forecast Retirement Expenses

Your annual retirement income should be more than enough to meet your daily living expenses. Keep in mind that the cost of living will increase over time, and insurance and health care could fluctuate. Having said that, some common retirement expenses to estimate include:

  • Food and clothing
  • Housing (mortgage, homeowners insurance, rent, property updates, repairs, etc.)
  • Utilities
  • Transportation (car payments, insurance, maintenance, gas, repairs, public transportation)
  • Insurance (medical, dental, life, etc.)
  • Health care costs not covered by insurance (deductibles, copayments, etc.)
  • Taxes
  • Debts and loans
  • Recreation such as travel, hobbies, and dining out

What to Do with Your Projected Retirement Income Needs?

A standard rule of thumb when talking about estimating retirement income needs is to have 25 times your anticipated annual expenses saved up by the time you retire. This is assuming you’re planning for a 30-year retirement. Theoretically, you could then withdraw 3% to 4% of your nest egg each year.

If you’re lacking additional sources of protected lifetime income, such as pensions or annuities, you may need to tap into savings in order to bridge the gap between social security checks and what you’ll need to live on. You could also buy a simple income annuity to cover part of that funding gap. These payments continue for life, thereby removing some of the guesswork of estimating retirement income needs and providing peace of mind.