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 firstname.lastname@example.org or call 317.549.3091.
Even those of us who have the best intentions with our money can fall victim to bad financial habits, which can cause unnecessary stress and anxiety. Some of the most common bad habits we fall into include:
- Impulse spending
- Not budgeting (or not sticking to a budget)
- Spending more than you earn
- Relying on credit cards
- Falling into the trap of convenience
Breaking bad financial habits takes time, intention, and effort. Below are some ideas for starting better habits to get your money to work for you.
Start an Emergency Savings Account
This isn’t anything you haven’t been told before, but if you want to quit the cycle of credit card debt, you’re going to need a savings account to fall back on in times of financial hardship or unforeseen costs. Start with a goal of saving $1,000 specifically for emergencies, so next time your car needs work, for example, you’ll have the funds to pay for it rather than sinking farther into credit card debt.
Nothing says “taking control of my money” like creating a budget that works for you. When you assign a purpose to every dollar, not only are you actively monitoring your income and spending habits, but you’re avoiding debt and reaching your financial goals more quickly. The trick is sticking to it. It’s important to track your spending monthly, and revisit your budget at the beginning of each month, adjusting as needed with the goal of spending less than you bring in. If you know you have a bigger expense coming up later that month, or even in a few months, you’ll have a big picture of your finances and you can begin to make a plan for saving. You can also decide what your priorities will be for that month, and start saving toward your goals.
Make a Plan to Get Out of Debt
Credit cards, student loans, and car payments eat into your budget, and limit the amount of money you can put toward retirement and other financial goals. In short, debt limits your choices.
One popular and time-tested method of getting out of debt is often referred to as the snowball method. You start by paying off the smallest debt, then once that’s paid off, you add that monthly payment toward the next smallest debt until that one’s paid off. For example, if your smallest debt is a doctor bill for $200 and you make arrangements to pay $50 per month until it’s paid off, for the next four months you’ll pay that $50 to your doctor’s office while paying the minimum on every other debt. Once the doctor bill is paid in full, you add that $50 to the monthly payment of your next smallest debt while continuing to pay the minimum on your other larger debts. As each debt is paid off, you’re adding more to the next debt and building momentum until even your largest debt is paid off.
Save for the Future and Start Investing
Once you set up an emergency savings account and pay off your debt, you can begin to save more aggressively. The first step is to bulk up your emergency savings fund to the equivalent of six months of living expenses so you’ll have something to fall back on in case of a major unexpected life event, such as a job loss. Once this is accomplished, you can grow your wealth by investing your money. You’ll need to work with a financial planner to help advise you in investments and diversify your portfolio.
It’s easy to get off track and lose focus when paying off debt, keeping on track with your budget, and saving for the future, so it helps to have some goals in mind. Whether your goals include a vacation home on a tropical island, paying for you child’s college education, or achieving early retirement (or maybe all three), keep these goals at the forefront of your mind whenever you lose steam. You can even create a vision board and put it someplace where you’ll see it every day, reminding you that good financial habits will pay off in the end.
If you have questions on setting healthy financial goals or would like to discuss your 2019 tax return, please feel free to email me at email@example.com or call 317.549.3091.
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.
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.
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.
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.
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.
As the clock winds down to the end of the year, there are a few last-minute money moves to make in order to lower your tax bill.
Maximize Your 401(k) and HSA Contributions
While tax deductible contributions can be made to traditional and Roth IRA accounts until April 15 of 2020, the deadline for 401(k)s and HSA accounts is December 31 of this year. You can contribute up to $19,000 to a 401(k), 403(b), most 457 plans, and federal Thrift Savings Plans (plus $6,000 in catch-up contributions for those who are 50 or older). As for HSA accounts, the maximum contribution for 2019 is $3,500 for individuals and $7,000 for family coverage. And if you’re 55 or older you can contribute an additional $1,000.
Start Thinking About Retirement Contributions for 2020
Retirement contributions to 401(k)s have increased for 2020. Individuals can contribute $19,500 next year, and those 50 or older can contribute an additional $6,500. If you prefer to spread out your contributions evenly throughout the year, you’ll need to adjust your monthly contribution amounts by January.
Take Advantage of Your Flexible Spending Account
Funds in a flexible spending account revert back to the employer if not spent within the calendar year. Some companies might provide a grace period extending into the new year, but others end reimbursements on December 31.
Prevent Taxes on an RMD with Charitable Donations
After seniors reach age 70 ½ they must take a required minimum distribution each year from their retirement accounts (an exception to this rule is a Roth IRA account). Seniors who aren’t dependent on this money for living expenses should consider having it sent directly from the retirement account to a charity as a qualified charitable distribution, effectively preventing the money from becoming taxable income.
Consider a Roth Conversion
Because withdrawals from traditional IRAs are taxed in retirement while distributions from Roth IRAs are tax-free, you might think about converting some funds from a traditional IRA to a Roth IRA. Just be sure this move doesn’t tip you into the next tax bracket. You’ll need to pay taxes on the initial conversion, but the money will then grow tax-free in the Roth IRA.
Take Stock of Losses
Sell any losses in stocks for a deduction of up to $3,000, but be aware that purchasing the same or a substantially similar stock within 30 days of the sale would violate the wash-sale rule. If that happens your capital loss would be deferred until you sell the new shares.
Meet with a Tax Advisor
If you’re unsure whether or not you’re ending the year in a favorable tax bracket, check in with an advisor who can identify actionable steps to reduce taxable income through retirement contributions or itemized deductions.
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.
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.
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 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.
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 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
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.