Articles

Tax Scams

During Tax season, stay on guard for scams.  These calls can be frightening, which is why people fall for them.  The callers can be threatening and aggressive by someone impersonating an IRS agent.  Callers often tell people that they will be arrested, deported, or subject to other legal actions if they don't send money immediately.

Here are some things the IRS says to keep in mind to help avoid being a victim of tax scams:

  • The IRS will not initiate contact with you by phone or email to ask for your personal or financial information.  The government loves a paper trail.  The IRS will write you first.  If you are unsure about a tax bill, call the IRS at (1-800) 829-1040.
  • The IRS will not give you an ultimatum to pay up immediately.  You will get a bill.  The agency won't call to congratulate you for getting a refund, another twist on the scam.
  • The IRS will not dictate how you pay your bill by requiring, for example, that you send a prepaid debit card.
  • Don't let anyone scare you.  The agency isn't going to threaten to send the police your house.
  • Please don't hesitate to contact me if you have any questions.

2014 Health Care Laws - A Tax-Time Bomb?

As strange as this may sound, your health insurance situation can impact your tax bill in 2014. There are three (3) key areas to consider.

  1. The Medical Uninsured. Beginning in 2014, virtually everyone is required to have health insurance or face a potential tax penalty. The initial penalty will be the greater of $95 per individual, $285 per family or 1% of your income.
  2. Small Business Tax Penalties. If you own a business and have 50 or more employees you are required to offer a minimally acceptable health insurance benefit. If you do not, you could be subject to penalties per employee beginning in 2015.
  3. The Health Insurance Premium Credit. If you signed up for health insurance through the medical insurance exchange, you may have been eligible to receive a reduction in your insurance premium. Eligibility occurs when your income is below certain Federal thresholds. You also have the option of applying the premium credit directly against your insurance premium or as a reduction of your taxes.

Tax Planning Is Now More Important Than Ever

With the full impact of tax changes in 2013 reflected in your last tax return. now is a good time to think about ways to reduce next year's taxes. Here are some thing to consider:

Expiring Tax Laws
A number of tax provisions expired in 2013 and unless extended are no longer available. This includes the mortgage insurance premium deduction (PMI), the educator expense deduction, the state sales tax itemized deduction option, and the tuition fee deduction.

New Taxes
Higher tax rates as well as the new Medicare surtax will continue to impact a number of taxpayers in 2014.

Life Event Changes
If your filing status is changing in 2014, you have an additional need to plan. This is important when you move from single to joint filing or from joint to single. Key life events include divorce, death, and a birth or adoption in the family.

Health Care Laws
ObamaCare provisions can also impact your tax obligation in 2014.

New Levels
Each year also brings changes to the tax brackets. This includes increased income levels for each tax bracket, new Alternative Minimum Tax amounts, new Tax Credit phase-out amounts and more.

Beware of IRS Email Phishing Scam

The Internal Revenue Service is warning consumers to be on the lookout for a new email phishing scam. The emails appear to be from the IRS Taxpayer Advocate Service and include a bogus case number.

The Taxpayer Advocate Service is a legitimate IRS organization that helps taxpayers resolve federal tax issues that have not been resolved through the normal IRS channels. The IRS, including TAS, does not initiate contact with taxpayers by email, texting or any social media.

The fake emails may include the following message: "Your reported 2013 income is flagged for review due to a document processing error. Your case has been forwarded to the Taxpayer Advocate Service for resolution assistance. To avoid delays processing your 2013 filing contact the Taxpayer Advocate Service for resolution assistance."

On Again, Off Again, On Again

A number of popular tax provisions expired in 2011 or were set to be changed substantially in 2013. They are noted here to help you plan for your 2013 tax obligation.

These provisions expired in 2011, but are now available through 2013:

  • $250 above the line deduction for out-of-pocket teacher expenses.
  • The ability to deduct either general sales tax or state income tax as an itemized deduction.
  • Cancellation of income for certain home indebtedness forgiveness.
  • The ability to treat mortgage insurance premiums the same as interest expense as an itemized deductions.
  • The ability for those 701/2 or older to make up to $100,000 in charitable contributions directly from qualified individual retirement accounts and exclude the contribution from income.

Provisions the law reset for 2013:

  • Child Tax Credit remains $1,000. It was scheduled to drop to $500, per child 16 years or younger.
  • Earned Income Tax Credit. The expanded provisions for an additional child and higher income is extended through 2017.
  • American Opportunity Tax Credit is now available through 2017.
  • While no longer refundable, the enhancements to the Adoption Credit, including the increase to $12,970 in 2013, are now made permanent.
  • The Alternative Minimum Tax law is permanent. After patching 2012, the exemption amount for the Alternative Minimum tax is made permanent and adjusted for inflation.

2013 Estate and Gift Tax

As part of the legislation passed in the wee hours of January 1st, 2013 is some permanency to the Estate and Gift Tax laws. Effective in 2013 and beyond:

  • Maximum Estate and Gift Tax rate: 40% (up from 35%)
  • Inflation adjusted estate exclusion: $5,250,000

Other Observations

  • Portability of an unused estate exclusion to a spouse is made permanent
  • There is an allowed deduction to account for estate taxes paid to a state
  • If this law was not passed; estates over $1 million were subject to an estate tax with a maximum rate of 55%

So while you still can't take it with you, at least the federal government will let your survivors take more of it with them.

Tax Tips for 2013

With the passage of H.R. 8, The American Taxpayer Relief Act of 2012 on January 1, 2013 the question: "What can I do to reduce next year's tax bill"? becomes more relevant than ever. Thankfully, the law change provides some certainty so you have time to conduct meaningful tax planning.

Here are some things to consider:

  • Prepare for less take-home pay. Your social security tax rate has gone back to 6.2% in 2013. An extension of the lower 4.2% rate in 2011 and 2012 was not added to the recently passed legislation. Please plan for this lower take-home pay. While you're at it, review the balance of your paycheck to ensure your withholdings are at the right level. File a W-4 with your employer if changes should be made.
  • Income tax rates now have certainty. The tax rates will remain unchanged for 2013 if your taxable income is below $400,000 single, $425,000 head of household and $450,000 married filing joint. Taxable income above these rates will have their income taxed at 39.6% versus 35%. Approximately ½ of the impacted tax returns will be small businesses. If this could impact you, now is the time to plan accordingly.
  • Maximum Dividend and Long-term Capital Gain tax rate goes to 20%. The tax rates on ordinary dividends and long-term capital gains remain unchanged for 2013 (0% if you are in the 10 or 15% income tax bracket; 15% for everyone else) provided your income is below $400,000 single, $450,000 married filing joint. For those with incomes above this the rate goes to 20% (a 33.3% increase). Planning to match losses against gains will become more important in 2013.
  • Itemizing medical deductions is now harder to do. Unless you are 65 or older, you may not itemize your out-of-pocket medical expenses until they exceed 10% of your taxable income. This is an increase from 7.5% in 2012. Consider loading appropriate expenses into one-year if it will help pass the threshold.
  • Phase-outs are back! Your itemized deductions and your personal exemptions can once again be phased out in 2013. This tax increase will impact you if your income exceeds $250,000 single or $300,000 married filing joint. You could lose all your personal exemptions and up to 80% of your itemized deductions.
  • Upper income tax increase #5. In addition to the tax increases for upper income taxpayers in income tax rates (35% to 39.6%), capital gains/ dividend rates (15% to 20'%), itemized deduction phase-out, and personal exemption phase-out there are new Medicare surtaxes in 2013. If your income is $200,000 single or $250,000 married, any additional income will be subject to an additional 0.9% Medicare surtax. If your income exceeds these levels you could be subject to a 3.8% Medicare surtax on your investment earnings.

Washington will be continuing the debate over our massive annual spending deficit and the national debt. Because of this, consider your situation with the current changes and be prepared to adjust your plan should other tax law changes be adopted.

Medical Expense Threshold is Going Up

When the Health Care Reform Act was signed into law it included a tax provision that raises the threshold for medical expenses prior to being able to deduct them from your income, The new threshold goes into place in 2013.

Old Law

In order to reduce your taxes by itemizing medical related expenses your qualified medical expenses need to exceed 7.5% of your Adjusted Gross Income (AGI). To the extent your qualified medical expenses exceed this limit you may reduce your taxable income dollar for dollar.

New Law

Effective in 2013 and beyond, the AGI threshold limit goes trom 7.5% to 10% of your AGI. Thankfully there is an exclusion built into the law that allows taxpayers 65 or older to continue to use the lower 7.5% of their AGI amount.

Action to Take Now

  • Plan for elective, qualifying medical procedures to be conducted prior to year-end. But do not plan cosmetic procedures as they do not typically quality for medical expense deductions.
  • As you approach the 7.5% threshold, 2012 would be a good year to load elective medical costs. Perhaps you need an eye exam and new glasses. Why not pay an orthodontist up front for a child's braces or consider refilling prescriptions prior to year-end.
  • If you are due for a physical, consider doing it now. If something comes up, you will have plenty of time to make tax-smart decisions on possible follow-up medical expenses.
  • Consider shifting income into 2013 to allow your 2012 income threshold to be lower for the purpose of calculating your medical deduction threshold.

Remember, each year you start over from zero and have to build your medical related expenses up to the required threshold prior to taking any deductions.

Exemption and Deduction Phase-outs are Back In

Itemized deductions and tax exemptions are common benefits within the tax code that reduce your taxable income. Prior to 2010, there were provisions to phase-out these tax reduction benefits for those whose income surpassed certain thresholds. After 2012, unless Congress acts, your itemized deductions and tax exemptions may once again be phased-out. So, who needs to worry about this? Outlined here are the income levels that initiated the phase-outs in 2009 (the most recent year these phase-outs applied).

Action to Take Now

  • Review your most recent tax return and see if you may be impacted by the itemized deduction and tax exemption phase-out.
Your Income and Deductions Could Be Reduced If Your Income Exceeds:
Filing Status:

If your AIG Exceeds

Personal ExemptionItemized Deductions
Single$166,800$166,800
Head of Household$208,500$166,800
Married Joint / Widow$250,200$166,800
Married Filing Separate$125,100$83,400

Tax Rate Increases - Bring Planning Opportunity

Tax rates are scheduled to increase in 2013. This can have a tremendous impact on your tax bill in 2013. Outlined below are the current rates, their income thresholds, and what they may become in 2013.

Income Tax Rate Changes
(using 2012 income tax brackets)
2012 Tax Rate 2013 Tax Rate Single Married Filing
Joint / Widow
Head of Household Married Filing
Separate
10% 15% $1-8,700 $1-17,400 $1-12,400 $1-8,700
15% $1,701-35,350 17,401-70,700 12,401-47,350 8,701-35,350
25% 28% 35,351-85,650 70,701-142,700 47,351-122,300 35,351-71,350
28% 31% 85,651-178,650 142,701-217,450 122,301-198,050 71,351-108,725
33% 36% 178,651-388,350 217,451-388,350 198,051-388,350 108,726-194,175
35% 39.6% Over 388,350 Over 388,350 Over 388,350 Over 194,175

Action to Take Now

  • Use the above chart and look for your current Adjusted Gross Income. Using the marginal tax rate you can see what the impact of the new rates might be on your income for 2013. Plan now to ensure you will not be surprised by the drop in your after-tax income with the increased rates.
  • If you have the ability to shift income into 2012, you may wish to do so. The one-year savings could be substantial.

Estate Taxes: Are You Ready for the Increase?

In 2012 the Unified Credit Exclusion amount is $5,120,000 with a maximum Federal Estate Tax Rate of 35%. In 2013 the exclusion amount drops dramatically to $1,000,000 while the maximum tax rate goes up to 55%. While many think Congress will take action to exclude higher estate values from tax, there is no certainty that it will occur. If you have an estate that approaches the lower exemption amount in 2013, you should put a plan in place to minimize the tax impact should you or your spouse pass away. Preparation in this area of the tax code could save you significant money in lower taxes and financial hardship for your beneficiaries.