Dirty Dozen Tax Scams

IRS released their “Dirty Dozen Tax Scams for 2012”, and it isn’t pretty. Individuals participating in these scams face penalties, interest, and possible criminal prosecution, so they’re not to be treated lightly. For the average law abiding taxpayer, the risk isn’t really from participating in one or more of these scams, rather it’s by being a victim of one. Briefly, here are a few of the dirtier scams.

Identity Theft-IRS says that identity theft cases are among “the most complex” ones they handle, but they’re “committed to working with taxpayers who have become victims of identity theft.” What happens is that identity thieves use stolen social security numbers and personal information to file fraudulent tax returns to obtain a tax refund. The trouble begins for a taxpayer when they file their legitimate return after a fraudulent return has been filed with her/his social security number. It’s usually at that point that the theft/fraud is detected, and the work begins to sort it all out. IRS recommends that anybody who believes their personal information has been stolen and used for tax purposes should call their Identity Protection Specialized Unit. More information can be found on IRS’s special identity theft page at www.irs.gov/identitytheft.

Phishing-we’ve all probably already seen plenty of emails purporting to be Fedex, Bank of America, U.S. Postal Service, etc, telling us that our mail was undeliverable, our credit card record needs updating, or some other urgent thing that we need to click on a link for. These things are all phishing scams, and the sole aim is to steal our personal information. IRS is warning taxpayers that they NEVER, I repeat, NEVER contact taxpayers by email, so if you ever receive an email saying that it’s IRS contacting you about your taxes, do not pass go, do not collect $200, do not click on any links, do not do anything but DELETE that email. Have I made myself clear?! What you can do is forward that email to phishing@irs.gov, and they will investigate it. IRS has more information available at http://www.irs.gov/privacy/article/0,,id=179820,00.html

Return Preparer Fraud-unfortunately one bad apple can make taxpayers wonder about all the other legitimate tax preparers out there (yours truly included). Here are a few things to look out for that may indicate the preparer is unscrupulous
-doesn’t sign the return or put an identifying number on it
-doesn’t give you a copy of your tax return
-promises a larger than normal refund
-charges a percentage of the refund as a fee
-encourages the taxpayer to place false information on a return, such as false deductions.

For purposes of brevity, I’ll wind things up now. The key thing to remember here is to always stay alert with your personal information, and if something smells fishy, it probably is. IRS has a YouTube video with more information about this topic. You can see it at http://www.youtube.com/watch?v=10D1XqVmIW0

Please pass this information along to others, since this is something that could affect all taxpayers. Let me know if you have any questions, and if you have any comments, please post them to this blog. Be careful out there!

IRS Small Business Resources (yes, believe it!)

We’ve all been programmed to think that IRS is our enemy, and while I don’t necessarily believe that, I do think that anything coming from the IRS has to be treated with caution. Having said that, I can also say that IRS does actually provide some helpful information to the public. One of those things is their Small Business and Self-Employed Tax Center. It’s a sort-of ‘one-stop shopping’ place for small business and self-employed information. Granted, it’s no substitute for trained professional assistance (hey, I need to preserve my job!), but it is a good place to look at, for information on all sorts of subjects that affect small businesses and the self-employed.

Some of the things covered in the website are
-Forms and publications
-Starting, operating, or closing a business
-Employment taxes
-Independent contractor or employee
-Videos

This, and much, much more! Check it all out at www.irs.gov/businesses/small/index.html

Let me know if I can help you navigate the maze of the ins and outs of operating a small business, or being self-employed. Kids, don’t try this at home, and don’t go it alone! Please pass a link to this article along to anybody you feel may benefit from it.

Tax Season Poll…When Do You File Your Taxes?

Year End Tax Planning…It’s Not Too Late

At this time of the year, I know that tax planning is first and foremost on peoples’ minds. O.K., maybe the second thing. The reality is that in the thick of your holiday shopping and family-get-together-planning, there’s still time to do some tax planning before the end of 2011. Is that cool or what?!

Selling investments at a loss-it’s the ultimate acceptance of defeat, and something for which denial is a strong factor. That investment you made in a stock or a mutual fund has tanked in value since you bought it. It hurts; I know, I’ve been there too. But the paper loss can save you money on taxes when you sell it. Capital losses in excess of capital gains can be deducted against other income on your tax return, up to $3,000 per year. For a person in a 25% marginal federal tax bracket, that means Uncle Sam will “subsidize” $750 of that loss, which could help take some sting out of it.

Retirement accounts-it’s still not too late to sock away money in a 401(K) or IRA, and get a tax deduction for 2011. Business owners can still set up certain retirement plans before 12/31/11 and fund the plan early in 2012.

Accelerate deductions-for taxpayers who are not expecting to fall into the Alternative Minimum Tax (AMT) in 2011, there’s still time to bunch deductions into 2011 for added tax savings. Making the 4th state estimated payment by 12/31/11 (instead of the due date of 1/16/12) can add to itemized deductions for 2011, as well as work related expenses (as a miscellaneous itemized deduction), or even elective medical costs. There are certain ‘adjusted gross income’ thresholds to consider for these, but if the numbers work, you can save a few bucks in tax.

Charitable contributions-cash contributions or even contributions of “appreciated securities” can give you a good bang for the tax deduction buck, and can still be done before year end. While we’re on this topic, I’d like to take a moment for a shameless plug, on behalf of my non-profit clients, and other organizations to which I have a connection (in alphabetical order, to downplay any favoritism!)

Darfur Peace & Development www.darfurpeace.org
Doorways For Women & Families www.doorwaysva.org
Habitat for Humanity of Northern Virginia www.habitatnova.org
Homeward Trails Animal Rescue www.homewardtrails.org
NOVAM www.novam.org

College savings-if you need to save money for a child’s college education, establishing a 529 plan in the state in which you live will result in a state income tax deduction for amounts contributed to the plan.

I hope you found this information helpful, and please pass it along to anybody you know who can benefit from the information. If you make charitable contributions to any of the organizations I mentioned above, please let them know I pointed you in their direction.

Uncle Sam Owes You!

The other day, IRS announced that it has $153.3 million in undelivered tax refund checks.  There are 99,123 taxpayers who are due refund checks that couldn’t be delivered because of mailing address errors.  These undelivered checks average out to $1,547 per check, which (in my mind) isn’t chump change!

How the heck does this happen, you ask?  The usual culprit is IRS having an old expired address on record, and no address to forward to.  They will always deliver to the last known address that they have on record, and if you’re no longer there (and any post office forwarding order has expired), that refund check will be sent back.   If you believe that Uncle Sam owes you a tax refund that you haven’t received, go to IRS’s home page (IRS.gov) and click on the “Where’s My Refund” link.  You’ll need to enter information about the return that you believe you’re due a refund on (don’t worry, it’s a secure web page), and you’ll be informed of the status of that refund.

IRS suggests a couple of ways to make sure you always get the refund due you.  The first is to notify them when you move, by updating your address on Form 8822 (Change of Address), which can be found at http://www.irs.gov/pub/irs-pdf/f8822.pdf .  Alternatively (and preferred by IRS) you should file your tax return electronically, and choose to have your refund directly deposited into the bank.  You can speak with your favorite CPA about all of this.

In the same announcement, IRS also reminded taxpayers that they do not contact taxpayers by e-mail about pending refunds, and do not ask about personal or financial information through e-mail.  If you ever receive an e-mail from a sender professing to be the Internal Revenue Service, do not reply, do not open any attachments, and do not click on any links; it’s a phishing scam.  So be careful!

Please pass this article along to everybody who’s a taxpayer (probably everybody you know), because you never know who could use an extra $1,547 (average) in their pocket, or bank account.  Do you have any good stories about undeliverable or misplaced IRS refunds or correspondence?  Please leave a comment, and also let me know if you have any topic you’d like to see me write about in the future.

 

Education and Taxes

What’s the first word that comes to mind when you think about education…taxes, right? Well, even if it’s not the first thing that you think about, the expenses of higher education for a taxpayer or dependent can save money on taxes, via a deduction or a credit. A deduction will save you taxes based on your top marginal tax rate, so for example, if you’re in the 25% tax bracket, a dollar spent on qualifying education costs will save you twenty five cents in tax. A credit is much more powerful, since it directly reduces your tax, so if you have a tax credit of a dollar, it will save you a dollar in tax. This discussion will tell you about a few ways that Uncle Sam can help you pay for higher education costs.

American Opportunity Credit-this credit can be claimed for four years of post-secondary education per student, with a maximum annual credit of $2,500 per student. The full credit is available to single taxpayers with modified adjusted gross income (MAGI) of $80,000 or less, and married couples filing jointly, with MAGI of $160,000 or less. The credit phases out for MAGIs above those thresholds.

Lifetime Learning Credit-this credit can be claimed for all students enrolled in eligible educational institutions, and is up to $2,000, period, regardless of how many students are claimed on a tax return. Unlike the American Opportunity Credit, there’s no limit on the number of years a student may claim this credit, though only one credit or the other may be claimed in one year, not both. This credit is handy for graduate students (who have already received the maximum of four years of American Opportunity Credit), students who are taking only one course, or people who aren’t pursuing a degree.

Tuition and Fees Deduction-as I mentioned above, credits are more valuable than deductions, but if taking this deduction nets more tax savings than, say, the Lifetime Learning Credit, then you claim the one that saves the most. Similar to the Lifetime Learning Credit, the maximum deduction is $4,000, regardless of how many students are claimed. This deduction phases out with the same thresholds as the American Opportunity Credit.

Student Loan Interest-generally, personal interest paid (other than home mortgage interest) is not deductible. If MAGI is under $75,000 single/$150,000 married filing jointly, interest on student loans to pay for higher education is deductible, up to $2,500 per year.

There are other ways that education expenses can save you tax dollars, and, as with anything having to do with IRS and tax laws, there are numerous requirements, thresholds, and fine print, so make sure you speak to your favorite CPA (hint hint) if you have any questions. Have you saved taxes with higher education expenses? Please leave a comment about how you did it. As always, forward this article to somebody you know who could benefit from it, and let me know other topics you’d like to see me write about.

Inflation and Taxes

Can you believe that inflation could produce tax savings? Believe it or not, it’s possible. Starting in 2012, various deductions, exemptions and exclusions will be adjusted (i.e. increased) for inflation, which could produce increased tax savings from 2011 amounts.

Retirement Plans-for 2012, the maximum 401(K) contribution increases from $16,500 to $17,000. For individuals who participate in employer sponsored retirement plans, and also make traditional IRA contributions, the income phase out range will increase from $56,000 through $66,000 for a single taxpayer in 2011, to $58,000 through $68,000 in 2012. For married taxpayers, the phase out increases from $90,000 through $110,000 in 2011, to $92,000 through $112,000 in 2012. What this means in plain English is that it’ll take more income in 2012 to phase out the deductible IRA contribution than it does for 2011.

Income Tax Brackets-though it’s anybody’s guess when (or if) tax rates will change from the current 10, 15, 25, 28, 33, and 35 percent amounts, inflation will have an effect of lowering tax bills, based on having more income fall into lower brackets in 2012 than they do for 2011.

Standard Deduction-for taxpayers who don’t itemize deductions, the standard deduction for single taxpayers will increase from $5,700 in 2011 to $5,950 in 2012. For married taxpayers, the increase will be from $11,400 to $11,900.

Personal Exemptions-these will increase from $3,700 in 2011 to $3,800 in 2012.

Estate Tax Exclusion-the current $5,000,000 exclusion will increase to $5,120,000 in 2012.

Gift Tax Exclusion-sorry, gotcha on this one! The annual gift tax exclusion will remain at $13,000 ($26,000 for married taxpayers who elect gift-splitting).

While none of these represent any giant tax windfalls to taxpayers, any opportunity to save a few bucks in taxes is a good thing, right?

How are you going to save more in taxes in 2012? Let me know, or else feel free to leave other tax related comments. As always, feel free to suggest a topic for a future article.