Do-It-Yourself Identity Theft Protection

Credit Score Ingredients

Identity theft is a growing problem in the United States, and dozens of companies offering various forms of identity theft protection have sprung up to combat it. Unfortunately, these services often do little to actually protect people’s identities, according to a study released by the U.S. Government Accountability Office (GAO).

Both the GAO study and consumer protection organizations like The Identity Theft Council point out that consumers have more effective, low-cost methods to protect themselves from identity theft. Here are some of their tips:

 

Bullet Point Monitor your own credit. You can get a free credit report from each of the three credit reporting agencies once a year at www.annualcreditreport.com. You can stagger your request from each agency so that you can check your credit history for any suspicious new account openings every four months.

In addition, one of the most effective things only you can do yourself is to scan your monthly credit card and bank account statements. If you see any irregularities, contact the financial institution at once and let them know if you believe any charges are the result of identity theft.

Bullet Point Place a fraud alert. You can place a free fraud alert on your identity if you believe you’ve become vulnerable for any reason, either because you lost your wallet, had your home or car broken into, or had your information stolen online. All you have to do is call any of the three credit reporting agencies (Equifax 1-888-766-0008; Experian 1-888-397-3742; or TransUnion 1-800-680-7289) and they will notify the other two.

Placing a fraud alert lasts for 90 days. Any credit provider will have to take extra steps to verify the identity of any person who tries to use your credit and open new accounts. It can be renewed for free every 90 days.

Bullet Point Freeze your credit. If you aren’t going to be applying for new credit for a while, one of the most effective things you can do to combat identity theft is to put a temporary freeze on your credit. You’ll have to call each of the three credit reporting agencies and may be required to pay a small fee ($5 to $10 each) to freeze your account, after which no one will be able to access your credit to open new accounts. It won’t affect your credit rating or your ability to use your existing accounts.

Keep in mind that while this shuts down other people from accessing your credit, it also stops you from opening new accounts. It typically takes three days for the agencies to unfreeze your accounts, so keep that in mind if you want to apply for new credit, or need to allow a potential new employer to access your credit report as part of a background check.

Bullet Point Do your taxes early. One of the most common kinds of identity theft is when people use a stolen Social Security number and other personal information to file a fraudulent tax return in the hope of snatching a refund. Your best defense is to simply file your return as soon as possible. Once the IRS receives your return, it shuts the door on potential identity thieves.

Business or Hobby?

Credit Score Ingredients

When you incorrectly claim your favorite hobby as a business, it’s like waving a red flag that says “Audit Me!” to the IRS. However, there are tax benefits if you can correctly categorize your activity as a business.

Why does hobby versus business activity matter?

Chiefly, you’re allowed to reduce your taxable income by the amount of your qualified business expenses, even if your business activity results in a loss.

On the other hand, you cannot deduct losses from hobby activities. Hobby expenses are treated as miscellaneous itemized deductions and don’t reduce taxable income until they (and other miscellaneous expenses) surpass 2 percent of your adjusted gross income.

Here are some tips to determine whether you can define your activity as a business.

BUSINESS versus HOBBY
You have a reasonable expectation of making a profit. Profit Motive You may sell occasionally, but making money is not your main goal.
You invest significant personal time and effort. You depend on the resulting income. Effort and Income It’s something you do in your free time; you make the bulk of your money elsewhere.
Your expenses are ordinary and necessary to run your business. Reasonable Expenses Your expenses are driven by your personal preferences and not strictly necessary.
You have a track record in this industry, and/or a history of making profits. Background You don’t have professional training in the field and have rarely or never turned a profit.
You have multiple customers or professional clients. Customers You have few customers, mainly relatives and friends.
You keep professional records, including a separate checkbook and balance sheet; you have business cards, stationery and a branded business website. Professionalism You don’t keep strict professional records of your activities; you don’t have a formal business website or business cards.

The IRS will consider all these factors to make a broad determination whether you operate your activity in a businesslike manner. If you need help ensuring you meet these criteria, reach out to schedule an appointment.

 

Marriage Tax Tips

Credit Score Ingredients

If you recently got married, plan to get married, or know someone taking the matrimonial plunge, here are some important tax tips every new bride and groom should know.

 

 

 

 

 

1 Notify Social Security. Notify the Social Security Administration (SSA) of any name changes by filling out Form SS-5. The IRS matches names with the SSA and may reject your joint tax return if the names don’t match what the SSA has on file.
1 Address change notification. If either of you are moving, update your address with your employer as well as the Postal Service. This will ensure your W-2s are correctly stated and delivered to you at the end of the year. You will also need to update the IRS with your new address using Form 8822.
1 Review your benefits. Getting married allows you to make mid-year changes to employer benefit plans. Take the time to review health, dental, auto, and home insurance plans and update your coverage. If both of you have employer health plans, you need to decide whether it makes sense for each of you to keep your plans or whether it’s better for one to join the other’s plan as a spouse. Pay special attention to the tax implication of changes in health savings accounts, dependent childcare benefits and other employer pre-tax benefits.
1 Update your withholdings. You will need to recalculate your payroll withholdings and file new W-4s reflecting your new status. If both of you work, your combined income could put you in a higher tax bracket. This can result in reduced and phased-out benefits. This phenomenon is known as the “marriage penalty.”
1 Update beneficiaries and other legal documents. Review your legal documents to make sure the names and addresses reflect your new marital status. This includes bank accounts, credit cards, property titles, insurance policies and living wills. Even more importantly, review and update beneficiaries on each of your retirement savings accounts and pensions.
1 Understand the tax impact of your residence. If you are selling one or two residences, review how capital gains tax laws apply to your situation. This is especially important if one of you has been in your home for only a short time or if either home has appreciated in value. This review should be done prior to getting married to maximize your tax benefits.
1 Sit down with an expert. It is natural for newlyweds to focus their attention on the big day. There are so many decisions to be made from selecting a venue to planning the honeymoon. Because of this, reviewing your tax situation often is an afterthought. Do not make this mistake. A simple tax and financial planning session prior to the big day can save on future headaches and avoid potentially expensive tax mistakes.

If you’d like a review of how marriage will affect your tax and financial situation, call at your earliest opportunity.

 

 

Three Popular Tax Breaks are Gone

Expense paperwork

As you make plans for the 2017 tax year, take note that three popular tax breaks expired last year and won’t be available unless Congress acts to extend them.

1 Tuition and fees deduction. You used to be able to deduct as much as $4,000 in college tuition and fees as an adjustment to taxable income. This provision was popular because it provided an alternative to other credits and did not require you to itemize deductions to receive the tax benefit. While this tax benefit is currently expired, several tax breaks geared toward students still exist:

student loan interest expense deductions
student education savings plans (529 plans)
education credits such as the American opportunity credit and the lifetime learning credit
1 Mortgage insurance premiums. The ability to deduct the cost of mortgage insurance premiums as an itemized deduction expired last year. This expired benefit used to phase out for taxpayers with more than $100,000 in adjusted gross income. Mortgage insurance is typically required of homeowners with a less than 20 percent down payment on their home purchase.
1 Lower senior threshold for medical expense deductions. The threshold for deducting itemized medical expenses raises to 10 percent of adjusted gross income for all taxpayers beginning in 2017. Prior to this, those age 65 or older had a lower 7.5 percent threshold. Only unreimbursed, qualified medical expenses in excess of 10 percent of your adjusted gross income can now be taken as an itemized deduction. For example, if a 70 year old taxpayer has $50,000 in adjusted gross income, he could have deducted his medical expenses that exceeded $3,750 as an itemized deduction. This year that number rises to $5,000 with the same income, putting it that much further out of reach for seniors.

Remember to plan for these changes. But also keep an eye on future action from Congress that could bring these dead tax deductions back to life.

Inherited Property: A Matter of Value

Estate

Avoid this potential tax headache

If you are expecting to inherit property when friends or relatives pass away, know that their generosity can come with tax consequences. It’s important to understand how the value of your inheritance is determined in order to avoid a potential tax surprise in the future.

Estate tax basics

When a friend or relative dies and leaves behind a will, someone will be named executor of their estate. The term “estate” means the total amount of the assets and liabilities the deceased person leaves behind, and the “executor” is the person named to handle the the affairs of the estate. It also includes managing the distribution of remaining assets to “beneficiaries,” which is another word for the people who inherit the assets.

The executor has the responsibility to calculate the value of the assets, generally on or around the date of death. This is called the “stepped-up basis.” If the total value of the estate is worth less than $5.49 million, the estate pays no federal tax. If it’s more than that amount, the IRS’s piece of the pie scales up to a whopping 40 percent. Thirteen states and the District Columbia also collect state estate taxes of as much as 20 percent.

The conflict over value

Generally speaking, executors would rather have the estimated value of an estate’s total property fall below estate-tax thresholds. But as a beneficiary receiving an inheritance, it’s in your interest to have a higher estimate of value. That way you may avoid higher capital gains tax if you sell the property.

A high estate valuation helps you as a beneficiary because you only pay tax on the increase in value from the “stepped-up basis.” So, if your inherited property was valued at $200,000 and you later sell it for $300,000, you would pay taxes on $100,000. But if the same property was valued at $300,000, you would potentially owe no tax.

A matter of value

In valuing a piece of property, an executor will compare it to similar properties that have recently sold. Ideally there is a qualified appraisal by an expert to determine the “fair market value”.

If you disagree with the way an executor has valued property you are inheriting, it may be a good idea to have your own appraisal done. With your appraisal in hand, reach out to the executor and make your case for the higher valuation based on your appraisal. Keep in mind that you don’t want an evaluation that is either too low or too high — you want a reasonable fair market value of the assets. If you don’t talk to the executor and you end up using a different valuation in reporting to the IRS, you could be facing a big tax headache.

If you’re able to talk to the executor and agree on a valuation, consider asking for a Form 8971 Schedule A. This form itemizes the valuation of property and is now often required by the IRS for estates worth more than $5.49 million. However it can also be used to provide you with documentation showing that you and an executor have reached an agreement on the value of a specific piece of inherited property.

IRS Announces Annual Tax Scams

Tax ScamsEach year the IRS announces a list of the “Dirty Dozen Tax Scams” its agents encounter most frequently. Highlighted here are seven of the most common.

Bullet Point Creating fake income. It has come to the attention of the IRS that some taxpayers are creating false income for the sole purpose of obtaining tax credits like the Earned Income Tax Credit. This false income can be in the form of a fake 1099-MISC or fictitious self-employment income. The penalties for this type of fraud can be severe.
Bullet Point Falsely padding deductions. Creating deductions and inflating dollar amounts of legitimate deductions is now on the IRS Dirty Dozen list. While it may seem a little thing to stretch the amounts, the increased reporting received by the IRS makes it easier for them to see these inflated deductions.
 Bullet Point Excessive business credits. This scam focuses on two commonly misused business credits: the fuel credit and the research credit. The fuel credit is usually only available for off-street vehicle use (typically for farming). While the research credit may seem straightforward, there are stringent qualifications and reporting requirements. Prior to using either of these credits, you should ask for a review of your situation.
Bullet Point Fake charities. After major disasters, many charitable givers are scammed into making donations to fake charities. This makes donations to them nondeductible. To protect against this, prior to donating funds make sure the charity is both legitimate and deemed a qualified charity by the IRS. Here is a link to the IRS tool to confirm charitable organizations. IRS Exempt Organizations List Check
Bullet Point Identity Theft. Identity theft tops the Dirty Dozen list every year. Thankfully, the IRS takes precautionary measures to curtail this out-of-control problem. In addition to limiting the number of direct deposits it will make to any single account, the IRS is working with states and tax preparation software vendors to put more controls in place. This includes some states requiring drivers license numbers on their tax forms, delays in early processing of tax refunds, internal tracking within software programs, and continual checking for heavy filing activity.
Bullet Point Phone scams. Phone calls from thieves representing themselves as IRS agents continue to get more sophisticated. The caller ID may show as coming from the IRS and the scam may involve numerous phone calls instead of a single contact. These thieves often have some of your personal information and try to intimidate their victims with threats of jail time, deportation or license revocation. Remember, never give information over the phone to someone claiming to be from the IRS.
Bullet Point Phishing. This recurring scam involves receiving fake emails and websites that look like the real deal. The IRS will not send you billing information or refund information via email. Do not click on any email link received from the IRS unless you requested it. Remember the IRS does not initiate contact through emails.

Use Your Tax Refund Wisely

Roth BasicsThree of every four Americans got a refund check last year and the average amount was $2,777, according to IRS statistics. Because the amount of a refund is often uncertain, we may be tempted to spend it without too much planning. One way to counteract this natural tendency is to come up with a plan beforehand to spend your refund purposefully. Here are some ideas:

4 Pay off debt. If you have debt other than your home mortgage, a great spending priority can be to reduce or eliminate it. The longer you hold debt, the more the cumulative interest burden weighs on your future plans. You have to work harder for longer just to counteract the effect of the debt on your financial health. Start by paying down debts with the highest interest rates and work your way down the list until you bring your debt burden down to a manageable level.
2 Save for retirement. Saving for retirement works like debt, but in reverse. The longer you set aside money for retirement, the more time you give the power of compound earnings to work for you. This money can even continue working for you long after you retire. Consider depositing some or all of your refund check into a Traditional or Roth IRA. You can contribute a total of $5,500 to an IRA every year, or $6,500 if you’re 50 years old or older.
3 Save for a home. Home ownership is a source of wealth and stability for many Americans. If you don’t own a home yet, consider building up a down payment fund using some of your refund. If you already own a home, consider using your refund to start paying your mortgage off early.
4 Invest in yourself. Sometimes the best investment isn’t financial, but personal. If there’s a course of study or conference that would improve your skills or knowledge, that could be a wise use of your money in the long run.
5 Give some of it away. Helping people, and being able to deduct gifts and charity from your next tax return, isn’t the only benefit of giving to a good cause. Research shows that it makes us feel good on a neurological level. In fact, donating money activates our brains’ pleasure centers more than receiving the equivalent amount.1

If a refund is in your future, start planning now on how it can best help your financial situation.

When Converting to a Roth Makes Sense

Roth Basics

Virtually anyone with a qualified retirement savings account can convert funds into a Roth IRA. A Roth is different from other retirement accounts in that contributions come from after-tax dollars, while earnings are tax-free. The question for taxpayers with funds in tax-deferred Traditional IRAs, SEP-IRAs, 401(k)s, and 403(b)s is whether converting them into a Roth is worth it.

Roth Basics…

 

 

Major benefits of a Roth IRA:

Thumbs Up Earnings are free from federal tax. This can be of tremendous benefit if you are in a high tax bracket during retirement.
Thumbs Up Unlike Traditional IRAs, you can keep contributing to a Roth after age 70½.
Thumbs Up Unlike Traditional IRAs, there are no minimum required distribution rules.

Downsides of a Roth IRA:

Thumbs Down Because initial contributions are made with after-tax funds, you must pay income tax on the amounts converted from other retirement funds.
Thumbs Down If the tax paid during the conversion is taken from your retirement funds, you could be subject to a 10% early withdrawal penalty.

Things to consider

Prior to making the decision to convert funds into a Roth IRA, consider the following:

Arrow You should have enough money outside of your retirement account to pay the tax on the conversion.
Arrow A Roth makes the most sense if you think you will face higher tax rates when you retire.
Arrow A Roth conversion will increase your reported annual income by the amount converted during the year. If you aren’t careful, this could disqualify you for important tax benefits, such as dependent child and college tuition tax credits.
Arrow A Roth needs time to build tax-free earnings. The more time you have before retirement, the more a Roth makes sense.

It is important to understand your options, so remember to ask for assistance prior to making a Roth conversion.

2017 Standard Mileage Rates

The IRS recently announced mileage rates to be used for travel in 2017. The business mileage rate decreases by 0.5 cents while medical and moving mileage rates are lowered by 2 cents. Charitable mileage rates are unchanged.

2017 Standard Mileage Rates
Mileage Rate/Mile
Business Travel 53.5¢
Medical/Moving 17.0¢
Charitable Work 14.0¢
Mileage Rates

Here are the 2016 rates for your reference as well.

2016 Standard Mileage Rates
Mileage Rate/Mile
Business Travel 54.0¢
Medical/Moving 19.0¢
Charitable Work 14.0¢
Mileage Rates

Remember to properly document your mileage to receive full credit for your miles driven.

Know Your Audit Risk

Audit Risk Nearly every taxpayer can imagine a worst-case scenario where they run afoul of the IRS and are selected for an audit. Here are a few areas that tend to get unwanted audit attention and ideas to help you stay prepared. Your audit risk is (probably) low. The first thing to remember is that the risk of having your tax return examined by the IRS is probably very low. The IRS audits less than 1 in 100 returns. If you are among the roughly 95 percent of Americans who make less than $200,000 a year, your chance of being audited is closer to 1 in 200. Audit chances rise dramatically the higher your income is above $200,000, according to the IRS annual Data Book.

Areas that get attention:

Bullet Point Missing something. Aside from your income level, one of the biggest red flags for the IRS is a missing or incorrect tax form. Assume a copy of every official tax form you get also goes to the IRS.

Action: Create a list of all your expected tax forms. Check them off as you start to receive them over the next month or so. Immediately review the forms for accuracy. These include W-2s, 1099s, 1095s, 1098Ts and more.

Bullet Point Excessive deductions. Your risk of an audit increases when your tax return shows unusually high-value itemized deductions, such as charitable donations or losses from theft.

Action: A legitimate deduction should always be taken. If your itemized deductions are high, make sure your proof of these deductions is well documented.

Bullet Point Large charitable donations. Your chances of an audit increase if you take large deductions for donations to charity, especially “noncash” donations of property with unclear value.

Action: Always remember to file a Form 8283 for any donation above $500 in value. If you are donating anything at that value or higher, it may be worth paying for an appraisal of the value of the property so you can defend your deduction.

Bullet Point Disparities with your ex. Your tax return may as well have a red siren attached to it if you and an ex-spouse are not on the same page on claiming dependents, child support or alimony.

Action: Ensure you and your ex-spouse are consistent in how tax items are treated on your separate returns. If you have had problems with this in the past, a quick phone call could save headaches for both of you.

Bullet Point Business activity. IRS agents have a keen eye for small business reporting, typically done on a Schedule C. In particular, the agency is quick to review claimed business activities they perceive as being hobbies.

Action: Maintain detailed business accounts and record significant time spent on your business activity in order to demonstrate both professionalism and a profit motivation.

Save