end-of-year-tax-planning

End of Year Tax Planning

Your tax return may not be due for another few months, but that doesn’t mean you shouldn’t start working on your end-of-year tax plans. With the calendar year ending soon, there are certain steps you should consider to minimize your tax obligation.

Figure out your tax brackets

One of the first things you need to do is figure out what your tax rate will be for this year and next year. This is important; depending on your tax bracket status, it may be more advantageous to defer certain tax deductions or income to next year, or take them this year.

Defer or accelerate income and tax deductions

Once you know which tax bracket you will be in this year and most likely be in next year, you can decide how you want to time when you use certain deductions and receive certain income. For example, if you think you will be in a higher tax bracket next year, you might want wait to use a deduction until next year and do everything you can to receive all the income possible this year. But if you anticipate being in a lower tax bracket next year, you might want to use the tax deduction now and defer the expected income until the next tax year. Note that if you are able to receive a current year’s income in the following year, such as an end-of-year bonus, you’ll need to confirm this is a normal business practice for your employer.

Take full advantage of your flexible spending account

Also known as a flexible spending arrangement or FSAs, these financial accounts allow an employee to put pre-tax dollars into an account throughout the year, which can then be spent on certain health expenses not otherwise covered by the employee’s health plan. One of the biggest drawbacks of an FSA is that funds contributed, but not used, are forfeited at the end of the calendar year. Recent changes have mitigated this “use-it-or-lose-it” rule somewhat by allowing up to $500 to be carried over into the following calendar year. The changes also allow the employer to provide a grace period of up to 2 ½ months to spend the money.

Make an extra mortgage or state tax payment

By paying that January mortgage payment in December, you can effectively take 13 months worth of deductible mortgage interest for the current year. The same principle can be used for state taxes due early the following year. Instead of making that state tax payment in January, make it in December and claim a bit more in your itemized deductions for the current tax year. But be careful if using this tax strategy: if you are subject to the Alternative Minimum Tax, or AMT, you may not be able to take full advantage of these early payments.

Loss harvesting

Selling off losing investments can give you tax losses to offset any capital gains during the current tax year. There are a few things to keep in mind. First, you can only use up to $3,000 in losses to offset any gains. Any additional losses can be carried over to the next tax year, though. Second, be aware of the wash-sale rule, which will effectively undo the tax offset if a “substantially identical” security is bought or sold within 30 days of the tax offset sale. Three, do not let your desire to engage in loss-harvesting override your overall investment goals.

In Closing

These are just a few of the potential end-of-year tax strategies you may want to consider. And not all these tips will be right for everyone. The best thing to do is to consult with your tax professional to see which steps make the most sense and the best way to go about taking full advantage of them.

 

 

Tips To Keep Your Tax Information Safe

Due to the financial nature of taxes, as well as the personal information needed to prepare a return, tax returns are prime targets for identity thieves. To put give an idea of how bad things are, the US Government Accountability Office estimates that during the 2013 tax season, over $5 billion in fraudulent tax refunds were issued by the IRS.

In order to prevent yourself from becoming a victim of identity theft, you should take reasonable steps to keep your tax information safe.

 

Tip #1: Secure your personal computer and Internet connection

Make sure your computer or mobile device has up-to-date firewall, anti-virus and malware/spyware security software. These can help detect malicious software that can steal information and record keystrokes. Additionally, if using a Wi-Fi Internet connection, make sure it’s protected before doing anything that requires the submission of personal information or typing of passwords, like online banking.

 

Tip #2: Protect personal information

Don’t provide personal information such as date of birth, social security number, address or other information unless it’s truly necessary. Also, don’t carry your social security card in your wallet or purse.

 

Tip #3: Avoid scams

Learn to spot suspicious e-mails or telephone calls stating you must confirm the security of a financial account or asking for personal information. If you think an e-mail or telephone call might be real, do not click on the link provided in the e-mail or provide personal information to the person who called you. Instead, contact the financial institution directly through a phone number known to be legitimate, such as on the back of your credit or debit card, to make sure the e-mail or phone call you received is not fraudulent.

Tip #4: Use an Identity Protection PIN (IP PIN) when filing your taxes

The IP PIN is offered by the IRS and consists of a six digit number that taxpayers provide with their returns to help prevent fraudulent federal tax returns. Only certain taxpayers are eligible, and once an IP PIN is used for one year’s returns, it must be used for all subsequent years.

 

Tip #5: Go paperless

Whether it’s e-filing taxes or receiving tax related documents via a website, it may be wise to have financial documents obtained electronically. If going paperless isn’t an option, having mail with sensitive personal information delivered to a post office box or a locked mailbox is an alternative.

 

Tip #6: Request a free credit check

Federal law allows you to receive a free credit report every year from the following credit reporting agencies: Equifax, TransUnion or Experian. Checking your credit report can help detect identity theft before you would otherwise notice it.

 

Tip #7: Use Form 8821

The IRS allows taxpayers to authorize another party to receive correspondence from the IRS. In order to utilize this service, individuals must complete Form 8821, which allows taxpayers to designate someone else, even themselves, to receive communications from the IRS. This can serve as a warning system should an identity thief deal with the IRS without the taxpayer knowing. For example, if an identity thief has submitted a fraudulent return and the IRS contacts the identity thief, the taxpayer can receive the same correspondence the identity thief has received.

 

Tip #8: Destroy then dispose

Before getting rid of anything that contains personal information, make sure that information has been properly destroyed first. From shredding old pay stubs to wiping computer hard drives to resetting mobile devices, make sure steps are taken to ensure personal information cannot be accessed by anyone else.

 

In Conclusion

Many of the above tips will be common sense for some taxpayers. For others, it won’t be applicable. Even if all of the above tips are followed, they don’t guarantee that tax information can’t be stolen. However, it makes things much harder for identity thieves, who often focus on the easiest targets.

 

 

How to Set-Up an IRS Tax Payment Plan

It’s a few days before the April 15th tax deadline and you’ve just finished preparing your return for last year’s taxes. Unfortunately, it turns out you owe additional taxes in an amount exceeding your ability to pay off the tax debt in full when your tax return is filed. You know you will be able to pay off the entirety of this tax debt, but you’ll need more time. What can you do? The answer will depend on several factors, such as how much you owe and how much time you need.

 

Short Term Agreement Request

If you need only a small amount of time, you can ask the IRS for a short term extension. The extension cannot exceed 120 days and the entire tax debt will need to be paid, subject to interest and applicable penalties. The biggest advantage of the short term agreement plan is that there is no user fee. You can request a short term agreement over the telephone or through the IRS’ website by applying for an Online Payment Agreement.

 

Set Up a Payment Plan

If more than a few months are needed to pay off the tax debt, a taxpayer can set up an installment plan where the taxpayer makes monthly payment to pay off the tax debt over time, up to a few years. However, the taxpayer must qualify before the IRS will agree to a payment plan.

 

Generally speaking, as long as the taxpayer owes less than $50,000, is up to date with all tax returns and can pay off the entire tax debt in a few years, the IRS will approve the payment plan. When requesting a payment plan, the taxpayer will get to choose the day of the month to make the monthly payment and the monthly payment amount. The monthly amount must be large enough to pay off the debt within a few years, but not too large that the taxpayer risks not making a payment.

 

Setting up a payment plan is not free. In addition to the interest and penalties the taxpayer will owe due to the delay in paying off the tax debt, there will be user fee. As of the time of this writing, the fee is either $52 for payments made via direct debit, $120 for non-direct debit payments or $43 for qualified low income taxpayers. Direct debit refers to giving permission to the IRS to automatically withdraw the monthly payment amount from the taxpayer’s checking account.

 

Taxpayers may set up a tax payment plan by either calling the IRS, submitting Form 9465 or using the using the Online Payment Agreement Application. If the payment plan request is being made when the current tax return has not yet been filed, it’s recommended the tax payer submit Form 9465 along with the return. If the return has already been filed when the payment plan request is being made, using the Online Payment Agreement Application is suggested.

Information needed to set up a payment plan will include the taxpayer’s:

  •  Name
  • Social Security number
  • E-mail address
  • Mailing address from most recent processed tax return
  • Filing status
  • Date of birth

 

In Conclusion

The IRS is fairly agreeable to giving taxpayers more time to pay off their tax debts. However, this extra time is not free, as penalties and interest will almost always accrue during the extension, on top of the fee for setting up a payment plan.

 

 

Stopping IRS Wage Garnishment

One of the IRS’ most powerful tools to collect a tax debt is wage garnishment. Wage garnishment is the ability to take a portion of an employee’s wages directly from his or her paycheck. Wage garnishment is a very intrusive method of collection and several ways to deal with it are discussed below.

Background: Wage Garnishment Process

Before the IRS can begin taking money directly from a taxpayer’s paycheck, it must go through several steps. It generally begins with written notice to the taxpayer regarding the amount of the tax debt along with any penalties and interest. Assuming the taxpayer doesn’t take suitable action in response to this first letter, the IRS will send another written notice, explaining the intent to place garnish the taxpayer’s wages.

 

Assuming the taxpayer still does not adequately respond within a certain period of time (typically 30 days), the IRS will start garnishing the taxpayer’s wages. The IRS does not need to get a court judgment before garnishment can begin.

 

The IRS will then directly contact the taxpayer’s employer and force them to deduct a portion of the taxpayer’s paycheck and send it to the IRS. The amount the IRS can garnish depends on the size of the paycheck. The law does not limit how much the IRS can garnish, but rather, how much the IRS must leave behind in each paycheck for the taxpayer. The amount the IRS must leave will depend on the taxpayer’s filing status.

 

Stopping the IRS from Wage Garnishment

 

The following is a list of methods for stopping or stalling wage garnishment. None of the methods will actually make the entire tax debt go away, but will allow the taxpayer to pay the outstanding tax bill using another method or buy time before wage garnishment resumes. Also, all of the below methods require any back tax returns to be filed with the IRS.

 

Method #1:  Pay Off the Tax Debt

 

This method is idealistic, since the wage garnishment process probably wouldn’t have started if the taxpayer had enough money to pay his or her taxes. However, getting rid of the IRS debt, even if it means incurring interest charges by borrowing money, might be worth it for emotional well-being if nothing else.

 

Method #2: Apply for an Offer In Compromise

 

An offer in compromise is a means of paying off a tax debt for less than the full amount. Taxpayers must apply for an offer in compromise and it’s up to the IRS’ discretion whether to accept it. For more information, check out our earlier offer in compromise blog post.

 

Method #3: Set Up a Payment Plan

 

If a monthly installment agreement can be established where the tax debt can be paid off in three years or less, the IRS will usually agree to stop garnishing a taxpayer’s wages.

 

Method #4: Claim Financial Hardship

 

If the taxpayer can prove that the wage garnishment is creating a severe financial hardship, the garnishment can be halted until the taxpayer’s financial situation improves. The taxpayer will be required to show that the wage garnishment does not leave enough money for the taxpayer to pay for basic living expenses.

 

Method #5: Change Jobs

 

When a taxpayer changes jobs, the IRS eventually finds out, then goes through the process of contacting the new employer and re-establishing the wage garnishment. This can buy the taxpayer some time where his or her wages aren’t garnished, although it merely delays the inevitable.

 

Method #6: Declare Bankruptcy

 

This is an extreme option, given the financial repercussions to the taxpayer’s credit history and cost of filing for bankruptcy. Also, it won’t wipe out the tax debt, but it can stop the wage garnishment for a period of time.

 

Expert Advice Is Recommended

 

Deciding which method is best will depend on each taxpayer’s unique circumstances. Figuring out which option to use and how to use it will almost always require the advice of a qualified tax professional.

 

 

quarterly estimated tax

Quarterly Estimated Tax Payments

The United States has a pay-as-you-go system for the collection of income taxes. Most individuals see this concept in action automatically, when their employer withholds taxes from each paycheck. For those who are self-employed or receive a large cash payment from a one-time financial event, there is usually no automatic income tax withholding. But Uncle Sam doesn’t have to wait long to get his money because of the quarterly estimate tax payment requirement.

Continue reading “Quarterly Estimated Tax Payments”

Settling Back Taxes With an Offer In Compromise

Imagine owing a tax debt so burdensome that you can’t see yourself ever being able to pay it. Wouldn’t it be nice if there was some way to write off some of your tax debt? Believe it or not, there’s something called an offer in compromise that allows taxpayers with back taxes to settle their tax debts with the IRS for less than the full amount. While not a magic reset button, the offer in compromise serves as a helpful tool for getting out from under the IRS’ thumb.

Continue reading “Settling Back Taxes With an Offer In Compromise”

IRS Tax Lien and Levy Basics: What You Should Know

If the IRS believes a taxpayer owes a tax debt, the IRS will begin a series of steps to collect the unpaid taxes. The process will begin with notifying the taxpayer and working with them to get the taxes paid. However, if the taxpayer ignores the request or refuses to pay, the IRS has two very powerful tools for collecting the taxes, both of which are the subject of this blog post.

Tax Liens and Levies: What Are They?

A lien and levy are two different things. A tax lien is a security interest the IRS attaches to all of a taxpayer’s property in order to protect the ability to recover the tax debt. Not only does the tax lien attach to all of the taxpayer’s property at the time the lien is imposed, but also to any future property acquired by the taxpayer.

 

A tax levy is the actual taking of property, where property is seized by the IRS in order to help pay for an outstanding tax debt. Unlike a tax lien, a tax levy allows the IRS to not just “claim” property, but actually take it. This can be done in several ways, such as wage garnishment, withdrawal of money from the taxpayer’s bank account and the seizure and sale of physical assets. Despite its power, as long as the required tax procedures are followed, the IRS does not have to go to court to get a tax levy.

 

How Does a Tax Lien or Levy Occur?

 

A tax lien will usually be preceded by two steps. First, the IRS will notify the taxpayer of the unpaid tax debt. Second, the taxpayer will fail to fully pay the tax debt. When a tax lien is placed on property, it ordinarily will not come as a surprise to the taxpayer.

 

A tax levy will usually occur only after a tax lien has been placed on a taxpayer’s property. Once the lien is imposed and the taxpayer still has not paid the tax debt, the IRS will send several notices warning of a tax levy and provide an opportunity for the taxpayer to contest the tax levy at a hearing. If the tax debt is not paid, the IRS will issue the levy.

 

How Can a Tax Lien or Levy Be Removed?

 

A tax lien can be removed or dealt with in several ways:

 

  • Payment of the outstanding tax debt.
  • Obtain a Certificate of Discharge.
  • Subordinate the IRS lien such that other creditors will have a higher priority. This can make getting a loan much easier since it allows non-IRS creditors to gain access to property to secure a debt.
  • Obtain a Lien Notice Withdrawal.

 

A tax levy can be removed when the taxpayer does any of the following:

 

  • Pays the outstanding debt.
  • Demonstrates extreme financial hardship imposed by the levy.
  • Shows that the levy’s release will make it easier for the taxpayer to pay his or her taxes.
  • Enters into an Installment Agreement with the IRS which requires the IRS to remove the levy.
  • Shows that the property levied upon is worth more than the tax debt and the levy’s release will not jeopardize the IRS’ ability to collect the unpaid taxes.

 

In Summary

This blog is just a basic overview of the tax lien and levy process. Should a taxpayer have a tax lien or levy imposed, or receive notice of a potential tax lien or levy, it is highly advisable to seek professional help, such as the services of a tax attorney.

 

 

 

telephone tax scam

Beware of IRS Telephone Scams!

While the use of scams to defraud people of their money is an unfortunate constant in our society, the means of employing a confidence trick has evolved with the times. One of many scams that exists today involves a con artist pretending to be an employee of the IRS and telephoning his or her victim, tricking them into sending the con artist money. We briefly described this scam in an earlier blog post, but in this blog post, we will explore the IRS telephone scam in more detail.

 

Details of the IRS Telephone Scam

The actual scam specifics can vary, but the main idea is to scare or intimidate a victim into sending the caller money on the basis that the victim supposedly owes the IRS an unpaid tax debt. If the victim doesn’t immediately pay, the victim is threatened with arrest, deportation, property seizure and/or a lawsuit.

 

Apparently this scam works, with over $23 million paid out by thousands of victims since October of 2013. And those that don’t fall for the con get dangerously close to doing so. Here are some of the ways the telephone scam can appear legitimate:

 

  • The caller will identify him or herself as an IRS or US Treasury official. They will provide a name and may even provide a badge number.
  • During the call, the caller will play a white noise recording in the background in order to mimic the sound of a call center.
  • When the call is received, the victim’s caller ID will appear to show that the call is originating from the IRS.
  • If arrest is threatened, but the victim doesn’t agree to send immediate payment, a follow up call may be made from someone claiming to be from law enforcement. The victim’s caller ID will often appear to show that the call is originating from the local police department.
  • The telephone call may be preceded by an official-looking e-mail or letter claiming the recipient owes the IRS money.
  • The caller may have some basic personal information about the victim, such as the last four digits of his or her social security number.
  • The victim is sometimes provided with a real IRS mailing address in order to send certain paperwork.

 

Signs the Call Is a Scam

Luckily, there are many signs that the call is not legitimate. Some of these characteristics include:

 

  • The caller demands immediate payment. The IRS will not expect payment without first providing an opportunity for the taxpayer to contest the amount owed.
  • The call will be the first time the victim is made aware of money they allegedly owe. The IRS will always make first contact by mail.
  • The victim is asked to provide a specific payment method such as a prepaid debit card or a money transfer. The IRS will provide multiple methods of paying any money owed.
  • The caller asks for credit card information over the telephone. The IRS will never ask for payment information over the telephone.
  • The victim is threatened with arrest if they don’t pay.

 

What You Can Do

If you have received one of these types of calls, the safest thing you can do is hang up. You can also report the call to the Tax Inspector General for Tax Administration or the Federal Trade Commission.

 

 

 

 

 

 

Watch Your Wallets!

Government spending constantly goes up, no matter what politicians promise. With so many government programs, pork barrel spending and earmarks, it’s no wonder this country’s debt continues to rise.  And exactly how does the government pay for all this? With taxes, whether creating new ones or increasing the rate of existing ones. The following blog discusses some of the strategies available that can help keep the government out of your wallet! Continue reading “Watch Your Wallets!”