Lost in the recent news regarding stolen identities at Snapchat and the credit and debit card theft at major retailers, is the dramatic increase in identity theft and scams using the IRS. One of the more recent scams announced by the IRS is worth noting.
Callers identifying themselves as the IRS phone you and disclose that you owe delinquent taxes. They say that unless there is immediate payment by debit or credit card you may be subject to immediate deportation, arrest, loss of a license or loss of your business.
Why does this work?
These callers sound legitimate and the scams are often fairly sophisticated. Per the IRS, the callers who commit this fraud often;
- Use common names and fake IRS badge numbers.
- Know the last four digits of the victim’s Social Security number.
- Make caller ID appear as if the IRS is calling.
- Send bogus IRS emails to support their scam.
- Call a second time claiming to be the police or DMV, and caller ID again supports their claim.
What can you do?
While the IRS never initiates communication via email, they sometimes do initiate contact via the phone. So what steps can you take to ensure this does not happen to you?
- Mail is the typical IRS contact vehicle. Initial communication with the IRS is most often the mail. Your fraud alert should go way up with a phone call or email.
- No personal information from you. Never give personal information to the caller. This is true even if the person calling sounds legitimate.
- Get their information. Get the caller to give you all the information they have on the case. Get their badge number. Also get the name of their supervisor and the division they work with at the agency. Then hang up.
- Initiate the contact. After hanging up, contact the IRS. You can then confirm whether the call was legitimate. Here are the legitimate contact points:
If, by chance, the request appears to be genuine please ask for help prior to sharing any information. As the old adage goes, it is better to be safe than sorry.
Surprise! Your stock loss is not deductible.
As you look for year-end tax moves to save on your bill from Uncle Sam, you may consider selling stocks that have lost value. This can be a great strategy when up to $3,000 in stock losses can offset your ordinary income. However, there is a little known rule called the Wash Sale rule that could surprise the unwary taxpayer.
If the Wash Sale rule applies, you cannot report a loss you take when you sell a security. Per the IRS,
A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:
- Buy substantially identical stock or securities,
- Acquire substantially identical stock or securities in a fully taxable trade,
- Acquire a contract or option to buy substantially identical stock or securities, or
- Acquire substantially identical stock for your individual retirement account (IRA) or Roth IRA.
Why the rule?
Many investors were selling stock they liked simply to book the loss for tax reasons. They then turned around and immediately re-purchased shares of the same company or mutual fund. If done repeatedly, shareholders could constantly be booking short-term losses on a desired company while still owning the shares in a chosen company’s stock indefinitely. Clever shareholders would even purchase the replacement shares prior to selling other shares in the same company to book the loss.
How does one take action to ensure the Wash Sales rule works to your advantage?
- Check the dates. If you decide to sell a stock to book a loss this year, make sure you haven’t inadvertently acquired the same company’s shares 30 days prior to or after the sale date.
- Dividend reinvestment. If you automatically re-invest dividends you will want to make sure this doesn’t inadvertently trigger the Wash Sale rule.
- It is only losses. Remember the Wash Sale only applies to investments sold at a loss. If you are selling stock to capture gains, the rule does not apply.
- Consider similar transactions. The Wash Sale rule applies to buying and selling ownership in the same company or mutual fund. With the exception of some common versus preferred stocks in the same company, buying and selling similar (but not identical) shares does not apply to the Wash Sale rule.
If your loss is ever disallowed because of the Wash Sale rule you can add the disallowed loss on to the cost of the new security. When the security is eventually sold in the future, the forfeited loss will be part of the calculation of future gain or loss. This also includes the original stock’s holding period to help define the transaction as a short-term or long-term sale.
The term “kiddie tax” was introduced by the Tax Reform Act of 1986. The IRS introduced this rule to keep parents from shifting their investment income to their children and have this income taxed at their child’s lower tax rate. The law requires a child’s unearned income (generally dividends, interest, and capital gains) above a certain amount ($2,000 in 2013) to be taxed at their parent’s tax rate. Here is what you need to know.
Who it applies to
- Children under the age of 19
- Children under the age of 24 if a full-time student and providing less than ½ of their own financial support
- Children with unearned income above $2,000
Who/What it does NOT apply to
- Earned income (wages and self-employed income from things like babysitting or paper routes).
- Children that are over age 18 and have earnings providing more than ½ of their support.
- Older children married and filing jointly
- Children over age 19 that are not full-time students
- Gifts received by your child during the year
How it works
- The first $1,000 of unearned income is generally tax-free
- The next $1,000 of unearned income is taxed at the child’s (usually lower) tax rate
- The excess over $2,000 is taxed at the parent’s rate either on the parent’s tax return (Form 8814) or on the child’s tax return (Form 8615)
What to know/do now
- Maximize your low tax investment options. Look to generate gains on your child’s investment accounts to maximize the use of your child’s kiddie tax threshold each year. You could consider selling stocks to capture your child’s investment gains and then buy the stock back later to establish a higher cost basis.
- Be careful where you report a child’s unearned income. Don’t automatically add your child’s unearned income to your tax return. It might inadvertently raise your taxes in surprising ways by exposing more income to the Alternative Minimum Tax or reducing your tax benefits in other programs like the American Opportunity Credit.
- Leverage gifts. If your children are not maximizing their tax-free investment income each year consider gifting funds to allow for unearned income up to the kiddie tax thresholds. Just be careful, as these assets can have an impact on a child’s financial aid when approaching college age years.
Properly managed, the “kiddie tax” rules can be used to your advantage. But if not properly managed, this part of the tax code can create an unwelcome surprise at tax time.
Health Flex Spending Arrangement Rules Changing
Do you have funds in an employer provided Health Flexible Spending Arrangement (FSA)? If you worry about the long-standing rule of using up those funds or you’ll lose them, then a new notice from the IRS could be helpful for you this year.
Millions of Americans take advantage of their employer’s cafeteria plan that allows setting aside pre-tax dollars to be used to pay for qualified health care expenses. The problem with these plans has always been that if you do not use the funds in the account by the end of the year they would be forfeited. Some employers have established an allowable “grace period rule” that gives an additional two months and 15 days to use the funds before they are forfeited.
The maximum annual amount that can be set-aside in Health FSA’s was recently set at $2,500 (indexed to inflation after 2012). This new limit is meant to help pay for the new Health Care Law. With this law change, the IRS agreed to reconsider the long-standing “use it or lose it” rules within FSA’s.
Effective in 2013, employers can opt to change their Health FSA plans to allow up to $500 in unused funds to be carried over into the following year. If an employer opts to do this, they need to forgo any allowable grace period rules currently within their FSA plan.
What you need to know
- Don’t assume you can carry over $500. With all the press around this rule change, many run the risk of assuming you don’t have to spend all your FSA funds by the end of the year. Remember, your employer must first make the rule change in their FSA plan before you can carry over unspent funds.
- Look for a notice. Ask your employer’s human resource department what the company’s plan is with the new rule. You will need to plan for next year’s withholding based on their answer.
- Contributions and spending must match. Just because you carry over $500 into next year, do not assume you can ask for expense reimbursements over the $2,500 limit during any one year. You cannot. So if you carry over funds, you may need to reduce your contribution into your FSA the next year.
Sound confusing? It can be. Until you receive definitive word your employer is changing their plan, it is best to use up your FSA funds prior to the end of your plan year.
Tips to ensure their deductibility
One often over-looked way to reduce your tax obligation is to donate gently used items to a favorite charity. Too often this is done without the necessary forethought to ensure you can deduct the value of these donations on your tax return. Here are some tips to ensure you can receive this tax benefit.
- Good or Better Condition. Remember only items donated that are in good or better condition can be used as a charitable contribution on your tax return.
- Document your donation. Fill out a donation sheet each time you donate. The sheet should include the name of the charitable organization, address, date, and types of items donated. It should also include a detailed list of the items donated, their initial value and the donated value. Note the value you are assigning to each item donated.
- Take a Photo. Use this photo as a visual documentation of what you donated.
- Get an acknowledgement and receipt. Even if the donation is small, always ask for an acknowledgement of your donation. Even churches should be ready and willing to do this for you.
- Establish reasonable value. Do not overstate the value of the items you donate. Use places like e-bay, Amazon, the Salvation Army and used book/consignment stores to establish the used values of your items.
- Donate entire ownership. The IRS does not like donation of part ownership of items. It is always best to make donations with no strings attached.
- Track your mileage too. Remember even your miles driven to and from the charitable location are deductible too.
- Have your warning antenna go up. The IRS has special rules for charitable donations. While they can be complex, here are some red flag items that should warrant consultation prior to donating the following:
- Any stocks and investments owned for one year or longer
- Any items valued over $250 or $500 or $5,000. Each of these levels can introduce new documentation requirements and a potential requirement for appraisals.
- Cars, boats, RVs, and other major assets
Giving items to unfamiliar charitable organizations